Where real estate is heading

By Roe Leer, president of the Greater Antelope Valley Association of Realtors ®.  

With six years of housing volatility behind us, it’s not unreasonable for current and prospective homeowners to ask, “Where are we heading?”  Our take is that historical trends are better prognosticators than crystal balls.  While we may be able to agree that bad policy and wishful thinking did much to lead us to a housing bubble, too many of us thought that bubble would never burst.  When it did, even more of us took on the mantle of pessimism.  Real Estate does have a certain rhythm and only when certain fundamentals skew in one direction or the other can we expect the unexpected.

The collapse of the housing bubble in 2007 impacted not only real estate sales volume, but home valuations, mortgage markets, home builders, home supply retail outlets and hedge funds held by large institutional investors and banks.  This cascade of impacts led the U.S. Secretary of the Treasury to call the bursting housing bubble “the most significant risk to our economy.”  The crash of 2007 was the steepest plunge since the 1989 Savings and Loan crisis.

So what did we learn?  Bubbles may be identifiable in progress, but can only be definitively measured in hindsight, after market correction.

Recently, GAVAR undertook a 20 year review of housing trends in the Antelope Valley.  The review clearly revealed an aggressive uptick in the number of houses sold from 1994 to 2005. In roughly this same time frame the average selling price for a home in 1994 was $105,434 versus $349,802 in 2006.  The 2007 crash should have been predictable, as the figures were unsustainable.  The disappointment for many was that the fall was a hard landing.  Hindsight tells us that there was much that could have been done by policymakers, lenders and others to mitigate this volatility.  Within two years of the crash, there was another run-up in the number of houses sold in the Antelope Valley.   But that number, too, fell by some 30%-35% from 2009 to 2012.  As the industry has labored to process an unprecedented number of foreclosures and many homes are yet to return to the market, both industry professionals and homeowners are curious as to the future.

And foreclosures in the Antelope Valley have been significant.  Bloomberg News cited an analyst in 2007 who suggested a direct linkage between increased foreclosures and localized housing price declines.  John Kilpatrick, of Greenfield Advisors said, “Living in an area with multiple foreclosures can result in a 10% to 20% decrease in property values.  It can wipe out the equity of homeowners or leave them owing more on their mortgage than the house is worth.  The innocent houses that just happen to be sitting next to those properties are going to take a hit.”

Statistics have a way of telling a story.  While home prices continue to climb, a lack of inventory is still impacting sales.  It is interesting to note that the average home price in 2001 was $79 per square foot.  That number rose to $208 per square foot in 2006 and fell to $75 per square foot in 2012.  What we’re seeing is an ongoing recovery in housing and mortgage markets, with fewer distressed properties available, improved home prices and a pick-up in home purchases.

So, is a new bubble forming?  No.  Home prices remain undervalued relative to fundamentals and much lower than in the last bubble.  That’s why today’s price gains are considered a rebound, rather than a bubble.  Economists reason that prices are determined by the ratio between supply and demand, and 1) supply is beginning to increase, 2) some speculative investors will begin to back-off as prices begin to rise and 3) as mortgage rates rise, a lower pool of qualified buyers will participate in the price bidding.

The conclusion we draw from analyzing 20 years of data is that real estate is transitioning from unstable to stable and that this should provide reassurance and opportunity to all who participate in the industry.

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Disclaimer: The views expressed in this article are the author’s own and do not necessarily reflect the views of The AV Times.

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