It’s official: speculators made their exit in 2014 and their ranks continue to decrease as we start the new year. While still above average at the start of 2014 (the red line in the chart), the share of absentee homebuyers (mostly speculators) in Southern California’s resale market dropped quickly.
All in all, the average percentage of speculators was level with 2011, at one in four home sales purchased by speculators and investors. In 2015, speculator participation will repeat the path of their run in the market during 2010 (the gold line in the chart), a downward move until they reenter the market going into 2016.
Believe it or not, fewer speculators is good news for the long-term health of California’s housing market. That’s because a higher than average share of speculators throws home sales volume and prices out of balance. This was demonstrated in the 2013-2014 surprising leap in home prices through languishing and slipping home sales volume during that same period.
Essentially, prices were being propped up by speculator cash while lacking the support of end users of real estate (buyer-occupants and long-term buy-to-let investors).
Thus, as the housing market continues to lose its speculator support, expect home prices to fall quickly in 2015, bottoming around mid-2016.
Why is this good news? Pricing finally falling within reach of incomes means a return to normalcy — and eventual stability. Home sales volume will begin to recover throughout 2016 and rise to a peak in 2019-2020 when The Great Convergence of first-time homebuyers and sell-and-buy Baby Boomers hit the market.