When the real estate market was at its lowest point, prices had to by definition do what? Either stay flat or rise. After all we’re talking about the lowest point. For argument sake, let’s say that low point was in early-mid 2011 and by the following year we’d have some year over year gain. It could be modest, maybe a percent or two or maybe even mostly flat. This was what happened in between 2011 to 2012. Then in 2013 things changed and we saw substantial gains which continued for about 6 months hitting double digits. That is, until the Fed announced that they had thoughts on tapering their bond purchases. Correspondingly the 10 year bond yield jumped as bond sellers dumped bonds in the single greatest bond selloff in U.S. History. Within three weeks treasuries and mortgage rates rose 1%. The brakes had been put home appreciation. The market that followed could best be described as treading water. This is not the least bit surprising given the previous 6 month, 20% run up and the shock to the system of a 1% jump in rates. By fall there was a return to normalcy in the marketplace: Prices and activity sagged in the fall just like they usually do. The holiday’s typical slowness ensued and naturally with the onset of the spring buying season, we expect a pick up again. In looking back a year to what was then, already a month into the rapid acceleration in price of 2013, we see that the percent of gain as compared to this year is less. In other words, by the end of February, prices were already higher than in January. So February 2013 to February 2014 would be a smaller percentage increase than the aggregate increase of January 2013 to Feb 2014. Confusing I know, but you have to remember as we compare prices on a 12 month basis, we are comparing to a time when each month was higher than the last; the year over year gain is going to decline with each month. The only way it could rise at the same pace every month would be if the 20% annual appreciation trend were to continue and/or accelerate month after month, year after year. We know that’s impossible.
We also know that 2013’s appreciation virtually halted about July. That means that as we approach July 2014, we will see the percentage of year over year gain is going to get smaller and smaller and that if we were truly flat since July 2013, July 2014 would show appreciation at 0%. That’s what a year of flat price appreciation would mean. But that’s not what I think we’ll see.
OK, I know I’ve completely confused you by this point but what all this means is that since we saw big gains last year and this year shows only modest gains, it could be said that we are in a trend of moderation and so year over your gains will become smaller. Slight gains some months, flat in others for an overall modest 3-5% appreciation. We should therefore, neither be concerned nor surprised, that Case-Shiller shows a continued decline in year over year appreciation. If we start to see month over month depreciation, then we can start to wonder about the sustainability and health of the real estate market. I neither expect that nor worry about that. I am happy we are entering a period moderation in property appreciation. I don’t want another bubble. And because I anticipate inventories will remain tight for many, many years to come, I see continued upward pressure on prices, not the other way around. Why do I think we will be tight for many, many years? In large part because we haven’t been building enough homes to accommodate a rising population and an improvement in the employment rate. To quote John Burns from Real Estate Consulting, a company that examines and forecasts housing trends for Southern California homebuilder The Irvine Company, “Since the US has been adding more than two new jobs for every home built for the last several years and there are less than 1.2 jobs per household, we will clearly need to start building more homes soon.” What could derail my hypothesis? Recession. You might think a sharp rise in interest rates too. However, a rise in interest rates will almost certainly be in response to wage and inflation pressures which are a condition brought about by an overheating economy. More income and higher rates of affordability equals higher property values. After all, inflation does not affect everything except housing. So short of recession, tight inventory shall remain and the market will remain stable and healthy.
There it is, Case-Shiller is going to continue to show a slowdown but this shouldn’t be cause for concern. Until housing inventory growth matches family and job creation, pressure shall remain on prices. And should income grow, as a result of a vastly improved economy… well suffice to say, you’ll want to make sure you already own real estate, because that’s a horse that can run and leave the idle naysayer in the dust.
Published on 2014-02-26 14:38:16