Monday, September 01, 2008

Is it a bottom? Or just one strange month?

Last week, the California Association of Realtors put out the July EHS numbers for the state. Prices had fallen 40 percent from a year ago, and sales increased by 43 percent. Inventories were whittled down to about six months, which is very close to an equibilibrium level (a nice rule for real estate--when inventories for a type of building are about equal to the length of time it takes to build that type of building, the market is more or less in equilibrium). I have talked to people at CAR to make sure that there isn't some quirk in the data to explain the extraordinary change.

As I have written before, prices in California have fallen so rapidly that in many markets it is now just as sensible financially to own as it is to rent--assuming one can get her hands on financing. There are, moreover, many cash buyers in places like the Inland Empire right now, and cash buying is a powerful indicator of a bottoming market. Finally, I am hearing lots of anecdotes about multiple offers on properties for sale.

The problem is that a very large number of the sales are foreclosure sales or short sales--properties that lenders are trying to dispose of, and are therefore selling at extremely low prices. Whether this tendancy will extend to the rest of the market is very much an open question. But if the next few months are similar to July, we may well be at bottom out here.


Anonymous said...

Just from a pure technical analysis, I'm not sure that this can be a bottom. A real estate cycle is typically very long. I believe 10-15 years? Shorter for the metro areas.

2 years from the high is not enough time to get to the bottom?

Anonymous said...

Real Estate demand typically slows in the winter because of the holidays. I don't think this demand will hold up...

Anonymous said...

"cash buying is a powerful indicator of a bottoming market"

Says who?

My guess is that you are assuming that cash buyers are dispassionate investor types who are seizing a market opportunity.

Often cash buyers are older people with cash from a previous sale moving into a smaller house, or foreign buyers.

Neither group is what I'd consider "smart money".

Plenty of stupid people pay cash too. But there aren't enough of them to put a floor under the market.