Monthly Archives: January 2015

The Big Squeeze

picContinuing our discussion of the Static Quo of the Status Quo.  The No/Low Inventory of  homes on the market.   A move-up market bogged down. A move-down market with nowhere to go. An entry-level market with shrinking opportunities.  What’s left?  A side-ways market?  Not really much incentive to sell a house just to be able to move into another one just like it.  Home transactions flow out of life transitions and contrary to the old adage, the more things change in your life, the more you don’t want your home to stay the same.

In the old days, there was a natural progression in the prevailing wisdom about how home ownership should work.  First you had to get into the market.  Beg. Borrow. Scrimp. Save.  Anything to buy that first home.

Then you settled in. Built sweat equity. Waited for appreciation.  And voila! Three to five years later, you had a stepping stone to the next bigger, better place. Then, you settled back in again. Repeated same.

Somewhere between the 3rd and 5th move-up –  you were arrived at the end all/be all of perfect homes.  Until of course you realized that life really wasn’t going to end there.  And the biggest lesson life teaches over a lifetime is, you never really arrive.  There’s always one more change ahead.   But then… I digress…

Here’s the list we started last week –  factors that in one way or another or in conjunction with each other that are helping to squeeze the current listing inventory. (Remember low inventory tends to become a self-fulfilling prophecy. Sellers become Buyers after they sell, so if no one is selling then not as many are buying either.  Low inventory is a cause and an effect.)

– Prop 13 Deterrence                                                – Limits on Capital Gain Exemptions

– Step-ups in Tax Basis                                           – Sustained Low Interest Rates

What else can we add to the mix of contributing factors?  Certainly each of the following plays a role in holding down the growth of inventory at this unique juncture in history.

– Fundamental Changes in Mortgage Lending

– Unprecedented Numbers of Cash Offers

– Inherent Undesirability of Contingent Offers

– Corresponding Low Rental Market Inventory

– Increasing Numbers of Foreign Investors

– Differences between New Tech & Old Tech Trends

– Shrinking Middle Class/Concentration of Wealth with 1%

– Higher Employment w/o Corresponding Wage Increases

– Lack of Suitable Housing Density

– Slow Growth Planning Policies/Land-Use Politics

– Huge Surge in Aging Baby-Boomer Demographic

– Changing Millennial Attitudes about Home

– New Paradigm of Risk-Aversion since the Meltdown of 2008

Need we go on?  Not right now since we are out of room anyway.  Next week – we’ll start talking about how some/all of the above can align in different ways to create a series of perfect storms for individuals.

The Whys of Low Inventory

UnknownWe hear it all the time.  Buyers want to Buy but they are frustrated. Stuck. Mired in a market that doesn’t seem to be on the same page as their desire to buy.  And Sellers want to Sell but they can’t quite pull the trigger and put their houses on because they can’t figure out exactly where they are going or how they are going to get there.

The knot in the Mobius loop of supply gets tighter and tighter when Sellers insist on having a roof over their heads after they sell  (unless they have gone on to their final resting place).   In order to get it, they have to become Buyers in a market where there isn’t much worth buying.

We could offer up the suggestion that more Sellers could rent after they Sell.  But that’s pretty much of a non-starter for folks who’ve owned their own homes for awhile.  And if there’s anything more disappointing than the number of homes to buy out there – it’s the number of places available to rent.

So we arrive at the Static Quo of our current Status Quo.  Where the Quid No Quo of Low Inventory begetting Low Inventory doesn’t offer up many easy solutions.

Let’s dig in and continue the discussion.  If you want to catch up on previous columns leading up to this one, go to  (the print is a bigger there too!)

Right now there are plenty of people talking about Low Inventory. But very few are talking about “The Why” of low inventory.  What’s causing it?  Perhaps it’s time to start outing a few of the factors contributing to the mix. Rounding up a list of likely suspects.

Here’s an initial list of some of the lesser characters involved in aiding and abetting low inventory. We’ll call them “accessories to the time”.   The hotline is open for any additional tips you’d like to call in.

Prop 13: The cap on annual property tax increases acts as a deterrent to selling in a market where prices are rising.

Capital Gains Exemption of $250K/$500K  for Singles/Couples:   Many longtime residents are over this cap and the tax consequences have ironically become a disincentive for some to sell homes

Rule Governing Step-ups in Tax Basis:  Act as encouragement for many married sellers to stay in their homes  until  one or the other to passes away before a move makes practical financial sense.

Sustained Low Interest Rates: Act as encouragement for homeowners and investors to hold on to the real estate they’ve already purchased at incredibly low rates

The list will get longer next week.  Then we’ll spend more time examining it in greater detail.  It’s a complicated mix of interrelated factors and underlying causes but I won’t leave you hanging.

A Crimp in the Flow

Unknown-3We’re ten days into 2015 already! Time’s-a-wastin’ so we better get to work. There’s a real estate market out there waiting to be distilled.  Here’s a quick recap to make sure we are all on the same page:

First: There’s no more significant factor shaping today’s real estate market than the sheer lack of available inventory. A fact that has brought increasing frustration to buyers. Placed huge crimps in the regular flow of transactions. And overwhelmed many people’s ability to find practical ways to move up or down in their lives. Anything else we might choose to talk about would pale in comparison to the effects of our ongoing supply issue.

Second: Cyclical ups and downs in the marketplace aren’t unusual or unexpected.  World, national and regional economies are always swinging back and forth at the same time the real estate market is busy either leading the way or following suit – waxing and waning between Buyers’ and Sellers’ interests, fluctuating waves of supply and demand and the subsequent rise and fall of prices.

Third: The precarious depth our inventory has now fallen to combined with the prolonged duration of its decline is a powerful statement that current conditions aren’t just another iteration of cyclical business as usual.  Something fundamental has shifted. Signaling a sea change well-beyond the scope previously imagined.

Fourth:  Low levels of inventory are a permanent fixture of the new market normal – a truth that will continue to unfold over the course of the coming year.  There’s no simple solution to the inventory problem, waiting around the corner, ready to nudge the supply cycle onto its next phase.

Fifth:  There’s no question that many of the big changes real estate is experiencing stem from deeper, residual impacts still reverberating from the Great Recession. The world was turned upside down in 2008. While it would be comforting to assume we could just resume where we left off before the rude interlude of the last seven years, there are some aspects of how things work that have changed forever.

Sixth:  Something else happened on the way to the great recession and its patchwork recovery. The perfect storm came along.  While the economy was crashing and burning, the country was also coming to the tipping point of a huge demographic shift that’s been in the works for a long time. Aging baby-boomers began reaching retirement age at the same time millennials began launching journeys into adulthood. These significant life transitions are changing the essential fabric of our culture. Redefining notions about quality of life and how people want to live it.  We haven’t quite figured out how to make our new choices, find comfortable places and build strong new foundations on all the left-over shaky ground we’ve got – where so many of the old rules no longer apply.

It’s coming… but it’s going to take courage, hard choices and a lot of work.  More next week.

“Scratching for Answers”

Unknown-2The main feature in last Sunday’s SF Chronicle Real Estate Magazine was a year-end poll that asked three high-profile Bay Area Realtors to respond to the same question:  What was the biggest surprise in the real estate market in 2014?  All three weighed in and gave the same exact answer:  The biggest surprise, bar none, was the lack of inventory of homes for sale.

The same conspicuously low inventory that has profoundly shaped every other factor in the market for the last two years.  The one that will continue to remain real estate’s biggest elephant in the room heading into 2015. The one for which there is no apparent magic wand, ready to transform our severely ratcheted-down supply back into a steady, reasonable flow of good choices and opportunities again.   Suffice to say that we’re heading back into crunch time soon. Once more unto the breach Dear Friends.

None of the three were able to offer any enlightened perspective about “why” there is such low inventory.  Just that there is.  And that’s exactly what we’ve been scratching our real estate mind’s about these last few weeks.  Trying to get a few answers. Or at least a clue.

So here’s my latest, best thought:  I remember a wise person, once telling me that if I wanted to understand the big picture of real estate, I had to forget about all the nagging little ups and downs of the economy.  Things were always going to ebb and flow back and forth.  That was the norm. Getting hung up on smaller cycles was a form of misdirection, sure to obscure the true slight of hand at work, changing the game on a much more fundamental level.

If I wanted to understand what was really going on, I should dig deeper. Not by drilling down ad nauseum into reams of statistical analysis but rather by stepping back and adjusting my gaze toward a broader, meta-view of the landscape.

When I couldn’t figure out why something was happening, I should take note of any large demographic trends taking place and start following them.  Big changes in population – like shifts in age, migration patterns, birth rates –  often happen below the conscious awareness of everyday life.  Demographic changes are what happen when the world is busy making other plans.

Is there any evidence that suggests our prevailing pattern of low to no inventory is a symptom of a much larger struggle that two different generations are having, trying to find their place in a world turned upside down by the Great Recession?  One that came of age and one that began reaching retirement age both during the last ten years?

Next Week: Aging Baby-Boomers and Millennials looking for their places

The Listing Drought

Unknown-1It’s tempting to look at how low the number of active listings has fallen at the moment and chalk it up to being a normal part of the seasonal ebb and flow of the real estate market.

It’s an easy excuse since historically, there are almost always fewer listings at this time of year than in the spring and summer. No one likes putting their place on the market during the holidays if they can help it.  And surely there must be plenty of Sellers out there getting ready to put new listings on the market in the coming months.

Except of course, we pretty much said the same thing last year.  And the two years before that.  And somehow all those great new listings we assumed would be coming, haven’t quite materialized to the degree we hoped they would.  As most prospective Buyers will attest, there have been a paltry few but not nearly enough.

Since we emerged from the depths of the distress market in 2011, when short sales and REOs artificially swelled the supply and comprised almost 30-40% of  total closed transactions,  the sheer lack of available inventory has become the single most dominant factor driving our marketplace.  Significant lack of supply has become a year round condition rather than a seasonal fluctuation.

In 2010-11, everyone was worried about the Shadow Inventory. That was the euphemism given to a huge secret stash of foreclosed homes that people figured all those big nasty banks must be purposely holding off the market.  They were fearful that if all that pent-up supply was somehow released into the marketplace, prices would plunge even lower than the 40% drop they had already experienced.

But ironically instead of torrents of Shadow Inventory flooding the market, we somehow have found ourselves going through an unprecedented  3 year drought marked by relatively few new listings.  One that has pushed prices up dramatically while it has also been shaking up some of the long held beliefs about the market we always thought we could rely on.

Take a moment to consider that this is the fewest number of homes that Santa Cruz has had for sale in November/December in more than 18years.  Add to that the fact that for 44 of the last 45 months, the number of listings has been lower than it was in the same month the previous year. And from my perspective, there is little on the horizon to suggest that real estate in 2015 is likely to be much different than it has been these past few years.

So it begs the question:  Is there something larger afoot in all of this? A fundamental shift in real estate and how we view the nature of homeownership?  To be continued…

Something’s In the Wind

UnknownLet’s start by recapping the conversation.  The real estate market is a shared collaboration between Buyers and Sellers.  An ongoing co-creation that happens between those who are listing and those who are looking.  Without enough of one or enough of the other or enough of both, the whole thing just doesn’t succeed very well.   It gets harder to generate sales – which is exactly where we are at for the moment.

Right now, both sides seem to have settled into a tacit mutual agreement that allows them to take a time out and to beat a quiet retreat to their respective corners.  Presumably, they’ll wait it out there until the magic moment “in the spring,” when the machinery cranks back up again.

I know … it’s supposed to happen this way. Exactly this way. It’s all part of “the normal seasonal pattern”.

Every year around this time, as the theory goes, people become overly-absorbed with the holidays.  Caught up in the crunch. Obsessed with family, shopping and parties. Or obsessed withpreserving their sanity in the face of all of the above.   What are you reading this real estate section for? Get busy and be with your family!

But is that all this is?   The same old same old seasonal pattern?  Is it that simple?

I’ve never been a big fan of the seasonal real estate theory.   It has always seemed like  an excuse to take the easy way out.  When in doubt – pull out the seasonal card.  When you know what’s happening you don’t need it to explain something more complicated.

I’m not comfortable rounding up all the factors at work shaping the market dynamic at any given time so I can lump them under the heading of the one of real estate’s lowest common denominators.  Like the weather. Or the holidays.  Or Springbreak. Or tax time. Or school starting in the fall.

Do real estate transactions really falloff because everyone is on vacation or because it is raining? Are they cliché-dependent?  Those concepts are becoming less helpful each year,specially as the world grow more diverse and continues to change in strange and mysterious ways.

So let’s put away our handy excuse to explain why things have wound down to such a noticeable degree right now.  Something bigger is at work that we should be trying to figure out.  This is the 45th  straight month the number of listings hasfallen below the same month the previous year.  I think it’s trying to tell us something.