Real estate investment in China is a big business, and one of the biggest investors is a company called Evergrande. The problem is that Evergrande has quite a bit of debt and is rather close to defaulting. The company certainly doesn’t control a majority of the Chinese real estate market, but it’s significant enough to put a dent in consumer confidence if it goes under.
This is merely a symptom of the actual problem with China’s real estate investment market. The truth is that China’s population has been falling dramatically in recent years, but investors haven’t scaled back their investments. This has led to a significant overabundance of supply, as well as compounding investor debt.
Why is this important for the US? Well, a large number of our foreign investors are from China, especially in the commercial sector but also in residential. Chinese investment in US real estate has been slowing already, but it’s high enough that a market crash in China would definitely have aftershocks in the US real estate market. Fortunately, because our market actually has the opposite problem as China — too little supply — investors bailing out and selling could just open up more opportunities for buyers.
Next year is expected to be a bit calmer than this year was. An estimated 439,800 sales are projected for this year by the end of the year, but the model predicts only 416,800 for 2022, a 5.2% decrease. It had increased 6.8% in 2021 from 2020. House prices will still be going up, albeit at a much slower rate. The median home price will have increased over 20% this year. It’s only expected to increase about 5% next year. This will also mean a 3% decrease in housing affordability, from 26% to 23%. The forecast assumes that the pandemic situation can be kept under control, primarily focusing on low supply during a recovering market. 2022’s market is likely to be better for prospective homebuyers who were pushed out due to heavy competition. Those who already couldn’t afford to buy still won’t have much luck, but the slowing rate of price growth is hopeful for them.
The California Association of REALTORS® (C.A.R.) has launched a new website, www.BringYourFamilyHome.com. This page will provide information to prospective homebuyers, especially aimed at first-time homebuyers, about financial literacy, credit scores, steps in the process, and how to contact agents. And C.A.R. hopes to address a long-standing issue by presenting the page in both English and Spanish.
California has a significant Latinx population, and many of them believe they aren’t able to afford a home. While certainly some of them don’t have enough income for the high prices in California, a significant number have misconceptions about what they can and can’t afford. 85% of Latinx prospective homebuyers still see owning a home as a big part of the American Dream, and the majority of those haven’t given up on it. But four out of five aren’t aware that they qualify for mortgage loans. 25% of Latinx people that are renting actually don’t need to because they can already afford to purchase, but don’t realize that and aren’t aware of the process. By providing educational materials in Spanish, C.A.R. hopes to help many more Latinx households achieve homeownership.
The 2021 housing market has experienced heavy competition from buyers, with most sellers receiving multiple high-priced offers. The peak was back in April, with nearly three-quarters — 74.3% — of listings generating at least two offers. While the numbers have been dropping off, with July’s percentage at 62.1%, it wasn’t until August that it fell just slightly below the prior year’s percentage for the month, at 58.8%.
The percentage is still over half, but that’s generally pretty normal. The current numbers are to be expected as far as seasonal variation. What’s even more indicative of a return to normality is the drop in number of offers and speed of sale. Agents are noticing decreases from 25-30 offers to 5-7 offers. In addition, a bit fewer offers are above asking price.
That’s just national averages, though. There are still some highly competitive markets, and the most competitive ones are actually becoming more so. 8 of the 10 most competitive markets actually had an increase in bidding wars between July and August.
Back in 2019 the first eight months of the year saw 5,706 homes sold. During the same period in 2020, in the early response to Covid-19, sales dropped off by 12% to 5,003. As the market came out of the Covid doldrums in 2021, sales took a dramatic 57% jump. It’s most easily seen looking at the sales volume for the Harbor area in March on the chart below.
Part of that jump was the approximately 700 sales which didn’t happen in 2020. We don’t know how many of those “deferred” transactions have jumped back into the market. As of August the South Bay sales were at 6845, a 20% increase over the 2019 sales for this point in the year.
Seeing that a huge part of the March increase came in Harbor home sales tells part of the tale. The biggest piece of that market in recent months has been entry level or first time home buyers. Closely following are investors in small income properties.
Stories from the street imply that the growth in ADU additions and conversions has had an out size impact on that market as well. Both homeowners and landlords benefit from having additional living spaces.
For right now, the pandemic appears to be fading, which would tend to boost sales. Similarly, the low mortgage interest rates continue to support the market. At the same time we’re moving into fall and winter, when sales typically slow. August showed just a hint of a seasonal downward movement. September should be a directional indicator.
Sales Prices Up
That jump in sales volume was accompanied by a bigger jump in the median price of the homes selling. Pent up demand and low interest rates combined to create bidding wars and drive median prices up. As of the end of August, the median price of a home at the Beach was $1.7M. That number was $1.5M in 2019 and $1.4M in 2020.
Median prices on Palos Verdes trended about the same at roughly $100K more per unit.The Inland cities and the Harbor area both showed mosest increases in the $50K neighborhood.
Area Sales Dollars Slowing
The monthly sales value of homes sold across the Los Angeles South Bay for August declined in all areas except the Palos Verdes Peninsula.
Compared to July, the number of sales on the Hill increased 8% in August, with a 2% increase in median price. That translated into a $150M increase in monthly sales since the first of the year.
Activity in the Inland cities has been stable for three months already, having risen about $50K per month since the first of January.
Monthly sales at the Beach and in the Harbor area pulled back for a second month in succession. Looking at the blue line for the Beach, we see a sharp drop in July which softened considerably in August. The Harbor area shows a steady decline over the same period.
As of August monthly sales totaled ~$150M higher than the beginning of the year at the Beach. During the same period monthly sales totals were up ~100M. As we move into the fall and winter season these numbers should slow somewhat.
Statistics – by Month, by Year
Interestingly, the number of homes sold in the Beach cities was unchanged from July, while the median price increased 6% at the same time.
There were 175 homes sold in both months. So how did Beach homes grow from a median price of $1.6M to a median price of $1.7M in one month? In July, 27 of those properties sold below $1M. In August, only 20 sales closed escrow for under $1M. The entire market simply moved up, pushing the median price up $100K in one month.
On a month to month basis, prices are holding or increasing across the board. At the same time we’re seeing slowing or flat sales everwhere but Palos Verdes. Continued slowing for the season is to be expected.
There’s still a lot of buyer traffic at open houses, but sales volume is slowing and buyers are showing price resistance. There’s also some chatter out there about what’s beginning to look like inflation in the real estate market. My crystal ball is showing a slow steady ride through the next month. It’s all cloudy after that.
Most of the time, investors look to buy when the market is down and sell when it’s up. This is actually quite useful for the health of the real estate market as a whole, since it makes up the majority of transactions during weak economies, even if it does primarily benefit the already wealthy.
However, that’s not what has happened in this situation. When the pandemic hit, investors were not immediately able to purchase and didn’t have a strong sense of where the market was headed, so investment dropped off dramatically. Prices actually continued to rise throughout the pandemic and even now, meaning there was never a low point for investors to take advantage of. They’re realizing that now, and starting to invest again, expecting prices to continue to go up.
While it’s not a huge cause for concern yet, this is problematic for people intending to buy homes to live in. Investors generally don’t live in the homes they invest in, yet frequently win out during heavy competition due to high cash volume. They’re also not serving the same purpose they do during down markets, since demand is already high. The most problematic type of investor is a flipper, who generates no value or utility at all, merely making a profit off of a home being temporarily vacant.
After lockdowns ended, the real estate market was inundated with prospective buyers who seemed to be itching to take advantage of low interest rates. Interest rates have started to climb back up, yet demand currently shows no signs of slowing, despite continuously rising prices. So what’s the actual reason demand is high, and perhaps more importantly, is it a good reason?
The stimulus packages are a likely culprit. A government stimulus is always going to effect short-term change, but its goal is also long-term change. This is done by a multiplier effect — when people have more money to spend, they spend more, which causes the money to recirculate and improve GDP. However, it’s important to realize what the money is being spent on. Between a quarter and 40% of stimulus money was spent on food, household goods, and debt, and much of the remainder was saved. The stimulus certainly helped people to get through the recession, but it didn’t actually do much to improve the economy as a whole.
From the outside, the real estate market looks like it’s recovering, since it’s becoming more competitive when there isn’t much reason for it to be any longer. In reality, most of the people who can afford to buy right now could already afford to buy before the pandemic, and the rest are perhaps falsely optimistic. The primary factor that can result in long term recovery hasn’t happened yet, and that’s job recovery. The job market isn’t expected to recover until 2025, long after the eviction and foreclosure moratoriums end.
Currently, Millennials are the largest group of homebuyers. The second largest is Gen X, who have a fair number of similarities with Millennials despite being in the workforce much longer. Gen X, like Millennials in 2007, also experienced a major recession in 1980 — and a fair number even lost their homes in 2007 that they had only recently been able to purchase. All in all, Gen X hasn’t had much luck with homebuying. They haven’t lost hope, though — the current hot market appears to be attractive to Gen X prospective homebuyers.
The effect is clearer in some cities than others. The most popular metros for Gen X to move to are in the southeast. This includes several metros in Florida, as well as Memphis, Atlanta, New Orleans, Raleigh, D.C., and Baltimore. By contrast, the least popular metros are primarily not in this region, with the exception of Nashville. The others are San Jose, Seattle, Pittsburgh, Austin, Buffalo, Boston, Minneapolis, Denver, and Salt Lake City.
Prior to the increasing popularity of work from home models, most people only travelled on vacation when, well, on vacation. While they were working, they needed to live close enough to work to have a reasonable commute. That meant resort areas such as Palm Springs and Lake Tahoe didn’t have a high permanent population, just a lot of transient residents, especially during holidays. Now, these areas are in high demand for homebuyers who wish to live there permanently.
It’s true that vacation towns are generally expensive. You’ll get that anywhere where tourism is a major source of the city’s income. But the 30% price jump in Palm Springs over the past year was not because of tourism, since tourists don’t buy houses there. Demand is increasing for areas close to recreation, since the same people can also work there, at their new home, instead of commuting. This is especially true of outdoor recreation, but even Truckee, with its numerous art galleries and clothing boutiques, doubled its median home price.
Some of these towns are struggling to take in new residents, though. Housing can’t be built overnight. While vacation towns often have more than enough space for their relatively small number of permanent residents, it’s frequently in the form of hotels, AirBnBs, and second homes. The former two are generally still occupied as well, just not by their owners.
We’ve just talked about the Millennial generation’s impact on the luxury real estate market and their desire for updated, move-in ready homes (see: https://www.beachchatter.com/2021/02/11/millennial-preferences-reshaping-luxury-market/). It turns out there’s another type of home that Millennials are itching to buy, and it’s quite on the opposite side of the spectrum. They’re moving across the country to buy old, cheap houses in need of extensive renovation.
Not all Millennials have the income to enter the luxury market, so for those with budget constraints, the alternative is to expand the search radius. There are plenty of houses under $100,000 that are in need of some updating in historically less desirable areas. A Utah couple bought a Victorian-style 1885 house in Connecticut for $85,000. They’re expecting to spend about $100,000 to remodel it. This is still far below Utah’s median house price of about $575,000. It’s likely that this trend will continue, as work-from-home enables prospective buyers to look anywhere within the country. More expensive areas such as New York City have already had a significant exodus.
There may be a surprising answer as to why younger generations have seen increased rates of living with their parents. Popular belief is that they’re either too lazy to get jobs or simply saddled with too much college debt. While lack of employment and exorbitant tuitions definitely play a role for some of them, Millennials are actually the largest group of homebuyers, so what’s true for some won’t be true of all of them. It appears some contingent of them have simply been biding their time, waiting for the perfect opportunity to skip past starter homes and enter straight into the luxury real estate market.
College may have brought with it a mountain of debt, but as a result, Millennials currently are the most educated group of buyers in the US and are earning more than any prior generation. They are also set to inherit more than prior generations did. It takes time, but they are able to save up money to buy a house. And not even just a house — the first homes of some Millennials are multi-million dollar residences. Of course, this is partly because rising prices have meant that more areas have multi-million dollar homes for sale. But another reason is Millennials’ wishlist items: move-in ready, good walk score, high-tech green features. These all add value to a home, making Millennials’ tastes — while not ostentatious — expensive.
California’s housing market saw multiple shifts during 2020 as different sectors reacted differently and regulations changed with the times. When 2020 began, we already had high home prices and a construction deficit. The lockdowns of the pandemic propelled an economic recession that was already in the making, causing it to arrive faster than expected. Normally recessions cause a drop in prices, but the circumstances of this recession were forced, and therefore not necessarily subject to the same natural tendencies.
In the beginning of the lockdowns, real estate agents were not able to meet with clients or show property, causing the market to grind to a sudden halt. As the year progressed, regulations loosened somewhat, allowing showings under safe conditions. That prompted a spike in demand, as people who were itching to buy, especially with low mortgage rates, were finally able to start looking again. However, that did nothing to change available inventory. Inventory is low as a result of lack of construction, and what little construction there was being halted by lockdowns. In addition, most of the construction being done was for higher-end single-family residences, even as many prospective buyers were losing income due to the pandemic. With high demand and low inventory, prices simply continued to go up.
The market itself isn’t the only thing that changed, though. Prospective buyers are no longer looking for the same types of properties they wanted before 2020. If people are going to spend more time at home, they want the type of home that they’ll be happy living in. Move-in ready. Plenty of space. Home offices. Room versatility. It even extends to the outdoor amenities — houses with pools and outdoor living space are selling quickly, since people are able to be outside without leaving the confines of their property.
2020 hasn’t been quite as bad for the real estate market as expected; Quarters 3 and 4 have actually experienced incredible recovery and even some growth from Q1 since the enormous downturn in Q2. Home sales are up about 800 from Q1, after falling by over 1100 in Q2. Despite the slowdown in construction, total housing starts now are slightly higher than they were in Q1, with the main difference being that more of them are individual homes and fewer are the more affordable multi-family residences. And now, the announcement of the COVID-19 vaccine has brought even more hope for a better 2021. Fannie Mae still expects a slowdown during the first half of 2021, but that’s because people, including builders, are going to need a bit of time to get back into the flow of things. Once prospective buyers have their incomes sorted, sellers see values going up, and halted constructions have been completed, those new homes should fly off the market. While it’s true that this is a lot of things that need to go right, it’ll be an automatic, albeit slow, process once lockdowns end and employment starts back up.
Chances are you’re familiar with the concept of inspecting a home before sale. Seller’s agents are required to list observable defects, but sometimes problems aren’t as easily noticed, which is why seller’s agents will frequently recommend that a qualified home inspector take a look. A good home inspector will always look for defects that affect the property’s value, desirability, habitability, and safety, and they are required to provide the seller’s agent with a home inspection report (HIR). But it may surprise you to know that who can be considered a home inspector is actually rather broad.
A home inspector is really anyone whose business is conducting home inspections and preparing an HIR. The State of California has no home inspection licensing. That doesn’t mean they are necessarily unlicensed, however, as many home inspectors have general contracting licenses or are pest control operators, architects, or engineers. You will occasionally find home inspectors without a license of any kind, which is why seller’s agents always want to be cautious about which home inspector they choose. There are some rules that even unlicensed home inspectors must follow, such as that the inspection be non-invasive and non-damaging to the structure, and that they provide an HIR to the seller’s agent.