Will Southern California home values survive the novel coronavirus?
We've seen this scenario before. A sudden shock to the economy. Jobs lost. Lenders in trouble.
Yes, it's early in the battle against the pandemic, so any economic guesswork probably requires a degree in epidemiology more so than a spreadsheet. But real estate history does have some lessons for anyone pondering what's next for housing.
Today's economic turmoil may not be another Great Recession that savages local home prices. The virus era might more be like an early 1990s replay. That often-forgotten downturn had far less drama, but it left long-lingering headaches for real estate.
Much like the late 1980s, real estate had been on a roll of late. The region's housing market came into the virus era with prices surging. The six-county median sales prices for existing and new homes was $550,000 in March, up 6.8% in a year, tying December's record high, according to DQ News.
But March results were mostly deals in progress well before "stay-at-home" mandates throttled the region's economy and dramatically slowed the home-selling business. And we know fewer transactions could create a drag on pricing.
Some early reports on April activity suggest discounting may have begun already.
Zillow looked at listing trends for existing homes and condos and found the median asking price in Los Angeles and Orange counties, as of April 19, was $856,575 — down 7% in a month. Yes, it's up 7% in a year but this same metric was growing at an 18% annual pace as of mid-March.In the Inland Empire, the $419,966 median was off 1.2% in a month as the rate of annual increases fell to 2% from 3.7% in mid-March.
As for new homes, the Meyers Group is now polling homebuilders on a weekly basis. Its latest survey shows 60% of Southern California division presidents are offering "concessions" — buyer incentives that can range from helping with financing costs to paying agents to bring in customers.
Short-run price fluctuations can be volatile and, at times, tricky to read. They can vary by price niches (luxury homes are weak sellers today) or neighborhoods (think, beach-close). And some price cuts aren't always seen in market stats, such as sellers picking up repair bills, upgrade expenses or closing costs that they'd otherwise skip.
"We haven't seen any major price reaction so far," Doug Bauer, CEO of Tri-Pointe Homes told Wall Street analysts recently. He runs an Orange County-based builder with operations across the nation. "There have been increased use of some incentives but ... we haven't seen any wholesale price reaction at all in any of the markets yet."
Let's go back to early 1989, when California's economy was hot. Unemployment hit a cyclical low of 5%. And home prices, as measured by federal indexes, were surging at a 20%-a-year pace.
But savings and loans — yes, somewhat like the real estate lenders portrayed in the holiday film classic "It's a Wonderful Life" — were collapsing after a decade-long fight against various financial ailments.
At loosely the same time came the fall of the Berlin Wall and the collapse of the nation's arch-enemy, the Soviet Union. But an end to the Cold War turned out to be an economic body blow for California's lucrative aerospace industries.
By early 1991, California's jobless rate hit 7.3%. Yet home price still jumped another 16%, thanks in good part to cheap money used to cure a mild national recession. In those days, an 8% mortgage was a steal -- they had been 11% just two years earlier!
But without a key home lender and the loss of good-paying jobs, California home-price appreciation was gone. For a long time.
Unemployment peaked statewide at the end of 1992 at 9.8%. Housing's pain was modest. This wasn't a crash. Just a lingering slump. Prices slipped just 3%.
By the end of 1995, prices bottomed out. The index was down 11% over four years. It would not fully recover until 1998, by this index's math.
Did home prices survive the initial economic shock of the early 1990s downturn without one huge loss? Yes.
But the meek recovery of the California job market meant essentially eight years with no home-price appreciation. And the 1990s' home sales pace, plus homebuilding, were quite modest during this extended malaise.
Fast forward to spring 2020: Business shutdowns under quarantine mandates forced a staggering 3.7 million Californians to apply for jobless benefits.
Historically speaking, my trusty spreadsheet tells me large upswings in California unemployment (nothing anywhere as big as 2020's jump) usually create downward pressure on housing values. Since 1976, statewide home appreciation rate cooled 79% of the time after unemployment jumps.
One long-time observer of the local economy foresees a mild price pullback. Cal State Fullerton's Woods Center forecasts Orange County home prices will drop 3%-5% by the end of the year, recovering 2%-3% next year. In each of the first three months of 2020, Orange County has set new peaks for prices.
"They won't fall drastically like the did last time," said Anil Puri, head of the center, referring to Great Recession's housing debacle.
Yes, this does not appear to be like the mortgage meltdown of a decade ago. That era's risky, oversupplied market — propped up by idiotic lending practices — collapsed with huge price losses. Mortgages in subsequent years have been far harder to land.
But the pandemic is putting cracks in the residential real estate game.
Look at the ailing rental market. Some Southern Californians can't pay their rent. In turn, local landlords are lowering rents to keep units full. This could dull the investment appeal of local homes.
Yet some things are crystal clear in what should have been a brisk, prime homebuying season in 2020.
Most homeowners, even the ones itching to move, seem content not to sell. Builders have halted most new construction. So, the year started with concerns about a limited supply of homes to buy. Now, the no-rush-to-sell strategy is pitched as support for current pricing.
Plus, there's no debate about homebuying lethargy.
Meyer's tracking of pending new-home sales shows L.A.-O.C. down 38% February to March and off 22% over the past year. Inland Empire? Down 31% in a month and 6% below last year.
And Zillow's data for existing homes slowed similar weakness, with a hint of good news. L.A.-O.C. pending sales in mid-April were down 59% from last year at this time, but contracts rose 3.1% week over week. In the Inland Empire, pending sales -- down 38% in a year -- rose in 8.8% in a recent week.
There are still plenty of Southern California house hunters in this virus era in which buying is a complicated, online/virtual experience. An obvious lure: historically cheap mortgage rates for folks with perceived secure employment and perhaps a view that the virus-linked economic turmoil will be brief.
"A number of us believe there will not be very much of an impact on home prices, or home sales, once we restart the economy again and people can get out and look at homes, both existing and new," says economist Mark Schniepp of the California Economic Forecast. "Some sellers will have to sell so price cuts will be an issue but not a big issue."
Schniepp and others who see little home-price risk base their optimism largely on hopes for a relatively quick, painful economic downturn followed by a rapid bounce back. Please understand that nothing would make me happier.
But watching the local economy for a third of a century teaches me that one should, at least, prepare for something other than the best-case scenario.
Look at builder Tri-Pointe, run by veteran real estate pros who built their company out of the ashes of the Great Recession. What was one of the first things they did in the virus era: Borrow $500 million. Why?
"We felt the overall cost of borrowing was minimal for the peace of mind of having the liquidity," chief financial officer Glenn Keeler told analysts.
