Are Prices Dropping ?

After nearly seven years of sometimes fevered price hikes, the Southern California housing market has slowed markedly in recent months. Sales have fallen from year-ago levels and price appreciation has shrunk.

 

In Los Angeles and Orange counties, year-over-year price increases peaked at 8.2% in April 2018 and have declined every month since. In October, home prices in those counties rose only 5.5% over the previous year.  

 

One big factor, according to experts, is that many would-be buyers are increasingly priced out. 

But real estate agents will tell you a growing number of people who could buy,  have decided they don’t want to pull the trigger at the top.

 

If prices aren’t rising as much, or at all, it takes some of the edge off the psychology that has helped drive home-buying in Southern California for decades. Many renters exist in a constant state of anxiety that the home-equity gravy train is passing them by.  Which in the past might drive them to stretch to make a down payment or to buy a suboptimal property.

 

In Los Angeles, people are particularly prone to “suspend disbelief” about what a home is truly worth, said Yale University professor Robert J. Shiller, a Nobel Prize-winning economist who has studied buyer psychology. That makes the area vulnerable to booms and busts: “You justify it: This is Los Angeles — the most glamorous city in the world.”

Buyer hesitancy is fed in part by uncertainty on Wall Street and in Washington, as well as memories of last decade’s brutal housing collapse, when as many as 10 million Americans lost their homes and prices plunged in the L.A. area by nearly 30% in one year alone.

 

A belief that the price slowdown will lead to a price drop could become a self-fulfilling prophecy.

“It’s a feedback loop,” said Shiller. “Excitement can’t last forever — and that’s what drives a boom.”

Shiller said the frothiness during this housing expansion is far less than last decade. But prices still could have overshot, he said. And several surveys confirm would-be buyers have turned more pessimistic, even if they don’t think the sky is falling.

 

At the same time, local buyers are expecting even less price appreciation over a 10-year period than they were at the height of the downturn.

There has been this anticipation of another 2008 among some home shoppers.  Some are expecting it to happen again, others are at least suspecting there will be a less severe version

Many who are struggling to afford a home in California would welcome a significant price drop, but only if it wasn’t accompanied by an economic collapse. But such a prospect is unlikely, given that homes don’t appear to be in oversupply and the state has a well-documented housing shortage.

Other factors argue against a crash. The California economy is still posting robust job growth, despite the possibility of a trade war with China.   And whereas the last housing boom and bust were driven by questionable lending, loan standards are much tighter today. And as much as prices have risen, the jump hasn’t been as sharp as it was in the early to mid-2000s.

“We don’t have a debt problem. We don’t have an overbuilding problem. We don’t have an economic problem — prices are not going to fall,” said one economist.

Of course, predictions are always a risky proposition.   And while the vast majority of economists don’t expect a recession in 2019, some are pessimistic, citing uncertainty, slowing growth overseas ,and the effects of tighter monetary policy by the Fed indicating a more downbeat 2019 and they’ll tell you “If it’s not a recession outright, it will be very close.”

 

 

The message –   Brace yourself for a rough year. 

 

 

 

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