COVID-19 and SoCal Housing

Southern California – will our bubble burst after COVID-19?

I’ve been asked this question quite a bit lately from current and previous clients. “Reports are saying we are headed for a crash, should we wait?”

I do not have a crystal ball, nor am I clairvoyant, but I can say that a bubble can only burst if there is a bubble to begin with. I do not believe we are in a housing bubble. I should say that I may be in the select few who feel this way.

Something to think about is that the mortgages that have been underwritten post-2008 crash, never returned to the high-risk and predatory nature of the zero percent down, negative amortization, stated income days.

Sure, us industry folk heard of the lenders that were offering “stated” income loans recently, and most of us steered clear of them. But if you did know a lender taking those loans on, they would more often than not, state that these loans required a minimum of 20-30% down payment. A vast difference from the loans pre-2008 crash.

So where is all this panic coming from? Frankly speaking, Southern California has not experienced the bubble that Northern California has, and when you look at the economic reports from big firms, a large majority reference California and its bubble, and then go on to talk about San Francisco and San Jose. Very few, if any at all, reference any of the larger cities in SoCal.

That being said, we have seen a steady incline in pricing, and prices are still moving upward. With rates so low, and rents so high, we have no shortage of buyers. There is simply just not enough inventory to feed into the demand of the consumers that are ready and willing to buy. One of the four basic principles of Supply and Demand: If demand increases and supply remains unchanged, then it leads to a higher equilibrium price. I will leave that right there.

On a personal note, every home we are placing offers on for our clients right now, are getting multiple offers still, and yes, this is during COVID-19 lockdown.

In fact, in the city of Placentia, CA alone, during April 2020, there were 19 closed sales for homes that had been on the market for less than 30 days. 19 properties that were on the market during COVID-19 and the quarantine. Of which, 17 out of the 19 sold for higher than list price.

Below you will see a chart published by the CRMLS in March of 2020.

The average price of homes is still on the rise and while there is a very high probability that the market will slow down, and perhaps even decline, it is my opinion that we will not see a crash. Plainly and simply, if homes have gone up the last year by, let’s just throw a percentage of 10% out there, and if we see a decline by 5-10% in the next year, all we are doing is “correcting” the price and returning to an average that is still holding value.

Also, most buyers are not buying homes to move out within 1-2 years. The majority of buyers consider staying in their next home anywhere from 5-10 years. In fact, according to the 2018 US community survey, most homebuyers are averaging 13.3 years in their homes. Given the last two real estate cycles alone, spanning over 30 years, it is more than likely, that any home purchased, even now, will gain value within 13 years.

Now, with that being said, we are projected to have the highest unemployment rate we have seen in decades. All of the great brains in the country are predicting a recession. That fact is unavoidable. We will feel the pinch and are more than likely to see rates go up and affordability go down. All of this, inevitably leading to home prices lowering. I am not in any way stating that prices will not stabilize or correct, but I am merely projecting that the home prices will not crash. The market will correct in the areas that the home prices are over-inflated, but many will remain stable. And keep this in mind, when interest rates rise, affordability will decrease. In many cities across southern California we will not see prices drop so low that the risk in higher rates correlates with the lower price, giving the buyer an advantage. You may pay less at the time of purchase, but will pay more over time.

My suggestion is, if you are in the market now, and can afford to buy, then do so. And feel free to reach out to us if you need any further information.

Disclaimer: This blog contains housing-related forecasts and predictions. Such projections are the equivalent of an educated guess and should be treated as such. One Realty Group makes no assertions about future housing or economic conditions.

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