Finally! The experts are getting on board. I’ve been calling the consistently low numbers of homes for sale the “new normal” for a long time. All the while experts, most notably Steven Thomas who writes the OC “Reports on Housing”, have been stating that prices won’t begin to fall until we reach those higher historic inventory levels.
I disagree with this notion. We may never reach those levels again, at least not in the next 6-8 years. Prices will probably fall well before we hit those levels. Our “new normal” of reduced housing inventory must also dictate a revised tipping point when prices will adjust up or downward.
That said, everyone should carefully watch market time, also referred to as DOM (Days on Market) instead of just the inventory levels. As with any product, the more demand there is for it the faster it sells . Demand has lessened when it takes longer to sell. The average market time for OC prior to 2011 was 90 DOM, depending upon price. (Lower prices sell faster than higher prices, based on traditional buyer demographics.)
Our YTD average market time is 45 DOM. 2017 averaged 42 DOM. I believe that if we see significant and sustained lengthening of market time, then we may see softening of prices. At first this will manifest as reduced appreciation over prior years prices. Prices will not fall. Only if there is a significant reduction in buyer demand combined with homes taking longer to sell, will prices start to reverse. I do not expect to see this for the next 20 to 24 months – if ever. Market time would have to DOUBLE to 90 DOM or longer. 1
Technology gurus say that future market changes are anticipated by artificial intelligence and baked into computer models throughout our financial markets, making cycles swing less wildly. This has proven true for local real estate as well. Consumer access to real estate sales data via ever-improving technology has removed the veil of mystery and minimized the herd behavior, which previously caused buyers to stampede into and then flee back out of the market.
Perhaps the 2018 tax code changes will play a bigger part impacting the value people place on home ownership. I expect it will, to one degree or another. If so, then more people will likely rent instead of buy and invest their cash where they’ll enjoy greater tax protections. And if that happens, I expect those with greater wealth and experience will pick up the slack in homes sold, causing more homes to be owned by fewer individuals. If this happens, fewer will control the market for rentals and tenants will compete for rentals even more than now.
Lease rates have risen, matching real estate sales price increases over the past 4 years. That makes sense. But it hasn’t always been the case. And now we have far fewer affordable homes, condos and apartments to lease, mirroring the reduction in affordable homes for sale. Imagine if fewer landlords controlled a larger proportion of the precious few affordable rentals? They would control the market and monthly lease rates would probably rise faster still.
Bad for tenants, but great for investors. Lower priced properties/rentals should yield the most fruit.
So if buying a primary residence no longer makes sense for you price or tax-wise, you should consider buying affordable rentals. Ideally, units with 0-1 bedroom or 3 bedrooms, as these have been the most hotly demanded. Oddly 2 bedroom and 4+ bedroom rentals are in lesser demand.
The Irvine Company already dominates the executive rental market. Why compete with them? Lower lease rates within highest demand neighborhoods will perform better in the long haul, both in terms of steady increases in annual cash flow as well as appreciation of property values. Less WILL be more.
Here are my best suggestions for high yield rentals priced below $1 million.2 A few are in Orange, because Saddleback College and Chapman University are tremendous draws for affordable housing. A property in Fullerton is also commute friendly for Cal State Fullerton. Knowing the sub-markets is key.
Call me if you’d like to tour any of these properties, or to build a customized plan for your investments. I’m here to help!