Why 2014 is ALREADY different from 2013

To prepare for this years post about what to expect in 2014, I went back to last years post in which I suggested three things that might make 2013 not just a modestly appreciating year, but potentially a really strong one. Those 3 trends; listing agents reading the market and pushing prices in areas of little or no inventory, less distress sales bringing values down, and homes being sold without appraisal contingency all continued in earnest. Though activity slowed dramatically in the second half of the year, we still finished 2013 with over 4000 homes sold in Santa Clarita, the highest number in 8 years. Prices almost everywhere in town were up about 20%, in lower price points even more. Like the stock market, it was really a spectacular year for values and the return of confidence in Real Estate.  Interestingly though, most of that “good news” happened before July, what does that mean going into a New Year? Of the 50 or so articles I have read projecting what 2014 might be like, almost all suggest “steady, not spectacular like 2013”, or “modest growth”. Many of the on line sites when you plug in a home address will tell you what they believe the appreciation in 2014 will be. It is usually between 6-10% for the 30 homes I ran. For some of those homes, I don’t believe they will see that under current conditions. In fact if I were to point out the three trends we experience now heading into 2014, they are not at all like a year ago. They are a rising interest rate environment, homes taking much longer to sell (often after price reductions) and buyers being more cost conscious than ever as affordability drives their decisions. The 20% appreciation of the last year has really affected buyer ability and desire to buy going into 2014. So the confidence we had for what was possible going in to 2013 has been tempered by this going in to 2014. Throw in inventory that has risen to over 500 homes and stayed there, tougher lending guidelines that began January 1, and you have an environment in which growth will occur, but not in all areas and price points.

To be clear, these changes to appreciation and market strength actually started last summer. The problem with a “New Year Prediction” is that you can’t neatly package cycles and trends in calendar years. The monster year that was 2013 actually started in fall 2012 when plunging inventory and multiple offers began for the first time in years. Those of us that track showings, buyer calls, and offers could tell you immediately that change was afoot. If we hadn’t just experienced 6 years of devastation, we would have proclaimed it more strongly and confidently. That cycle of strength really came to a stop in Summer 2013. Since then, any busy agent will tell you that all forms of activity slowed dramatically. In June interest rates rose over 1%. As I liked to explain at the time, it was like someone turned the spigot off. Calls, offers, showings, all slowed noticeably. Inventory, which hit a low of about 250 homes in May started to build. We have been at over 500 homes for sale for months. That is still not enough inventory, but if it starts to rise in spring and does not get absorbed quickly, prices likely wont rise.  The amount of time it takes for a home to go under contract, “days on market” also changed, more than doubling in the second half of 2013. I believe that homes will definitely take longer to sell in 2014 because that trend has been happening for months. Smart sellers need to know what that means and how to make it work for them in the New Year. On pricing, it is critical to note that for the first time in 29 months sales fell in November 2013 compared to 2012. That is huge because a lot of the headlines that explain rising values don’t really explain what is behind that. When something stops after 29 months it means a cycle has changed. In this case, buyer demand was lower than the year before. Again, any good agent could tell you that, but what does it mean? It means that the environment that led us to push prices in November 2012, could be the exact opposite in 2013, because demand has been reduced.

Ok, ok, so 2014 actually started in summer 2013, demand isn’t the frenzy it was, interest rates went up, inventory is a bit higher, what does it mean? It means, more than ever the knowledge and expertise of your agent is crucial to studying holes in the market. To explain honestly what is, and ISN”T possible. There is still a lack of quality (read model sharp) homes in most price points under $800,000. Prices can be pushed if condition warrants it. Average homes in terms of condition or location wont just sell, buyers wont buy just to buy. In fact, one of the biggest changes in the rebounding market of today compared to 10 years ago is buyer mentality. They buy LESS home than they qualify for, they don’t push it. They are extremely aware of value and cost. When interest rates rose in June 2013, I had many buyers put the brakes on the home buying process. If the 2004 buyer was motivated by greed (meaning certain appreciation), the 2014 buyer is concerned with AFFORDABILITY, and is extremely in tune with all costs, from interest rates to tax and HOA fees. Todays buyer looks at what it will cost to make the home the way they want it. If it is too much, they pass. The 2004 buyer just wanted in. This logical approach to purchasing is of course, a good thing. But it does mean that sellers, and their agents need to understand it. Specifically, who is your likely buyer and what are they comparing your home too. Just putting yours up at a higher price than the last may not work.

Still,  2014 has the potential to be a strong year. The number of sales and appreciation will likely be lower than 2013. In some areas, like over 1 million, it may be relatively flat. That isn’t just opinion, over 60 homes came on the market over $900,000 in the second half of 2013 and received no offers. Generally that means they were not priced or marketed properly. So what buyers will drive the market in 2014? The first time buyer will still be there, though if interest rates rise, that cools them off. The investor buyer is all but gone, there simply aren’t the distress sales that drove that segment of the market. For most Santa Clarita homeowners, that buyer didn’t mean much to them anyway. No, the buyer that we need for 2014 to be strong is actually a seller. Coined the “repeat” buyer, this buyer  has a property to sell and wants to buy something different-either larger or smaller. Bigger lot or smaller. In Santa Clarita or out. I used to call this buyer the “move up buyer” because that is what Santa Clarita has long been built on. Myself and other top agents started a Network Group in 1993 based on working this buyer to create activity in the market. Today, it is just as likely to be someone selling and moving to smaller, as larger. Either way, we need their home to create multiple transactions to the benefit of all involved. In many situations this may be the homeowner who bought a property in 2010-2012, and now has equity. Sometimes substantial equity. I have touched on these scenarios before. The condo homeowner who wants a house and the value of the condo is up 30% since purchased. Interest rates are still low enough, and due to an improving economy, they have the confidence to move up. The homeowner with the 5 bedroom and the kids are all but moved out, that wants smaller. Maybe a single story. Do you know how much demand there is for single story homes of quality in our valley? It is huge. Again, where are the holes in  the market? The opportunities to take advantage of? They exist, but more than ever it is up to the agents to talk to their clients and show what is possible. Put buyers and sellers together. 2013’s frenzy ended 6 months ago. Now it is up to us to create a strong 2014.

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