The Following Article is from the Fall 2006 Newsletter
As an article in the Los Angeles Times so aptly put it, “There is no consistency or predictability in the real estate market inSouthern California.” The market is “still going up” or “it is finally going down” as prognosticated by market gurus the last five years or “it is running sideways, a flat market.” These are the most frequented opinions by local writers and predictors of future real estate values.
Which is it? I think it is all of these inSouthern California…..depending on the neighborhood. What is clear in this market? This market is not for the “faint of heart”! For sellers it requires the patience and fortitude of the early 1990’s because “Days on Market” has increased from a few days to 10-12 months depending on the neighborhood. It is also clear that the “sense of urgency” for some buyers has subsided. 60-70% of all buyers are motivated by the immediate need of having sold their current residence or they are relocating and need a place for their family to live. The remaining 30-40% has more flexibility in their purchase timing, they are discretionary purchasers. Some of this group are looking for properties that will not be primary residences…they will be alternatives for hotels, vacations/weekend residences, investment properties or contiguous properties to add to their primary residence. A large part of this discretionary group are people that would LIKE to make a change but don’t HAVE to make a change in their living situation. This group would include some retirees, families where an increase in household income would drive a change, trust-funders where the economy has give rise to more available funds and those that just feel good about life and the direction the economy is going.
The primary driver of real estate values is perception. When people feel good about the way things are going and the media supports that point of view the discretionary buyer group is more active in the real estate market. When they don’t feel as comfortable because of the barrage of negativity in the media they tend to operate more in the “wait and see” mode.
When that 15-20% of the market is less motivated to buy a home, inventory builds causing an extending of the “time on the market”. This slowdown in-turn takes the urgency out of the marketplace causing more buyers to delay decisions to buy. As this happens, some sellers become unnerved wondering if their house will sell. At this point some sellers will reduce their asking price, others will take their home off the market and the rest will do nothing.
Some areas are experiencing a reduction in values: areas of the San Fernando Valley, Palm Springs, Las Vegas and downtown San Diego, to name a few. Other areas, like the Westside of Los Angeles, prices appear to be holding, but properties are remaining on the market for much longer periods of time.
Why does the Westside appear to be an anomaly? Two things….one there is an inordinate concentration of wealth, way beyond the late eighties and early nineties. Two, the lack of inventory is more pronounced now than at any time in history. There are more people now who want and can afford to live on the Westside. You can’t make dirt! The only new building lots available to the marketplace in the last thirty years are the formerly unbuildable lots up in the hills.
Where are we headed? Again, confusion abounds. The National Association of Builders reported last summer that the current “slump”, which started early in 2005, would bottom out in the summer of 2007 with a rebound in 2008. A few weeks ago the National Association of Lenders predicted that the “downturn” is at the bottom and would rebound in 2008. Real estate reports from Yale, Harvard, UCLA and various other predicting agencies have had conflicting prognoses. I read a prognostication from another agency last week stating the bottom point of this downturn would be the same price point as the peak of the last upturn (1989 prices).
Again, who really knows and as you can see the predictions are all over the board. It is greatly dependent on where you reside. The consensus seems to be that this potential downturn will be much shorter and much less severe than the last.