Home prices have risen nationwide an average of 10.9% year-over-year in March 2013. This is the greatest one-year increase since April 2006.
In California the increase is even greater. Compared to last year, home prices were:
- 22% higher among low-tier properties;
- 16% higher among mid-tier properties; and
- 13% higher among high-tier properties.
Is this another unstable boom, much like the brief home price rise of 2009?
Some see signs that it may be the start of something much better — a solid and irreversible recovery in prices.
The main culprit behind the current uptick in pricing is the low inventory of homes available on the market, according to some widely proclaimed news sources. However, as prices rise, current homeowners feel encouraged to place their homes on the market in the hopes of finally turning a profit. Thus, the purported low inventory situation in which we are currently said to be may soon be tempered, stabilizing prices before roiling out of control.
Further, as home prices rise, more homeowners are lifted out of negative equity. These now positive equity homeowners can sell their home without resorting to a short sale. Meanwhile, distressed sales have declined during the past year — another positive sign for the real estate market going forward.
All of this good news has prompted a national revival of construction, which should also (apparently) help the low inventory issue while lending support to the continuing economic recovery.
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first tuesday insight
Much like escalating home prices, all this optimism needs to settle down before we become totally untethered from reality. So drop your anchors.
The rise in home prices experienced through March 2013 was in fact remarkable, if not stunning. But it was fueled by speculator acquisitions, which will – by their nature – not last. Once speculators as buyers exit the market, prices will drop, pulling most, if not all, those newly positive equity homeowners back underwater. This will mean no further standard additions to the multiple listing service (MLS) inventory.
And the persistent theory that inventory is the culprit is completely bogus. Inventory talk is supply side thinking that does not fly in a recovery replete with speculation. Doesn’t everyone know that no matter how many more homes you throw onto the MLS for sale (or into a trustee’s sale) they will be immediately snapped up by a hoard of speculators only to return to the market in the not so distant future? Again, no inventory will be left to meet the unsatisfied small present demand of buyer-occupants no matter the level of new listings hitting the market.
Speculators at this point buy everything, repetitiously and in endless multiple numbers as homes come on the market. Contrast this activity with buyer-occupants as end users who buy one property through the MLS and leave the marketplace for around 16 years.
If inventory was in short supply, builders of SFRs would be all over the ground with replenishments. But they are not, and for good reason. Builders will not sell to a speculator (as that creates competition and a vacant/rented home interfering with the sale of the rest of the tract) and they properly see no demand by buyer-occupants sufficient to build more than a few niche homes.
Further, while distressed sales have been declining in California (45% fewer real estate owned (REO) resales occurred in Q1 2013 compared to one year earlier), the problem is still very elevated when viewed from a historical perspective. Short sales have merely grown to nearly replace the decline in trustee’s sales and REO sales. Think of a balancing of scales.
Due to new regulations in 2013, like California’s Homeowner’s Bill of Rights, mortgage servicers have become more cautious about rushing to that trustee’s sale. This has slowed the foreclosure process down. But it has not reduced or removed distressed sales from the picture. As of the Q1 2013, REO resales accounted for 17% of all home sales statewide. In a healthy, traditional market, this number is much lower, around 7%.
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All of this merely highlights the fact that speculators cannot cure the housing market by bidding up prices, however much we may hope they will. Home sales volume supported by end users must increase first before prices can begin their stable recovery.
So far in 2013, sales volume has remained low and roughly level with the slow period in 2012. That was before the sales volume rose through November, driving prices up in tandem with the voracious repetitive consumption of homes by speculators.
The real cure will come once end users have access to mortgage funds and the speculators have developed an urge to sell. This is controlled by:
- jobs, which at the current pace of recovery are not set to be fully restored until 2016;
- monetary policy of the Feds, who refuse to allow rates to go negative to jumpstart lending and the economy; and
- austerity spending induced by congress when economic stimulus programs are needed to supplement weak growth in the private sector.
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So expect 2013 to finish as yet another dull year on the long, bumpy path to full recovery. Don’t let today’s destabilized home prices fool you — we’re not there yet by any drilldown analysis.
Re: March Home Prices See Best Annual Rise in Seven Years; Home Prices Rise, Putting Country in Buying Mood from The New York Times
I am every interested in your views of the $500,000 to 900,000 market in Orange County, CA. Not many speculators are active in that range, though there are a lot of cash buyers/occupiers with solid incomes from a strengthening local economy. I cannot help feeling your speculator scenarios are occuring overwhelmingly in the lower priced markets still in a weak recovery mode. True? False?
Rob Arnold:
Thank you for your comment. In response, we have posted an article: A speculator by any other name…. This article defines speculation and explores how the overblown speculator presence has affected California’s current housing market.
Regards,
first tuesday Editorial Staff
I have been fascinated by First Tuesday. It’s not every real estate education business that fearlessly takes strong stands, goes after banks, speculators, CAR, the DRE (now folded into another agency), as well as rogue agents, to compile merely a short list of targets.
First Tuesday also polls its clients, offers additional services, and certainly offers a unique perspective on the real estate market, bordering on being an alternative voice of agents.
I say ‘bordering on’ because, while I will defend to the death your right to be opinionated, when it comes to a financial market like real estate, it’s important not to over-reach common sense. First Tuesday should refrain from overly sensational journalism.
Thus my critique. There are times when the passion of the argument displaces what should be supporting evidence. Some agents may even stumble in embracing the “facts” presented. Hardly an outcome to be sought by an educational institution.
For example, in this article, it is said that “once these speculators exit the market…”. The business plan of the large groups like Colony has them seeking to buy thousands more properties for a period of years. They hope to create ‘a new class’ of financial instrument for long term investors. We’ll eventually see how well they do, but it may take a few years just to complete acquisitions.
Likewise, ‘speculators’ includes a lot of smaller investors, right down to people building their American dream with a couple of rentals. As long as prices remain below building cost, this could continue to be a safe and solid idea.
As agents, it may be a bitch for our loan-approved buyers to actually buy a house, and for us to get a commission. But, keep working, since a return to even lower prices cannot be assumed from the data I look at. At best, rising interest rates will moderate demand, MOSTLY FROM LOAN-APPROVED buyers. Some cash buyers will keep buying until houses exceed rebuilding cost. We’re not THERE yet.
Finally, the comment “Builders will not sell to a speculator” should be modified to read ‘Some builders will not KNOWINGLY sell to a speculator if they have an available non-speculative buyer’. Most builders do force buyers to complete the escrow and limit the number that one buyer can buy. But, as with buyers who tell the bank they will be owner occupants, plans can change on the day after the close of escrow.
In a market where the inventory of trust is tiny, I’d like to see First Tuesday remain a credible source of ideas.
ROB ARNOLD