Plenty of signs point to a real estate slowdown, particularly in Southern California, but to hear experts talk about it, it’s unlikely to be anything like the downturn that started in 2007 that cost so many people their homes as the Great Recession rolled over the nation.
One loud sign portending a slowdown is increased foreclosure activity.
The number of scheduled foreclosure auctions in Los Angeles, Riverside and Orange counties is up 21% this time from a year ago, according to Auction.com, one of the biggest sellers of properties that were foreclosed upon.
“It’s another mark against the market,” said Daren Blomquist, vice president of marketing economics for auction.com. “Not everything is rosy, and people are having some trouble.” Blomquist said it’s the first time since after the recovery from the recession began that auction.com has seen such a large jump in foreclosure auction activity.
However, Blomquist doesn’t see real estate tanking like it did a dozen years ago, and neither does Jordan Levine, deputy chief economist for the California Association of Realtors (CAR). The housing crisis that started in 2007 was driven by people being too far extended on their homes thanks to lax lending practices and questionable mortgage products – neither of which has ever returned – and a deep world-wide economic slowdown.
“We’re not forecasting that coming down the pike,” Levine said of a potential real estate market crash. “You don’t foresee a big cliff like you see in ‘07, ‘08, ‘09. But that’s always contingent on the broader economy.”
CAR is forecasting home sales for California will decrease roughly 7% through end of 2019 compared to the prior year.
During slowdowns, there’s often a psychological element that plays in to whether buyers will buy and investors will invest, and whether they want to continue to pay premium dollars for real estate.
A recent poll by CAR shows that 25% of consumers believe that now is a good time to buy. The bad news is that 75% do not feel that way, something that Levine believes is “psychological scar tissue from past downturn,” when so many were blindsided by the market collapse.
Affordability challenges also continue to limit the number of people who qualify to buy property, particularly in Southern California; roughly 30% of households are able to afford a median-priced home in Los Angeles County, according to CAR figures. “That’s why we’re forecasting the prices this year are going to be relatively flat,” Levine said.
Prices in Southern California appear to have reached their peak in the first quarter of last year. In L.A. and Orange County combined, which includes Long Beach, median home prices were up 7% year-over-year in the first quarter of 2018, according to ATTOM Data Solutions, an Irvine, Calif.-based property data firm.
Prices were up less than 0.8% in the first quarter of 2019 compared to the same period a year ago. Home prices nationwide were up 4.3% in the first quarter, according to ATTOM.
“Nationwide home prices are slowing, but they’re slowing even more dramatically in Southern California,” Blomquist said. “I think that will be the story of 2019 in Southern California, is that slower price appreciation. It’s possible it can even go negative in some markets, especially in higher priced local markets.”
Prices in San Jose, for example, decreased by 4.7% in the first quarter of this year from the same period last year, according to ATTOM.
Home prices in Long Beach have been down for most of the year, according to Richard Daskam, a broker-associate with Keller Williams Realty. Daskam pored over recent figures from the MLS real estate database and found the median price for all Long Beach ZIP codes combined was $575,000 in November 2018. In April the median was $555,000, the data shows.
“We peaked around December ,” Daskam said. “For Long Beach, it’s a definite trend downward, slowly.”
Part of the drag on the local market is coming from areas like Belmont Shore and Naples, where properties have been sitting longer on the market for some time as buyers balk at spending $2-3 million on a home, according to Daskam.
“The high end in Long Beach is just not moving,” Daskam said.
Properties in Belmont Shore and Naples sat on the market an average of 15 days in November 2018, while the average number of days reached 69 as of mid-May, MLS figures show.
Overall in Long Beach, million-dollar-plus homes sat on the market for 15 days in November 2018, a figure that was up to 49 days as of mid-May. By comparison, the average home in Long Beach sat 13 days before selling in October 2018, and the most recent figures show homes sitting just a bit longer – an average of 23 days on market.
Robin Auwerda, an agent with Keller Williams Coastal Properties, sees the upside in price pressures easing.
“The trend is buyers are feeling more comfortable being out there as a buyer,” he said. “The market has shifted, but things are still moving really fast. Buyers can’t think about it for a long time, but when they come in strong, they can start asking for termite [treatments], or repairs, and not always be offering the list price.”
It was just a year ago that Auwerda often had his clients write offers on properties, and then increase those offers once, twice or more, to successfully land a home in what was a sellers’ market for so long that it had become the norm. “Now, you see some sellers lowering their asking price just because they’re longer on the market,” Auwerda said.
Another drag on the local market could be that people are leaving the area. “If you look at Census figures on the migration of the population in coastal counties like Orange County [and] Los Angeles County, in 2018 we saw negative net migration – meaning more people are moving out than are moving in, and that is weakening demand as well,” Blomquist said. “It should put downward pressure on price appreciation.”
CAR’s Levine emphasized his belief that the market is unlikely to go too far south, and that the economy doesn’t appear to be teetering on the edge of another major recession for the time being.
“The economy is continuing to move forward at a fairly decent clip,” Levine said. “Unemployment’s at very low levels by historic standards. That should keep some demand for housing out there.”
There are, of course, wildcards that can deal a downward blow to the market, he acknowledged. A trade war could be one of those wildcards. With the U.S. and China poised to top one another with tariff after tariff, the eventual result could be higher prices for consumer goods, and those higher prices could end up impacting interest rates, Levine said. “That’s one of the potential sources of issues in the economy,” Levine said, adding that if prices rise, “the Fed will need to be more aggressive in combating inflation.”
Higher interest rates could put downward pressure on real estate sales, especially in markets that are severely impacted by affordability issues – namely Southern California and Long Beach. “If we push rates up higher and faster, then it just puts consumers even further behind the 8-ball,” Levine said. “However, we’re not forecasting that right now.”