I neglected my duty to keep you updated on a weekly basis, but this report will provide you with an up-close and analytical look at the front lines of the real estate market as seen from my eyes.

What I can tell you is that the market is on fire and current conditions are causing home prices to jump.

More on that in a second.
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News Flash

• In a nutshell, the Coronavirus = threat of significant harm to economic activity = fear on Wall Street = flight to bonds = lower mortgage interest rates = greater home affordability for buyers = upward pressure on prices (assuming all other things are equal).  This is a development I’ll be watching, but I also have family that traveled to China and Vietnam.  They are just days from returning so everyone is freaking out there.
• *Refinance Alert* — Interest rates are dipping again so those with rates above 4% should start a conversation with their lenders–let me know if you would like to know how to get the best deal.
• We lost a sports icon yesterday and my thoughts and prayers go out to all the families affected by this incredibly tragic accident.

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Remember when I said January is the new April?

When I reported in the previous Tidwell Report that January was expected to be the new April, I never imagined that the market could go from an extended holiday lull to peak buying season virtually overnight—yet it seems that this is exactly what happened.

Allow me to elaborate….

After the holidays, people return to work and generally start or resume their home searches at a slow pace, which increases at a sustained rate into the Spring.  However, the second week of January became my April when I received a flurry of phone calls.  Some calls were from homeowners interested in developing a strategic plan to sell their home and to capitalize on this market, while other calls were from buyers who wanted to get into the market before prices started to ramp up in the 1st quarter as they’ve done historically.

On the buy-side, I assisted 3 clients in making 3 offers on different properties over 3 consecutive days. In each deal, we received a Seller Multiple Counter Offer and every Seller countered on price, asking all Buyers to come with their best and final price, which was not unusual.

What was different was that each Seller Multiple Counter Offer asked each Buyer for their best and final offer above a specified amount.

These were the deals in play:

Deal #1: Condo on the Westside 
Asking: $765K
Received 10+ Offers
Countered: Best & Final Offer Above $815K

Deal #2: Home in Sherman Oaks 
Asking: $995K
Received 10+ Offers
Countered: Best & Final Offer Above: $1.1M

Deal #3: Home in Sherman Oaks 
Asking: $1.299M
Received 5 Offers
Countered: Best & Final Offer Above: $1.425M

How much higher can prices go?

These best and final floor prices exceeded the original asking amounts…specifically, 6.5% in the instance of the condo and by more than 10% in the case of the houses. I quickly learned that fierce bidding wars were also underway in different price ranges across other urban areas of Los Angeles.  If this trend continues, the median price for a home in Los Angeles is going to skyrocket especially as these transactions go through escrow, become closed sales, and become public knowledge, which could fuel a fear of missing out but that is another story.

Those who have been in real estate since the early ’80s cannot recollect a market like this one especially since we started 2020 so completely different than we started 2019.

Nobody Expected This

At the beginning of 2019, the outlook was not great and the economy and real estate market started to feature some bad prospects of what that upcoming year might look like, including some things that had not been seen in almost 10 years.

Leading up to 2019 the following market conditions took root:

Significant increase in Mortgage Rates. In October 2018, mortgage interest rates spiked at 5%.

Significant decrease in the Median Price of homes. In December 2018, the median price of a home in CA dropped almost 8% from its peak in June of 2018.  News outlets speak of price changes in annual terms, like June 2018 to June 2019, not in terms of how much prices changed on month-over-month basis, like June to December. At the start of 2019, it was expected that the median price would level off in the 1st quarter and that if we got to June with the median price stable, then prices would still be down significantly since they remained down 8% from the prior year, which would have been big headline news for media outlets.

Significant increase in the supply of homes for sale. In 2019, inventory supply had risen according to the Unsold Inventory Index. The inventory supply swung from a record low 2.7 month supply in 2017 to a 3.1 month supply in 2018 before jumping up to a 4.7 month supply at the beginning of 2019—that benchmark looked like it was heading to a 5 month supply, which is considered a normal inventory range.

Stock markets closed the end of the year below where they started at the beginning of the year. Stock markets ended 2018 significantly lower than where they started for the first time since the big recession in 2008.

Significant decline in Annual Home Sales. The six month period for Q4 2018 and Q1 of 2019 represented the fewest home sales for a six month period since Q4 of 2007 and Q1 of 2008. To put this in perspective, in September 2007 you could put no money down, you could have the worst credit, and you could have no job and you could still qualify for a 100% financing loan.  In a single day, this completely changed and ‘home loan’ becomes a dirty word because the credit market collapsed. Nobody would invest in home loans since the people who packaged them had scammed everybody.  For that reason, in October 2007, you could only pay cash to buy a home…you couldn’t get a home loan.
So we recorded the fewest number of home sales in the six month period from Q4 of ’18 to Q1 of ’19 for the first time ever since the time that you could only pay cash to buy a house at the end of 2007.

We were not worried about clients because compared to historical level the number of defaults wasn’t that significant. The amount of homes in foreclosure remains to this day at a very low level because it is pretty difficult to get a loan compared to how it used to be—while I would not say it is easy today, it is really not that difficult). And today, the people who are getting home loans can afford them and they are putting a decent amount down, so because of that, they are not defaulting.

Why did the # of sales drop off a cliff?

Nobody knows exactly why but we can speculate of a few possible main causes:

• Maybe 5% interest rate peak
• People always say, “Hey how high can these prices go?” Maybe people thought prices were too high and put their searches on hold.
• Everybody freaked out with the tax law limiting the real estate tax deduction to 10K.  Anybody that can qualify to buy a house in CA already pays $10K in state income tax so they either don’t get much or they get none because of the limitation. <<----- Some believe this is the case

Where are we now?

Fed Actions
So we had started out 2019 with things looking bleak and talk that the Fed would deliver 3 rate increases, but we ultimately got 3 rate decreases.

Home Inventory
Home inventory levels in Los Angeles sank back down to the 2017 record low levels—in fact, it is worse in some places like the San Fernando Valley where it has dipped under a 2 month supply.

Home Prices
Instead of home prices flattening out as expected, they rebounded in April and May of 2019, so not only did they make up the 8% loss suffered from June and December in 2018, but they have also been higher month over month since then.

Interest Rates
Interest rates not only came back down but they are back down to where they were in 2017 so while it sounds like a 2-year record old its actually a 2-year low and a 40-year low.

Back to 2017 
And surprisingly our market conditions are not that different than they were back in 2017, which featured intense bidding wars, rising prices, and a low interest rate environment…and the return of Seller leasebacks, which allows the Buyer to take title to the property while the Seller remains in possession for some specified duration, like a few weeks to a few months, depending on what they negotiate.

Power Shift
Just when we thought the power was really starting to shift back in favor of the Buyers, it looks like the pendulum swung further in the opposite direction, suggesting that 2020 is going to be another great year for Sellers.

LA still isn’t that bad
Still, in theory, if you compare home prices in Los Angeles with the home prices of other major cities in the world, our home prices are pretty reasonable and you get a lot for your money, but many Buyers will tell you that does not feel like the reality they are familiar with, and I feel for them because this is not an easy market to navigate.

What Does The President of Rodeo Realty Think?

When asked last week for an updated outlook for 2020, our brokerage’s president said that the real estate industry continues to face this increasing challenge of a super low inventory and it is common sense that Buyers will continue to struggle to find homes more than they have in recent years.

“If they don’t buy a house, they will wish they did because they are going to wish they can get the same house six months from now for what they can buy it for right now.

But even though things are going up, it doesn’t mean you can list an $800K home for $900K or $1M so Sellers need to understand the value that we as listing agents bring to the table, including the exclusive time and effort that we can devote to representing their interests.” 

In one of the deals I mentioned above, I was able to successfully get my client’s offer accepted and the deal entered escrow. The listing agent made a misstep at the final hour (before the inspection contingency release) that prompted me to inform my clients of the opportunity I perceived and recommend that we change the agreed-upon strategy to negotiating the request for repairs. This ultimately delivered a massive win for my clients—if you are curious about the details, call me and I can tell you more.

The bottom line is that not all agents are created equal. Unless a seller has a bad experience by definition, they may not even realize that the result they got was not the best outcome they could have had.  In this deal, the Seller had no idea how bad the agent failed him and the Seller was left unaware of the better outcome that the agent cost the Seller.  In markets like this, Sellers stand to benefit by identifying a REALLY good agent who is committed to representing your interests, or you risk giving up the best outcome when you go to sell one of your most valuable assets.

More on the pulse of the market and the economy:

CALIFORNIA EXISTING HOME SALES & PRICES
*surged in December* 
The California Association of Realtors reported that:

• Existing home sales totaled 398,880 in December on a seasonally adjusted annualized rate, up 7.4% from December 2018.
• The median price paid for a home in December was $614,090, up 10.3% from December 2018. That marked the largest year over year price increase since May 2014, and the first double digit year over year price increase in 5 1/2 years.
• Inventory levels continued to drop. There was just a 2.5 month supply of homes listed for sale in December, down from a 3.5 month supply one year ago. Inventory levels dropped 26.5% from one year ago, and December marked the lowest inventory level in 7 years.

On a regional basis: 

• In Los Angeles County, the median price increased 9.0% year over year
• In Orange County, the median price increased by 7%.
• In Ventura County, the median price increased by 2.7%.

US EXISTING HOME SALES & PRICES
*surged in December*
The National Association of Realtors reported that:

• The number of existing homes sales surged 10.8% in December, from the number of homes sold nationwide in December 2018.
• The median price increased 7.8% year over year in December. That marked the 94th straight month of year over year price increases.
• There was a 3 month supply of homes for sale, down from a 3.7 month supply last December.

STOCK MARKETS
*lower for the week*
After several weeks of steady gains, stocks declined moderately from all-time highs this week.

By The Numbers:

• The Dow Jones Industrial Average closed the week at 28,989.73, down 1.2% from 29,348.10 last week. It’s up 1.6% year to date.
• The S&P 500 closed the week at 3,295.47, down 1.0% from 3,329.62 last week. It’s up 2.0% year to date.
• The NASDAQ closed the week at 9,314.91, down 0.8% from 9,388.94 last week. It’s up 3.8% year to date.

TREASURY YIELDS
*lower this week — We watch treasury bond yields because mortgage rates often follow bond yields.* 

• The 10-year treasury bond closed the week yielding 1.70%, down from 1.84% last week.
• The 30-year treasury bond yield ended the week at 2.14%, down from 2.29% last week.

MORTGAGE RATES
The Freddie Mac Primary Mortgage Survey released on January 23, 2020 reported mortgage rates for the most popular loan products as follows:

• The 30-year fixed mortgage rate average was 3.60%, down slightly from 3.65% last week.
• The 15-year fixed was 3.04%, almost unchanged from 3.06% last week.
• The 5-year ARM was 3.28%, down from 3.39% last week.

Have a great week!

Copyright © 2020 Kevin Tidwell Real Estate, All rights reserved.