So Cal Real Estate News

Note: Most of our market predictions are based on So Cal’s two market cycles: the annual cycle and the broader economic cycle. It’s basic stuff, but if you understand both cycles, you’ll be miles ahead of 90% of the population and 50% of the agents in trying to figure out what’s going to happen next.

Yesterday Peter Viles had an interesting post on who’s buying in So Cal today in his L.A.Times’ blog. That got me thinking about writing a post on “Time to Buy?”

But I’m going to save that post for the near future. Instead, I’m going to “set the stage” for that with the first post in our new “back to basics” Real Estate 101 series.

1: The “Economic Cycle”

In any real estate market, there are at least two basic cycles. We’ll call the longer cycle the “real estate economic cycle” It roughly corresponds with the boom-bust-boom-bust business cycle we’re all too familiar with. 20 years ago I used to say these cycles generally take about 4 - 7 years. In other words, it usually takes 4 - 7 years to go from bottom through peak back to new bottom.

Well, the current So Cal real estate “economic cycle” last hit bottom around 1995, so it’s already gone about 13 years. But we were heading for a bottom before the Fed began their “life support” intervention after 9/11 in 2001 (see “How We Got into this Mess”). That would have been about an 8 - 9 year cycle, at least.

2: The Annual Cycle

We’re not going to insult your intelligence by telling you how long the annual cycle lasts, but we will say it’s much more predictable then the longer “economic cycle.”

All things being equal, the annual cycle has both prices and activity bottoming in December, then gathering steam through the winter, peaking in late spring, leveling off in summer, and heading down in fall.

In what we used to consider a “normal” market, prices only went down in the fall about half as much as they went up in the spring. As we near the peak of a booming economic cycle, prices go up year round, but they go up faster in the spring and slower in the fall. Outside events, like the Fed lowering rates on 9/12/01 or Bush I invading Iraq in 1989 impact both cycles.

By “activity” we’re talking about homes going into escrow, which is what the average Californian means when she says “Our house just sold!” (Not that the average Californian is saying that much right now. But she would if she’d read our post on “How to Sell Your So Cal Home for Top Dollar in 30 Days in Any Market.”)

DataSlow’s median pricing statistics report homes closing escrow, which is usually about 30 - 60 days after they opened escrow. And DataSlow reports those stats about a month after the median closing date, so it’s 2 - 3 month old “news” when you read it in the paper. So DataSlow’s charts would indicate that prices peak in the summer, but that’s just the homes that went into escrow in the spring closing in the summer.

Why . . .

do prices usually peak in the spring and drop in the fall here in So Cal? 3 reasons:

1. Income taxes. Many buyers are brought into the market each year when they have their taxes done and realize they need more tax shelter, and that begins early in the year as those with simple returns file in January. For other’s, buying a home becomes a new year’s resolution.

2. Honey Do Lists. Many sellers also make a new year’s resolution to sell and move up or down. But all it takes for a buyer to “get on the market” (start looking) is to stop at an open house or get online (see “A Better Way to Search for Home Listings“). And first time buyers usually one to get into that home of their own by summer.

But it takes a lot of work for most sellers to get on the market! Work they’ve been putting off for years. And if it ain’t happened in the last decade, it ain’t gonna happen real fast now. For most sellers it takes 4 - 7 months to realize they’re not going to get everything done and call a Realtor for advice on what to do & who to hire. So must sellers are getting on board the real estate train right when most buyers have already gotten off. That affects supply and demand, which affects price.

3. School, Vacation, Weather & Holidays.

O K, that’s really 3 - 7, but we’ll lump them together. Buyers with school age kids want to get into their new home before school starts in the fall, and they want to have it in escrow before school gets out in June. That’s so they can get their kids signed up at the new school before the staff takes off.

Once summer hits, buyers have other things on their plate the rest of the year. Summer vacation, back to school, then Thanksgiving and Christmas. (Despite the weather, Christmas in California begins in September or October. As my pastor, Chuck Smith of Calvary Chapel Costa Mesa, says, “When you see those Christmas decorations going up in the stores, you know Halloween is just around the corner.”)

So buyers are pretty much too busy to buy from when the kids get out of school on. Sellers, however, tend to be at least one generation older than their buyers. They’re less apt to have school age kids, they take their vacations off peak, & they’re often just getting their home ready to put on the market when summer hits, as we said.

Selling a home is frequently a less discretionary decision than buying. Divorce, death, foreclosure, and job transfers occur at a fairly consistent pace all year round. (Actually, death tends to occur in the winter after Christmas, but you really didn’t log onto this blog to hear about my college days working at the Westwood Village Mortuary as a resident manager.)

Local Variations

The annual cycle varies by region somewhat. In areas with brutal winters (which to us is pretty much any place north of Fresno), things continue to drop until the snow starts melting. In resort areas, prices tend to peak during peak seasonl–winter in the desert & in ski areas, summer in most other vacation meccas.

How to Figure Out What’s Next

These two cycles are not synchronized, but they do influence each other. When the economic cycle is in a major downward move, prices may just level off in the spring, or even drop some. But if the downward cycle continues, they’ll drop even faster in the fall.

Our understanding of the annual cycle enabled us to predict the increase in activity that DataQuick and the Association of Realtors reported for February closings. It’s why we think closings will also be reported as up when March figures are released in about a week.

The question is, will the impact of the overall downward cycle overpower the normal seasonal uptick. Remember, it’s still early in the annual cycle: March closings mostly went into escrow in January and early February. Our best guess is that sales will be up but prices down for March closings, but by April or May prices may also be modestly up.

Part of the problem with prices is that DataQuick uses median prices, which can be skewed by differences in which price ranges of home are selling (see Jeff Collin’s summary of a detailed study that proves what we’ve been saying about this for years.)

Well, now you’ve got one of the basics of predictions down. Give it a shot, & see if you can impress your friends. Or shoot us a comment or question, so we can explain it better or add whatever we may be missing.

Note, 7/15: This is our classic post on the current housing turmoil. We think we’ve been proven right by subsequent events, so there’s no need to modify it, although we’ll occasionally add updates at the end. We think it’s as relevant today as it was when it was written.

Yesterday (11/27) the Los Angeles Times front page asked “Homeowners’ big question, How low will prices go?”

Today, they gave us a partial answer: “L.A., O.C. home prices decline sharply.”

We’ve got a better answer: “Nobody knows.” We first heard it at the California Association of Realtors’ economists panel in Anaheim last month. It came from Frank Nothaft, chief economist at Freddie Mac, as he was discussing how low prices would go and when things would turn around: “We just don’t know,” Nothraft said. “We’re in totally uncharted territory.” His point being that the problems brought on by sub-prime lending make this “correction” a new animal.

In a way, however, Northaft was just restating the conventional wisdom regarding any market’s cycles: “They don’t ring a bell when it hits the bottom. Or the peak.”

The consensus seems to be we’ve got 1 - 3 down years ahead of us, more if a major recession hits. Most economists also predict that Southern California real estate will take a bigger hit than the national average, just as we went up more. Prices are predicted to “correct” between 15% and 40%, with most economists in the 20% to 25% correction range. Maybe worse for outlying areas like the Inland Empire or Palmdale, and for entry level condos everywhere.

Having a bit of a contrarian nature, when everybody gets on the recession bandwagon, we start thinking about getting off. To be honest, we’ve already seen price corrections of as much as 20% in Lakewood, Los Alamitos, parts of Long Beach and Orange County and some other markets we serve.

That’s from peak to current low, and it’s comparing like homes (similar location, size, & condition), not the almost useless median selling price that takes comparing apples with oranges to an insane new level.

With interest rates dropping again and prices already down, we wouldn’t be surprised to see prices start moving upward this coming February. But we wouldn’t be surprised if they kept dropping as well. (We’re talking about prices on homes going into escrow in February, not closings. So the increase that may come this February would show up in March or April closing statistics.)

Why don’t we know? “Uncharted territory.” Too many variables: interest rates are dropping, prices have dropped, but more foreclosures are coming, and Congress may be making the “liquidity crisis” worse with the House’s proposed “reform” bill. We just don’t know. Nobody does. If they say they do, they’re either lying or deluded, or God.

What to do when nobody knows when we’ll hit bottom? That’s in the post which follows this one, (”What to Do When Nobody Knows What’s Next”).

7/15 update: Nobody knows what’s next, but that doesn’t stop us from making our best projection, which we try to update regularly as needed. For our latest posts, just look under “Recent Posts” near the top of the column to the right.

On a more uplifting note, you might also want to check out “A little perspective.”

Finally, we’ve added two links at the top of the column to your right so you can search almost all of Southern California’s Multiple Listing Services directly:

Search So Cal M.L.S. gives you direct access into the MLS covering Orange County and southeast Los Angeles County (think Greater Long Beach).

Search M.L.S. Alliance gives you direct access to a search across almost all Southern California Multiple Listing Services.

Feel free to play with them both & see which one you prefer. You shouldn’t find any ads as you use them, but you will have to deal with our picture as you search. We’ve been told you can print it & put it in your attic to deter termite and pest infestations.