Sunday, October 7, 2012
NOW THE “HEADLINE NEWS” HAS EVEN CAUGHT UP
At
the beginning of the summer I wrote that “the statistics have caught
up” with what had been happening “on the ground” in Orange County real
estate since February. I used graphs showing sharp inventory corrections
across the board, and striking inventory shortages in various market
segments in various cities in Orange County. As the summer wore on we
had to recognize that the sales and inventory numbers were clearly
breaking out of the range of “anomaly,” and into the definition of a
“trend.”
Over
the last month it was hard to miss the numerous news reports; big
cable, major network, local papers and countless blogs “caught up.” And
they caught up fast. I don’t think there has been one day in the past
month that I haven’t seen a report talking about the strength of the
real estate market, often with the word “surprising” in the description.
The first graph attached to today’s report clearly shows the length and
strength of this trend in Orange County.. (While the story might be the
same, better, or worse in markets all across the country I am, for this
report, focused on our market here in Orange County.)
DRAMATIC SHIFT IN DISTRESSED INVENTORY
Continuing
the discussion from last month on the “shadow inventory,” a topic that
seems to quickly creep into every real estate discussion, please take a
look at the last two charts attached. The two 4 year charts of active
listings, versus pended sales, versus sold, the first being for all
distressed* resale residential in Orange County, and the second for all
standard resale residential sales in the county just have to grab your
attention. Digging through the data a little deeper yields some
interesting data points. (The graphs show total active inventory, not
new listings.) As the graphs show, standard sales have been generally
increasing, and distressed sales have remained fairly constant. But the
dramatic shift has been in distressed* listings coming to market. For
the six months ended at the end of August, in 2009 there were 4352 new
distressed listings, in 2010 it was 4484, in 2011 it was 4050, and this
year it was 2819. These are Orange County statistics. But, since we are
impacted by the national news and opinions let’s take a look at a few of
them.
*Distressed properties include all houses in foreclosure, in notice of default, and short sales.
THE
FOLLOWING THREE PARAGRAPHS MENTION AN ANALYST NAMED A. GARY SHILLING.
HE IS ONE OF THE MOST ARTICULATE OF THE “BEARS.” I DISAGREE WITH MOST OF
HIS ANALYSIS AND FORECASTS, BUT
HE IS A HIGHLY RESPECTED ANALYST WITH A PRETTY GOOD TRACK RECORD,
NOTWITHSTANDING SOME GLARING MISSES. BUT, ALL THE OUTSPOKEN FORECASTERS
HAVE THEIR SHARE OF MISSES. I’M RELUCTANT
TO SINGLE OUT ONE ANALYST BY NAME, BUT DO SO WITH RESPECT, AND I HOPE
THAT COMES ACROSS IN THE FOLLOWING DISCUSSION.
The
state lawsuits ended the “robosigning” mess in February (coincidentally
the month that our positive trend lines seem to begin). This was
supposed to set in motion a big new round of foreclosures, put on hold
during the lawsuit, which would flood the market with a huge excess
inventory of housing that Gary Shilling keeps saying is inevitable.
(Gary Shilling gets and deserves a lot of credit for accurately
predicting the housing crises of 2007/2008. However, we should remember
that in July, 2011 he confidently predicted, based on what he insisted
was still two million excess housing units, and that an imminent 20%
collapse in home prices would lead the nation into a severe recession in
early 2012.)
However,
as the nightmare of 2008 was coming to an end the most aggressive
estimates I remember were three to three and a half million excess
units. For four years the industry has built a half million below the
norm (that’s the long term norm, not the exaggerated norm of the early
2000s). So, we have absorbed something around two million of the excess
already. In last month’s report I got into the discussion about all the
owners who were upside down and, it was assumed by many experts, would
“strategically” default. But, it turns out that “HOME” means something a
lot deeper to an American homeowner than a line on their balance sheet,
and the percentage that are using the “strategic default” is pretty
small. Now, as we move into the fifth year of our “housing crises” it
appears that there’s a concerted effort by the FDIC and the major banks
to “slow walk” their way out of the rest of their “special assets”
(foreclosures). Bottom line; every time I try to get into the “shadow
inventory,” I keep coming up with numbers, at least for Orange County,
that, if they all came to market at one time, would amount to several
months of inventory, not the several years that Gary Shilling, and
others, to be fair, keeps talking about.
The
bulls and bears who analyze, write and speak on this shadow inventory
usually have lots of acronyms after their names and really expensive
software programs to do their analysis. (Yet they still come up with
exact opposite conclusions.) Gary Shilling could be right about another
two million units of “shadow inventory,” and another 20% drop in housing
prices, and about a major recession starting earlier this year
accompanied by a major stock market correction. But, if you followed him
in July, 2011, you lost a lot of upside opportunity in both real estate
and the stock market while hiding your money under your mattress. One
of the reasons I’m writing this is to try to interject some street view
common sense into the constant parade of the “talking class” on our 24
hour news channels. We have to be careful, but there’s a point where
careful turns into paralysis, and usually at the exact wrong time.
#1 QUESTION I HAVE BEEN ASKED DURING AUGUST
Over
the last month I have been repeatedly asked one or another version of,
“What will happen to the market when school starts and the summer
selling season ends?” Great question—at least I thought. To answer that
frequent question I started “digging deep” into ten years’ worth of
numbers. To my surprise I found only the very skimpiest of evidence
showing a hard pattern of the strong summer sales period versus the
weaker fall/winter sales period. Further, there were numerous months
completely out of sync (a strong month during the winter or a weak month
during the summer), further undercutting this already weak pattern.
(There is a more recognizable pattern in “listings” than in “sales.”) No
doubt a statistician could pick out a pattern with some percentage
predictability attached. But, for a normal person just trying to make a
decision on buying or selling a home I could not find a pattern anywhere
near strong enough to use as a factor in your decision making process.
Further, if a person did want to use the listing pattern it is clear
that 2012 is a contradiction. The “pattern” style increase in the number
of listings in the second quarter certainly did not happen this year.
We
now head into fall with a shortage of listings in the most sensitive
price ranges in broad sections of the county—glaring shortages in the
lower priced condominium market. From my perspective—from street
level—it looks like we’re likely to see slowing sales in the next two or
three months, but not because of anything having to do with the end of
summer or the beginning of school. The sales this fall will be impacted
more than anything else by a shortage of the inventory! What a change!
#2 QUESTION I HAVE BEEN ASKED DURING AUGUST
You
might have guessed it, “What will happen after the election?” This
election can have a profound impact on who and what economic philosophy
occupies the Executive Branch, the House of Representatives and the
Senate at the national level, and some pretty important economic
decisions at the state level. If you and I were sitting together we
might spend several hours dissecting the different outcomes of this
election. And, hand-in-glove, the aptly named “fiscal cliff” ties
directly to this election. For sure, it is impossible to watch your
choice of cable news without seeing multiple political commentators
waxing eloquently on this subject. Whether there will be any kind of
fundamental shift in supply and/or demand in the 1st or 2nd or 3rd quarter of next year as a result of the election outcomes is still pretty foggy to me.
I
have read dozens of expert forecasts—political, economic, and combined,
with very different conclusions and forecasts. Most all of these
pundits have an exuberant confidence in the accuracy of his/her
forecast. The pessimistic “bears” have ample logic for their scenario.
But, the optimistic “bulls” have equal logic for theirs. Since they are
noticeably contradictory there will have to be about as many wrong as
right. In the true spirit of the talking class we will certainly know
which ones are right a year from now—they will remind us. (Ironically,
many of the ones who are wrong will find a way to spin the results to
make them look right after all.) I have to report one simple answer to
you; I don’t know what the results of the election—or the fiscal
cliff—will be in the next few quarters, or the impact on the 2013/14
housing market. (You can also put Europe and China under my “I don’t
know” heading.)
The first Professor of Economics was hired by Harvard University in 1871.
Prior to that “economists” had to “live their talk,” so to speak, and
reside in the world of their theories. I wonder if creating a whole new
class of the “academic economist,” a class of “expositor in theory,”
residing in the comfort of lifetime tenure followed by generous
pensions, and shielded from “living with one’s mistakes” has served us
well. F.A. Hayek said, “We shall not grow wiser before we learn that
much that we have done was very foolish.”
IF YOU’RE SITTING ON THE FENCE YOU HAVE TO SERIOUSLY CONSIDER THIS TIMING OPPORTUNITY
I’ve
read reports that even though this has been a good summer in various
markets around the country, we’ll continue to “bounce along the bottom”
for another year or so. There are still experts, expanded upon above,
insisting that we are about to be hit with a huge inventory of “shadow
inventory” which will pressure prices again. But here’s the reality of
what the numbers are telling us about the last six months, and where we
are today. If you’re thinking of SELLING, this is the most
favorable market for you in at least six years. Might it get even
better, or worse, or just bounce along? Yes, it might. If you’re
thinking of BUYING, particularly using financing, this is the
most favorable market for you in at least four years. Might it get even
better, or worse, or just bounce along? Yes, it might. Looking back on
my own career, or my whole life for that matter, I have let slip many a
good opportunity in the here and now by over-thinking the unknowns of
tomorrow. Repeat: We have to be careful, but there’s a point where
careful turns into paralysis, and usually at the exact wrong time.
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Michael Shepard
Estate Represenative
Mobile: 949-395-6640
Email: mikeshepard@cox.net
First Team Realestate
Laguna Beach, CA
Estate Represenative
Mobile: 949-395-6640
Email: mikeshepard@cox.net
First Team Realestate
Laguna Beach, CA
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