When will this “Seller’s Market” Turn?

This spring marks the 6th straight year of appreciation in the cost of housing in California. In many areas the cost to buy or rent has become unaffordable. As I begin my 28th year of selling Real Estate, I know this won’t continue indefinitely. We all should know this if we follow history. Still, this market remains a sellers’ market for anyone with a nice home under $800,000 in Santa Clarita and if you have participated in any “multiple offer” situation recently you feel at the mercy of a seller with a choice of buyers, hoping they will pick you. It’s a frustrating feeling to be sure.

To know when this crazy appreciation may slow down and even change to a more balanced market, it’s important to know why this sellers’ market won’t change for at least 2 years. First, we have a strong economy and people have jobs. Confidence more than anything else fuels housing. When you talk to thousands of people a year and they all tell you “I’m not buying in a declining market” like they did from 2007-2012, you know the importance of this. The opposite of that is happening now. When you are a little tentative as a buyer to offer a higher price for a new listing and you lose it to 4 other offers that all offered as much or more than you were considering, the next time you don’t want to lose out. And you offer whatever is necessary to get the property complete with a heart tugging letter of how you will be the perfect buyer for that seller. Sound crazy? Perhaps, but this is at the core of what you read about as median prices get back to all-time highs. Psychology is a very important driver of the current market. More on that later.

Besides buyer confidence that prices will continue to rise, there are some fundamentals causing a supply/demand equation that favors sellers. First, the amount of new construction built in Santa Clarita from 2007-2017 isn’t anywhere close to meeting demand. Building in California is both expensive and very time consuming. The Newhall Ranch project (now called “Net Zero Newhall”) which I believe will change our market significantly, has been trying to be approved for almost 20 years. Just NOW is the grading beginning around Magic Mountain. New construction has always driven our market and we haven’t had anywhere close to what is needed to satisfy demand. Further, what we have had hasn’t moved the needle with the MANY people in our valley who would move moved if there was something to get them excited. Small, 2 story properties with Melo Roos taxes, high HOA’s and no yards isn’t what this group wants. They have a low tax base on the home they have lived in for 10-25 years, low or no extra fees, a low house payment with a great interest rate they likely locked in a few years ago, and basically, they are comfortable. They might be ready for a change (the house is too big, or they want newer etc.) but there isn’t anything to get them excited. So, they stay put and don’t move. In Santa Clarita we have averaged under 600 total homes for sale for 4 years in a valley in which 1500 would be considered “normal”. We have less homes for sale this year than we did last year, and last year was an all-time low. That is why prices go up!

Another driver of this sellers’ market is the complete change in the quality of buyers in the marketplace and the loosening of lending guidelines in the last 2 years to reflect that. Today’s buyers – some of which lost their homes 10 years ago – are well educated about their options and have taken the time to be a solid buyer again. They buy less than they can afford, they have jobs and their credit is good. Because of this, lenders have made it easier to get loans and again you have a fair supply of good buyers for an unusually small number of sellers. A good supply of motivated buyers plus not enough homes for them to buy equals further appreciation.

So, when will this change? It’s telling that I am getting more sellers calling me to sell and they plan to buy “in a year or two when the market goes down.” If this sentiment grows, a lot more homes will come on the market. Again, confidence and perception really drive cycles in the market. The problem is, it’s hard to see any mass movement to sell and wait when most fundamentals suggest otherwise. Yes, people are retiring out of California but the millennial population coming into the market is the largest home buying group in the history of American Real Estate. They are behind the crazy markets in Salt Lake, Seattle, Portland, Nashville and Dallas. Plenty of them are buying in California too. What I think will cause the market to slow and eventually balance out here is the combination of 3 things that we will start to see in about 18 months here in Santa Clarita.

First, rising interest rates are happening and will continue to happen for the next 18 months. No one disputes this, the Fed has clearly stated it and though historically money is still cheap, higher rates mean a seller’s home costs more to buy even if the price stays the same. We are getting back to the point where people are spending over 40% of their income for housing-both ownership and renting. That CANNOT continue to go up for long. Further, all buyers watch carefully what home ownership costs and one clear trend that came out of the mortgage meltdown is buyers being conservative and buying less than they can afford. They rarely stretch it. Rates going up combined with prices going up (though slower than few years ago, prices are still going up) means at some point buyers simply can’t afford it and don’t buy.
Second, is the new construction mentioned above as creating more supply to take buyers away from the resale market. New construction has a double effect. It takes away the buyers that might consider resale homes if new weren’t available AND it causes people that have homes to put them on the market, so they can go buy a new home. I remember clearly trying to sell Warmington or Lexington resale homes in 1995-96 and having buyers choose new Castlerocks in Northbridge. Or losing buyers to new homes in Sand Canyon, Stevenson Ranch or Castaic instead of my resale down the street. This always happens when new comes on the market and it causes the resale market to cool and sometimes even decline a bit in value. This won’t happen in Encino or Manhattan Beach where there is no room to build, but it will certainly happen here in Santa Clarita in 2020.

The last reason the market will cool has less to do with economics and more to do with psychology. Can you believe that the median price in San Francisco County is over 1.5 million? That we have had 6 straight years of appreciation when a normal cycle is half that? That your neighbor just sold for $20,000 over their asking price with 5 offers? Well we can believe it because it is happening, but it isn’t “normal.” We all know that Real Estate is cyclical and though it’s hard to see any kind of big drop in prices, the cycle will eventually change. In a few years this exuberance for housing will seem just as foreign as me doing a market analysis in Tesoro Valencia in 2010 and having every single home on that piece of paper be a short sale or a foreclosure. That really happened though it seems hard to believe today. So, no reason to think this seller’s market changes soon, all the fundamentals suggest otherwise. But with rising rates, new construction coming and in time, buyers backing off a bit, it will change again. Just like it always does.