The Bubble Is Back

Fascinating front-page article in today’s L.A. Times — Alejandro Lazo, Forget About “For Sale” Signs, at p. A1. Check it out.

We have been mentioning in several recent posts the evident return of the “bubble” in Southern California. If the L.A. Times is to be believed, home prices around here have gone up by some 25% in the past year. Now, we have a new, rapidly spreading phenomenon of homes being rapidly sold via real estate agents but via a private grapewine, without a formal listing. The reason for that is that brokers don’t want word of an imminent listing to get around, because that is likely to precipitate a frenzy of would-be buyers engaging in a bidding war, with several would-be buyers bidding on the same property.

So, brokers canvass desirable neighborhoods themselves, going or writing door to door, trying to talk existing homeowners into selling their homes to the brokers’ clients on an individual basis, with no one in the general market even knowing that the house is for sale at the right price.

The other significant new factor is that more and more buyers require no mortgages, but are instead paying the full price in cash. That indicates that the market is dominated by professionals who are trying to take advantage of the post-2008 bubble and pick up homes at bargain prices in order to “flip” them or rent them out and enjoy the cash flow.

The explanation is two-fold. First, ever since the popping of the 2008 bubble, home construction in California has dropped sharply, lowering the supply, while the normal demand has gone on. Also, there has been an increase in the numbers of foreign buyers who want to grab a bargain when they see one, and invest some of their money in a stable and secure place like the United States. Finally, some brokers seemingly forgo their commissions because they often deal with repeat buyer-customers and expect to make it up on future sales. How? A new custom is developing whereby the buyer pays the broker’s commission outside the sales transaction, so it is not reflected in the nominal sales price.

On a personal, anecdotal level, the Times’ description of the home market seems right. In a townhouse complex near our place, two town houses sold during the past month, both in the low 400s, and both in a matter of days. One (newly renovated) sold for the listing price and the other, described as being in need of “tender loving care,” and priced accordingly, went for $25,000 more than the listing price. But we recall seeing only one “For Sale” sign. This is hardly a scientific survey, but it is consistent with the L.A. Times story.

The real problem is that all this market activity notwithstanding, wages in Southern California have not gone up anywhere near consistently with this trend, and the improved unemployment figures involve modestly paying jobs that are unlikely to support  purchases of $500,000 to $1,000,000 (and up) homes. So stay tuned for a replay of the 2008 bubble, especially when interest rates go up as they inevitably will.

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