Bubble watch: Would a ‘normal’ housing market be so terrible?

“Bubble Watch” digs into trends that may indicate economic and/or housing market troubles ahead.

Buzz: Apparently some “Chicken Littles” are misreading the “greater number of options” for house hunters. Industry experts say their “revised” forecasts show the market hitting an “inflection point” in which “equilibrium” will emerge among buyers and sellers. This “revaluation” will produce a “leveling” to a more “sustainable” pace.

Source: That’s my summary of common buzzwords used in recent weeks by real estate industry gurus.

Topline

The latest housing numbers haven’t been pretty as the pandemic era’s surprisingly hot market seems destined for a significant chill.

Basically, buyers are saying “no” to sky-high prices, veritable wallet busters amplified by a historic jump in mortgage rates.

Southern California home sales were down 19% in April vs. a year ago. Statewide, the slump was 9%. One U.S. sales index for existing homes has been declining for six straight months. New-home purchases have dipped every month in 2022. Builder sentiment has tumbled to its lowest level since June 2020.

Yet it’s been amusing to watch housing cheerleaders try to spin this slowing marketplace, which has caught them off-guard.

Swiftly, real estate insiders have gone from bragging of a “new normal” boom for housing to cautiously saying what’s ahead is a more sedate “normal” market.

The Dissection

But what does “normal” look like?

For answers, let’s turn to the trusty spreadsheet, looking at real estate benchmarks comparing the past year’s trends with “normal” averages dating to 1988 …

Home appreciation: Price gains have run 17% in Southern California in the past year vs. the normal 4.7% annualized gain. I’ll bet most people would take that kind of depressed appreciation, even if it’s just a sliver of the current profit pace!

Home sales: Southern California purchases averaged 22,611 a month during the last 12 months — essentially normal since 1988. But it’s far from normal, by county: Current sales are below average in Los Angeles (off 9%), Orange (off 6%), and Ventura (off 3%), flat in San Diego, and higher in Riverside (up 18%) and San Bernardino (up 9%).

Rents: The Consumer Price Index showed the pace of rent hikes nearly tripled to 3.4% in the past year. History says this is a normal level of price hikes for tenants, by this yardstick.

Building permits: The industry wants you to think more construction will fix what ails housing. California developers’ building permits filed in the past year are running 1% above the normal pace since 1988.

Mortgage rates: A stunningly quick move from record lows below 3% to above 5% still leaves financing costs below the typical 6.2%. But the Federal Reserve promises it’ll be upping rates to kill off an abnormal bout of inflation.

Inflation: Who wouldn’t want to see inflation shrink back to its normal 2.4% rate from its current highest-in four decades levels. But how painful will inflation’s cooling be? Note that mortgage rates now run 3 full percentage points below inflation. The “normal” spread is 4 points ABOVE inflation!

Job growth: You need a paycheck to join or stay in the homeownership club. California bosses grew staffing by 6.9% in the past year vs. normal’s 1%. That rehiring from the pandemic’s economic chill has helped add sizzle to the housing market.