The Following Article is from the Sping 2011 Newsletter
It is a very complicated, often times confusing answer. It depends on whether you are looking at the macro view, the whole country or an entire state, or whether you are looking at the micro view which looks at individual neighborhoods. It is very confusing because we read in the news statistics about the state of the real estate market but it isn’t always clear what segment they are talking about. They may be speaking of home values covering the entire country, the state of California, Los Angeles County, Los Angeles City orjust the Westside. Sometimes for good measure they throw in the commercial markets, multi-family and condominiums. Headlines many times are all inclusive.
There are two things to consider when wrestling with an answer to the titled question. First, which specific micro market are you investigating and what type of property are you evaluating? Second, where is that specific micro market in the real estate cycle?
To truly understand your own market you have to understand which micro-market you are in. Sometimes that will be a particular zip code sometimes a single neighborhood within a zip code. Values and future trends can be dramatically different from city to city and from neighborhood to neighborhood. For instance, 90402 values are down, on average from the peak, 16%; 90049 is down 22% and 90272 is down 30%. There are zip codes in the U.S. that are still falling and have already experienced over a 50% drop in home values. There are zip codes or neighborhoods like San Marino, CA where home values have not dropped at all but are actually still on the rise while contiguous neighborhoods have seen double digit drops in value.
Real estate cycles have two critical points where confusion abounds, the “peak” and the “bottom point”. As we approach a “peak,” buyers and sellers start to anticipate what is coming and there are differing reactions. The sellers want to think values are still on the rise and the buyers are certain that values are about to or have already started down. This creates a plateau in activity, a lull, the feeling of a “Mexican Standoff.” When everyone is clear which way the market is moving, there is slow shift in the consciousness of buyers and sellers and the market activity increases.
When we are approaching the “bottom point” the same thing happens, only in reverse. The sellers are anxious for the values to begin to rise again and buyers want the values to continue to erode. This creates an elongated trough until there is a collective change in consciousness as to which direction the market is going. What is the primary hinge to the change in the level of inventory? “Supply and demand” is always the final judge. Low inventory drives sellers to hold firm to their prices which force the motivated buyers to pay what they may think is a premium price.
To complicate things buyers are reading about “Ghost Inventory,” homes where the banks haven’t foreclosed but the homeowners haven’t made mortgage payments, in some cases for years-there are currently about 8,000,000 of these properties. Buyers are also bombarded with news about all the foreclosures and short sales that are available. Again, these are macro issues not necessarily micro issues. This creates problems when buyers want to apply the global statistics to a specific neighborhood but that neighborhood is not experiencing a big downturn or is in a different place in the real estate cycle.
Los Angeles’ Westside has neighborhoods where there is very little inventory and prices are very stable with a few properties selling at prices slightly over last year, especially if they sell in the spring. The best example of this is north of Montana in Santa Monica which is within the 90402 zip code. There are current 21 homes for sale there, only one of which is a foreclosure that has been on the market for 2+ years. This neighborhood has a total of 2550 homes which means only .00082% of the homes in this neighborhood are for sale. In contrast there are neighborhoods in the U.S. where 35+% of the homes are for sale and upward of 75% of them are foreclosures or potential short sales.
So, in a nutshell, what we read in the paper has to be filtered through these types of lenses. “One size does not fit all.” Most markets have cycles that do not change quickly because of the excessive inventory of homes that need to be absorbed by buyers. The more impacted markets may be a result of devastation of the local economy like Detroit, Michigan; vacation communities, like Palm Springs; or large new development communities being built in the expanding population growth areas like the Antelope Valley and Riverside. Again, it is all driven by home inventory, whether that is lack of employment/local economic conditions or over-building. So as you can see every micro market is different, good news in some but not so good news in many others. Most of the readers of this newsletter are in the former category.