The State Of Real Estate

First Quarter of 2014
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Agents eagerly await my Broker’s Open House for my new listing in Pacific Palisades, March 2013

A Belated Happy New Year to You! 

To look back on 2013 and say it was an exciting year in real estate is an understatement for which even Thesaurus.com gave up on locating a suitable descriptive! Driven by a market fueled by high demand, low inventory

78 The State Of Real Estateand an abundance of anxious cash buyers, the Los Angeles real estate market ignited in early 2013.  Prices soared at unheard of rates over the first half of the year and the momentum created continued to push housing prices upward through the third and fourth quarters. The net result was a year of record price appreciation and the return of equity sales throughout the Southland.  
So where does this leave us
 as we turn the corner and launch forward into a new year?  Here are a few things to consider:

 

Cash buyers moved home prices upward uncontrollably in 2013, at a rate that was unprecedented.  It wasn’t a random occurrence either.  There are reasons that this happened and what follows is a brief explanation.

 

The rate of price increase in a rebounding market is usually slowed due to the appraisals required by the lenders providing the buyers obtaining financing.72 The State Of Real Estate

 

Historically, appraisers apply the “brakes” on a runaway seller’s market.  When an appraisers value a homes on behalf of lenders they are using comparable home-sales data from transactions that took place six months prior to the “contract date” of the property being appraised. As such, they are pulling data that is almost certainly reflecting lower prices, since home prices have been steadily on the rise.

 

Moreover, appraisers are limited by lenders, to assigning appraised values of not more than five percent above comparable sales, thereby putting the brakes on rapid increases in home prices. In this sense appraisers can be seen as the real estate equivalent of the “circuit breakers” that stop trading on the stock market, at times when drastic sell-offs are taking place.

But in the case of the all-79 The State Of Real Estatecash transactions that occurred in abundance last year, there was no financing and therefore, no appraisal was obtained. Without any external limitations, prices were free to go and homes free to sell at whatever price the market would bare, and with 1) so many buyers sitting on lots of cash, 2) so little inventory available and hence, 3) a highly competitive bidding environment, prices took off!

 

The Westside and San Fernando Valley real estate markets remained highly exuberant and active for the first seven months of 2013, but settled down a bit in the third and fourth quarters both in sales activity and the rate of price increase. Part of this was likely seasonal, but I think part of this change in dynamics was due to the run-up over the first six months. As prices rose, developers (the majority being cash buyers) became more cautious and reluctant to write aggressive, competitive offers in the latter half of 2013, knowing that they weren’t getting in on the ground floor.71 The State Of Real Estate

 

That is not to say that the developers have disappeared, far from it. I have spoken with many investors and builders that are actively searching for properties to develop; they’re simply being a little more selective.  Let’s face it, notwithstanding with all this new-found euphoria clouding our heads, even those with the most mediocre recall can still remember the fall of 2008.

 

So, where do we go from here?

 

What’s in store in the very near future- I have found that activity in January has been historically strong and a good indicator of things to come for the first two quarters.

I’ve heard some of my colleagues predict a flattening, or leveling of real estate prices over the coming year. I disagree. In my nearly twenty five years as a real estate agent, I have never experienced a sustained flat/level market for any significant length of time. The only one that remotely qualifies in my mind would be the four-month lull after 911 and that was a time of unprecedented circumstances.

 

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I see 2014 as being a good year for real estate. Not just for us Angelenos, but for the rest of the country, even the areas that have not fully recovered from the downturn. Moreover, as a result of prices having risen over the course of the last twelve months, there are far fewer homes that are still “underwater” and thus, we experienced a significant decrease in short-sales and foreclosures in late 2012 and 2013.  This trend is likely to continue into 2014 and beyond, as long as the economy continues to improve and home prices rise. Fewer short-sales and foreclosures benefits all homeowners and neighborhoods for many reasons (beyond the obvious), but that’s fodder for another article.

Some brokers and economists are predicting a “flattening” of prices.  While I do expect to see a “leveling” in 2014 I see it a bit differently.  Not that prices will stop rising, but rather that therate at which prices will rise will relax a bit: a “deceleration” in the rate of rise, if you will (thank you Mr. Layton, Pali High physics).

 

And for the long term. . . It has been my experience that real estate prices cycle up and up until they reach that certain point in time, at which people believe we may be close to the top (or conversely, the bottom) of a housing cycle.  When enough people come to believe a

change is coming, there will be a “shift” of the societal collective and we will “tip” into a “down” real estate market characterized by rising inventory, declining sales and ultimately, declining sale prices. That market will carry on for a time, until people start to believe we’re close to the bottom and we will “tip” once again into a rising market. The housing market doesn’t typically experience the sharp leaps and drops associated with the stock market. 

The progressions are typically unidirectional and deliberate. I don’t know the exact mechanism that triggers the reversal. In a sense it seems as magical as a child experiencing their first snowfall. Exactly why real estate markets tips, when they tip, I’m not sure, but once it does it continues on the new course for a significant period of time.  Historically cycles run seven to ten years up, seven to ten years down and so on.  At least that’s how housing markets have played out to this point.

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A brief cautionary tale. . . Although real estate cycles have run rather consistently and predictably I am of the belief that the lengths of our real estate cycles may begin shortening in the not too distant future. To be fair, my opinion is not based on any hard data, specific evidence or, calculations using data from prior cycles. My hypothesis is based mostly on my observations of the state of the world we find ourselves in. Maybe it’s just me but the world is going faster. Change is happening faster, people are changing careers, employers and relationships at rates and frequencies never seen before.  Fashions change faster, Christmas sales start before Thanksgiving, news and information are dispensed, transmitted and shared at lightening speed.

 

The younger generation is processing information at astonishing rates.  Rates that are much more rapid than the rate of change when comparing my generation to that of my parents’. Based on these observations I see no reason to believe that the real estate industry should be any different.  Do you remember when agents used to carry around MLS Listing Books?  The speed at which we do business feels exponentially faster than it was, not even ten years ago. This and more observational evidence leads me to believe that the length of real estate cycles may be shortening as well.

 

If past history is an indication of the expected length of a real estate market cycle, then I believe that we can expect this “Seller’s Market” to continue for at least several more years.  Note that I am deliberately using the word, “several” for it’s inexact nature, as I am not sure as to exactly how many years “several” will be this go around. Time will tell, but when in doubt I am reminded of a slogan Fred Sands, Jack Douglass and many other wise Realtors were and are known to say, “the only market we know for sure, is the one we’re in now.”  Buy, Sell and “Hang On”!

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