Forecasts are wonderful, if you are right. But the reality is, how can you possibly forecast something like the real estate market with the huge variety of forces that influence the market? And always be right?
Leslie Appleton Young is probably the best real estate forecaster in the country. Certainly she does the best job for the entire state of California. But as we have seen, sometimes our two neighboring areas (Conejo Valley and Simi Valley) can behave quite differently. That brings forecasting down to the art of averaging. The forecast predicts how all the real estate in California will behave. But not the Conejo Valley. But not my house.
What if we were forecasting the average temperature in California? In January. And the two data points were Mammoth Mountain and Death Valley. They are actually fairly close to one another. The average temperature might be 50 degrees. That average temperature would indicate you should wear a light jacket. But that light jacket would leave you freezing in Mammoth, and you would have to take it off in Death Valley.
Compare that to forecasting real estate in the red hot market of the Silicon Valley, and the still tepid market in San Bernardino. Average is good, but all real estate is local. What is my house going to sell for?
As good as Leslie is, the forecast can change because of something that happens the day after the forecast. At a meeting I attended last Monday, Joel Singer mentioned CAR’s forecast of 5% growth against the current experience of 10% decline. Forecasting is a lot of science, and a lot of luck. And a little fortune telling mixed in.
Why are we not achieving that forecast?
Last year, we did not have enough inventory to satisfy demand. This year, we have plenty of inventory. That would indicate the sales numbers should rise.
What about interest rates? Everyone was forecasting higher rates by the end of this year, probably 5 – 5 1/2%. Higher rates should mean lower sales. Rates are happily very boring, as low as last year, maybe lower. That should give us a boost in sales. So why are sales 10% lower?
In a conversation at home one night, I mentioned that the stock market took a big jump that day. My wife asked me “WHY?” I thoroughly explained that the forward looking economic indicators created a certain buoyancy, that the manufactures index said business was looking rosy, that the Fed announced they would not raise rates. Then she asked me “Is that really what happened?” I said “No, more people bought stocks than sold stocks. that’s why the index went up.”
No matter how brilliant we are in our analysis, and the only really good way to be brilliant is to analyze the past and not forecast the future, the market depends on individual decisions, individual transactions. Why aren’t we selling as many homes as we thought we would? Because not enough buyers and sellers agreed with us.
But they do ask us how the market is doing. Rather than giving them a one word answer, let’s look at the statistics, and give them a story.
INVENTORY GROWTH
2013 was a close as we have gotten recently to a “normal” inventory graph. Our inventory should be topping out, and begin to recede in another month. If this year is to be normal.
It looks like Simi/Moorpark has already begun to flatten. Notice how the two charts pretty much compare. Also, compare the two boxes in the charts. They have the same number of homes listed below $750,000, but Conejo has a much higher inventory. And note the increases from last year. Every sector is up, almost double, except in the over-$1 million category. That category has actually stayed consistent for the last few years, no decrease, no growth. A separate market.
SALES ACTIVITY—CLOSED ESCROWS PER WEEK
Conejo continues to see strong sales, but not as strong as the previous two years.
Simi/Moorpark stays about the same year to year. This is probably due to the preponderance of sales in the under-$750,000 category. That category has been strong with short sales and REOs, then strong with investors, and now strong with first time home buyers.
COMPARE THE STATISTICS from April through July, 2014 versus 2013.
Inventory is up 51%. The median price is up 3%, but the average is down 2%. (higher priced properties are being discounted.) The number of closed escrows is down 13%. That is considerable. Particularly when we were hoping for growth.
Simi/Moorpark inventory figures are up much more, but then they started out really low. Median prices are up, but they have a smaller range of prices, and do not experience as many higher priced sales as Conejo. Sales are down 7%, still significant, but not as much as Conejo.
Why are these numbers down?
One factor is the increased scrutiny in lending. We are still experiencing large percentage of escrows closing for all cash. What better place to invest cash than real estate? Rates are low, but the process of lending is very difficult. New government regulations make it so, multiple levels of scrutiny at banks make it so. It is extremely difficult to get a stated income loan. While these loans were abused in the past decade, these are the loans needed by non-W-2 workers, these are the loans needed for the 1099 workers. They have a very difficult time qualifying for loans, and that has put some of them out of the market.
So the market is strong, but not as strong as we would like. Not as strong as we had forecast. If only we had a better way to know how each one of those individuals considering buying a home were making their decisions.
And that is the main reason why we are not yet completely done with the recession. Jobs are back, but lower paying jobs. Security is returning, but a less secure feeling than before. Student loans are still onerous. Building is taking place, but more for multi-family than for single family. Prices are going up, finally, but wages are not. Yet.
The economy does not have an on and off switch. It is a matter of balancing an enormous amount of factors. Ms. Yellen has a lot of input into how the economy will behave. But so do each of your clients.
It all boils down how many people are buying and selling.