Tag Archives: supply and demand

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 tombrezsny@wordpress.com  (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.

“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

All Filler – No Killer?

CrunchyTacoWhat was that tag line we used to see on posters promoting Rasta bands at the Catalyst in the old days?   All Killer – No Filler?

Wouldn’t it be nice if we could channel more of that sentiment (and mojo) into the real estate inventory right now?  Seems like no matter how many times a day you and I (and I ) go onto the MLS to check for new listings or download our search engine results…nothing much new “of value” comes on. Just the same old same old.

Tired inventory.  Picked-over inventory.  Stale-inventory.  A warmed-over re-hash of stuff that didn’t sell last year.  A strange menagerie of distress properties.  Dubious short sales you can never be sure of.  A smattering of REOs the banks are still pinching out of their systems…starting with the worst first.

The sum total?  An uninspiring catalogue of choices.  Most of which aren’t qualified enough to move anyone anywhere.  As in: Move buyers in. And move sellers out.

I guess we could say it’s mostly Filler…Very Little Killer in real estate right now.  Not many killer views, killer yards, killer locations.  Lowering our expectations even more… there aren’t even many plain old, modest, middle of the road, houses packaged in nice presentations at reasonable price points.  Specially right in the sweet spot zone between $600k and $800k.

I don’t know about you…but it’s killin’ me.

Most Agents out there understand.  They’ve got clients calling. Buyers ready to buy.  Buyers becoming increasingly frustrated with a market that doesn’t seem to offer anything that fits their needs or price range.

And by extension, Buyers frustrated with their own Agents, who become more and more suspect each week they fail to uncover that special hidden gem that’s waiting out there. Somewhere.

It isn’t a Perfect Buyers Market anymore.  But it still could be a good one.  Interest rates are still remarkably low.  And prices are still well below the peak (remember – the Median Price almost hit $800k back in the boom days).  The median is in the low $600,000s now.

What’s missing?   Great places that people actually want to buy.  I think some people call it supply.  Or maybe “effective” supply would be a better term.

I keep having the same deja-vu experience.  Clients who’ve been looking forever, pouring over on-line pictures of homes for sale, who keep calling and asking to see places they forgot they already saw a year ago.

Houses that didn’t work then and aren’t going to work after another 365 days on market and a minimal price reduction.   I call this  “Deja Viewing”. Stare at the MLS long enough and homes start repeating themselves over and over.

So when’s this slow tortuous drip of new properties coming on going to end?  When do the floodgates open? I feel like a kid staring at the classroom clock.  Waiting for recess from a hard lesson. The minute hand isn’t moving. The fabric of time is frozen.

Groundhog Day comes tomorrow – February 2nd.  Will another shadow appear?  Will we have another six weeks of wintry inventory?   Will there be a foreshadowing of a huge shadow inventory we’ll see relatively soon?  Or will there be the shadowy logic of would-be sellers still planning to hold back putting their places on the market, for as long as they can?

Either way, looks like the winter of our buyers’ discontent (vis-à-vis the market’s lack of content)  might run through to the spring.  Hopefully not the summer and fall too – like it did for all of 2013.

Hopefully the shadow will be banished for good by February 2015.  We can’t keep kicking the groundhog down the road forever.


The Shadow-ier Shadow Inventory

shadowShapesContinuing our head scratching session from last week…(go to tombrezsny.wordpress.com to pick up the thread) 
We were musing, albeit a little plaintively, about theconspicuous lack of listings on the market.  Real estates’   trending topic and dominant issue du jour.  The Big I.  As in INVENTORY.  Or the lack thereof. 
There isn’t anyone trying to buy a home in SC County right now, under a million bucks, who isn’t painfully aware of the challenge that ultra-low inventory represents. 
There’s not a single local Agent trying to help someone buy a home that’s not frustrated by the increasingly narrow bandwidth of choice –  tightly compressed between the vastly unappealing, conspicuously flawed, woefully overpriced and the eminently desirable, competitively priced, multiple-offer worthy.  
It’s famine or frenzy time.  Either Agents are showing properties to their clients, with some degree of trepidation, because they aren’t really worth showing.  Or…they are scrambling like chickens with their heads cut off to help them compete with five other offers on some rate little needle-in-a-haystack exception that finally showed up on the market.
Can’t we just get a big handful of listings coming on,  that are pretty good homes with reasonable amenities in decent locations –  that don’t fly off the market in a week with a barrage of offers?  They don’t have to be perfect. Just above average.
Can’t we trade in some of the dogs – those built on 50 degree slopes next to the freeway with significant structural issues or failed septic systems – for just a few more of the modestly appealing kind? 
Inquiring Buyers want to know.
What a weird turnaround we’ve experienced in recent years.  Back in 2010,  30-40% of the inventory and sales fell into the distress category. Short sales and Bank REOs. 
On top of that, there was an underlying belief that a huge unseen cache of additional foreclosures,  known as the “Shadow Inventory”  was sitting out there. Held in the secret toxic asset vaults of  evil banks.   A giant supply of homes waiting to be released into the market and flood it with fresh meat.
These days, distress sales have dwindled to a tiny fraction of the inventory. Conversely,  all-cash purchases have risen precipitously and now constitute 30-40% of the non-distress sales.  We don’t hear anyone whispering about the Shadow Inventory anymore.  If it ever existed, it has disappeared through some nefarious unseen slight of hand. 
These days there’s a new shadow-ier Shadow Inventory that has risen to take the place of the old one.  It’s the inventory of nascent buyers out there… milling around on the sidelines.   Not by choice but by the sheer lack of places to purchase.  Stressed buyers rather than distressed properties.
The queue in the Shadow-ier Inventory is getting longer.  Off the top of my head, I can count at least six different sets of my own clients who are looking diligently. And have been for some time.  Six sets of major life transitions on hold for the time being.
They are ready, willing and able to buy. Just about every single Agent in SC County has their own clientele of qualified buyers that fits the same description. 
Have a 3 bedroom, 2 bath, 1700 sq ft home on a decent street, that’s not a total fixer, has a few upgrades and amenities,  priced between $600-$800k? Bring it on Sellers. 
You’ll be swamped at your first open house. You don’t have to wait.  All those apocryphal notions and suburban myths about Thanksgiving and Christmas always being bad times to sell are silly. 
List it and they will come.  Now. 
To be continued.


Head Scratching About the Market

head-scratchingLet’s just plunge in, shall we?  Last week’s column ended with a rather plaintive question directed at no one in particular. Just a head-scratcher tossed out in the general direction of the Universe-at-Large:  “What’s wrong with this picture?”
We were talking about a growing conundrum. One of those riddles wrapped in a mystery, tucked inside an enigma. The enigma that is the real estate market right now. A market increasingly defined by its sheer lack of available inventory – a.k.a – options, choices, supply. 
Inventory. The thing most regular people simply refer to as “homes to buy”.
Make the rounds through the open houses this weekend. Become a fly on the wall. Eavesdrop on random conversations coming from different rooms. You’ll hear a lot of similar refrains. A litany of recognizable leitmotifs echoing through the various halls.
Things like: “When are more places coming on? There’s nothing to look at. Nothing worth buying. Too dated. Too small. Too much work. Good ones are gone too quickly. Too much competition.  Prices bid up too high. We’ve been looking too long.  Interest rates are going up too far.”
Sounds all too “too” familiar to us Agents.  Just to offer a frame of reference grounded in actual data rather than buyer chatter  – let’s repeat a few stats from last week.
The inventory of homes in SC County this October was the lowest for any October stretching back 17 years!  For the last 32 months in a row, the number of active listings each month has decreased from the same month the previous year.
In other words  – this shrinking inventory thing isn’t new.  It’s been ongoing for two and a half years.  Where it stops? Nobody knows. 
Basic supply and demand suggests that as buying increases, the supply of homes shrinks.  People pay more. As prices rise more Sellers put their homes on the market. The supply of homes rises to meet demand until some kind of equilibrium is achieved or tipping point reached.
We know supply is shrinking. We know prices have gone up. The median has risen this year from $485,000 to $647,000. The overwhelming impression is it’s a Sellers market.  Which begs the question.
Why aren’t more Sellers Selling in a Seller’s Market?  If more Sellers don’t sell, more Buyers won’t buy. If more Buyers don’t buy, prices won’t go up and convince more Sellers to Sell.  Things get stuck!! A logjam ensues. The market doesn’t function.
Here are a few reasons more Sellers aren’t Selling.
       Sellers aren’t just Sellers. They are Buyers too.  They need a roof over their heads when they sell.
There’s not enough new construction locally to create significant new supply.
       The same low inventory that makes prices go up for Sellers makes it harder for them to buy. Their choices are limited.
       As prices go up for Sellers, the prices of the things they want to buy go up to.
       Today’s prices haven’t risen to their previous highs. Many Sellers still don’t have enough equity to go anywhere. Many are still underwater or just treading the surface.
       Loan regulations have changed. No or easy qual loan options have disappeared. Many Sellers can’t qualify to move without selling first.
       It’s very difficult to Sell and Buy at the same time in a market with such low inventory.
        The inventory of rental options is even worse than the number of homes for sale. And tougher to navigate.  It’s difficult to sell a house, rent one, then buy another afterwards.
Anyone recognize themselves in any of the above?  Let’s continue this next week.


Circling Birds: Part Deux

GirlBirdsThis goes out to all you circling birds. You don’t mind if I call you circling birds do you? Ok. It might help if I told you what circling birds are…You can decide for yourself if the flight pattern fits.

Whenever I sit down with Sellers thinking about putting their home on the market, the conversation inevitably turns to a kind of “active imagining” of who the buyer for their place might be.

Everyone wonders. What does the profile look like? That mysterious Buyer X who is going to emerge from the shadows of the great undefined “marketplace” – made up of a constantly shifting mix of people. All different ages, demographics, life circumstances, future goals, agendas, motivations, desires, needs.

Sometime, somehow, someone is going to decide on this one right place, out of all the other possible places lined up like addresses on the lottery board. A buyer that’s going to pull it together. Summon up courage, and resources. Proactively take the steps necessary to make it home.

My answer to most Sellers is that the person most likely to step up sooner rather than later isn’t someone who just started looking or is just getting around to thinking about looking for a home.

Rather, it’s most likely going to be one of those circling birds out there. And by that I mean one of those anxiously active, very frustrated buyers who has already been flying around for months – without arriving at their destination.

Yep. Circling birds have been at it for a while. Applying themselves. Doing their homework. Making the rounds. Trying to define what they want as they go.

Circling birds are tracking the market. They are hooked up to an intravenous fiber optic line that’s feeding them search engine e mails and a steady dose of new listings and price reductions hourly, daily and weekly.

They are remarkably knowledgeable about what has sold. What’s gone into escrow. What prices used to be. They know their own little market niche better than most Agents because that’s all they are looking at. They see the tree. Not the forest.

Circling birds have tromped through those atrocious bank-owned properties that give us all the creeps. And other tired old places that could only be classified as “the dregs” of the market. Some have already made offers awhile back on a short sale or two. Exhausted their patience while waiting for a response. A few have lost out in multiple offer bids for a really great place. Felt bitter pangs of disappointment. Dragged their hearts up and gone back into the trenches to look.

Each of these experiences and every house hones their focus and desire. Brings them closer to home. Narrows the parameters surrounding their future landing pad. They’ve looked high and low. At everything on the radar. Good, bad and ugly. They’ve grown more sure of what they want – through the process of elimination.

And that’s the whole thing Sellers. Circling birds are ready to go. And the inventory is exhausted. There’s nothing else to look at except that next best thing that comes on the market – your place!

When your house goes on, all those ready, willing and able buyers are going to sit up and take notice. They are going to bug their Agents to show it to them. They’ll be doing virtual drive-bys on google earth on their lunch hour. They’ll be doing drive-bys coming home from work. If it looks right and priced right, they’ll swoop in on the first day or for that first open house.

Make sense? So…what’s the big take away? The $64,000 answer to the $64,000 question? Ponder this: What happens when you put your house up for sale in this kind of market and nothing happens? Birds descend but they don’t stick around to roost? You accumulate enough weeks on market without an offer that you begin to feel like road kill that even the buzzards won’t touch?

What was that old Real Estate Mantra again? At the right price everything sells. At the right price all objections disappear. Hmmm. Might be that extra $64,000 you tried to add on to your $640,000 list price…. Just sayin’ Sellers…