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Beyond the Bubble

It’s nearly impossible to predict what will happen to housing prices

Back Article Jun 17, 2019 By Ryan Lundquist

I get a little bored with real estate “bubble” conversations. People often are looking for a quick one-word answer. Are we in a bubble or not? Yes or no? Well, there’s more to consider beyond just one word, which is why we need to look at some of the bigger dynamics in the Sacramento real estate market.

The spring market has been really competitive. Real estate agents are saying it’s “hot” and they’re right because buyers are hungry, sales volume has been strong and it’s taking less time to sell. But prices also seem a little flat. That sounds crazy since there’s so much competition, but it’s what the stats show.

National real estate expert Barry Habib has the perfect metaphor. He says the market used to be driving 80 mph, but now it’s driving 30 mph. In other words, we’re still seeing progress with price growth, but it’s been a much slower pace.

We’re seeing market momentum slow. For years, prices would increase 7 to 10 percent over the previous year, but now it’s more like 2 to 3 percent. National real estate expert Barry Habib has the perfect metaphor. He says the market used to be driving 80 mph, but now it’s driving 30 mph. In other words, we’re still seeing progress with price growth, but it’s been a much slower pace.

The last half of 2018 was really dull and many wondered if the market was at a tipping point because buyers seemed to put their foot on the brakes. When interest rates increased, buyers began stepping away from the market; sales in the 10-county Capital Region were down 10 percent during the last half of the year.

But in 2019, the market has rebounded since rates went back down. It’s as if last year’s dull vibe has been swallowed up to create a more normal feel. Low rates have been a steroid to help buyers put their foot back on the gas pedal, showing just how sensitive our market is to rate changes. As rates presumably rise at some point in the future, we can expect our market to damper once again.

After prices increased for seven years in a row in the Sacramento region, many are concerned about a possible downturn. Some even believe in the “seven-year rule,” which contends the market changes directions every seven years. I can understand this idea because the market really does tend to have a cycle where it shifts every decade or so, but let’s remember there’s no law that says prices have to change every seven years.

Real estate markets go up and down — just like relationships, the stock market or my pants size. The market tends to have a pattern where prices go up for a number of years before we see a change in direction. In Sacramento we saw prices dip in the 1980s, 1990s and 2000s, and we know at some point the market will change again because that’s what markets do.

We do seem to be closer to the top of a price cycle since affordability is becoming more of a struggle and price growth has slowed. Yet we don’t know when the market might turn or how severe it would be. Some think we’ll see a collapse like 2005, others say the market will correct by 10 percent, and some say the market will just level off. All three ideas have one thing in common — they’re guesses.

No matter what the market does, here are a few quick suggestions for both sellers and buyers:

1. Price for today: Don’t make the mistake of pricing for the more aggressive market from yesteryear. Look at the most similar properties going into contract and price accordingly. It doesn’t matter how competitive the market feels; what prices are doing is the key.

2. Be careful of real estate prophets: We are flooded with real estate predictions, and there are many people telling us what the future will look like. The problem is when predictions are made and they don’t come true, the prediction timeline keeps moving forward. So at some point a “prophet” could end up being right despite being wrong for so many years.

3. There is no formula: With so much talk about market change, it’s important to remember there is no such thing as a “bubble” formula. More than 10 years ago, we experienced a severe housing collapse stemming from rampant loan fraud, and that sort of change isn’t now a recipe for how every downturn or market correction needs to look in the future.

I gave a big talk a few months back to a room of investors and afterward someone asked me, “What’s the market going to do over the next three years?” And I told him, “I’ll tell you in three years.”

Comments

Jon Yoffie (not verified)June 29, 2019 - 8:59am

Great article. "Price for today" is exactly what we tell our clients in the El Dorado Hills area. When they do, activity is great. Those that prefer to think their home is "special" or price for what we call the "unicorn buyer" (that one buyer who absolutely HAS to have their house) find themselves chasing buyers as they're forced to drop the price on what is quickly becoming a stale listing.

Ryan Lundquist (not verified)July 2, 2019 - 10:10am

Thanks Jon. Ah, the elusive unicorn buyer. It's so easy to get distracted and price for that one buyer instead of the market. I appreciate your words here.

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