Job recovery will be slower than expected

Reports demonstrate record job gains in California in the last few months, nearly 700,000. But that doesn’t mean we’re actually making new jobs. It means that we lost so many jobs this year that even recovering a small percentage of them is going to look like a large number. There were actually over 2.7 million jobs lost in California between December 2019 and April 2020, significantly more than were lost in two years during the 2008 recession. So we’re still a long way off from returning to the December 2019 peak, let alone generating new jobs.

Federal assistance has been necessary to keep the economy floating, but it’s also been inadequate. We’re going to need a lot more help. A COVID-19 vaccine is a solid step, allowing more people to return to work. It’s not going to be enough, though, since the economy was already on a downward trend before COVID-19 — recall that the peak was December 2019, three months before the lockdowns. The recovery is expected to be W-shaped, with some unstable gains from now through 2021, and no clear upward trend until 2022 or 2023. Even then, job recovery will have just started, and the real estate market is going to need even more time after jobs start back up.

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Despite fierce competition, it’s not indicative of recovery

Throughout California, homes are selling quickly. 46% of homes are on the market less than two weeks. Using data from Redfin, 54% of offers were contested. The breakdown by region is 67% in the San Francisco/San Jose area, 65% in San Diego, 58% in Los Angeles, and 47% in Sacramento. However, don’t mistake this for a healthy market — we’re still in a transition period.

The actual reason for low days-on-market is a combination of high buyer demand, due to low interest rates, and low inventory. Those who are able to buy correctly recognize this as a great time to do so if you are able to afford it, and are scrambling to get at what few properties are available for sale. Even the high demand, though, is merely high relative to inventory — there still aren’t very many people who are able to afford a purchase right now. Whether or not we get a COVID-19 vaccine before then, the housing market won’t properly right itself until the job market stabilizes. The expectation is that this won’t happen until 2022 or 2023.

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Here’s why house prices are still high despite the recession

It may seem intuitive to look at past recessions, such as the one in 2008, to predict the market during the current recession. But that doesn’t always work, since the circumstances surrounding the downturn may be different. In 2008, what caused home prices to drop was reduced buyer demand and increased foreclosures and short sales. Now in 2020, that’s not happening.

Buyer demand is actually relatively high right now, as a result of interest rates being low. The Fed decreased interest rates in 2019 in expectation of a recession. They were right, of course, but couldn’t have predicted the exacerbating effect that COVID-19 would have. Interest rates can’t get much lower without the Fed going negative, so the market doesn’t have anywhere to go. Foreclosures may be on the horizon if federal and state governments don’t maintain protections. But for the time being, there’s a moratorium on most foreclosures, so there’s no need to drop home prices. Another factor is the lack of construction. With fewer homes being built, especially in the form of affordable housing, low inventory means there’s no competitive pressure on sellers to reduce prices.

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Predictions for the 2020 recession’s impact on inventory

The real estate journal First Tuesday asked readers in July how they felt the 2020 recession would impact for-sale inventory. The votes are now in.

A plurality of respondents, 45%, felt inventory would go down. This would likely be a result of both anxiety from sellers and not enough construction. However, the number who instead felt construction would increase and there would be rental vacancies, leading to more listings, was 39%, not too far off from the plurality. The third and final category, those who felt there would be little to no impact, totalled 16%.

But that was July. It’s now August, and there certainly has been an impact. It turns out the 45% were right. Inventory has declined steeply, and construction companies are even more wary about building than they already were before the pandemic. Fortunately, declining rental vacancies points to an increase in inventory as soon as construction starts back up. Changes to California zoning laws also hope to speed up construction.

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Recession Still Felt for Half of US Homes

Some markets have recovered very well from the recession, with over 95% of home values in seven of the 35 largest markets exceeding the pre-recession peak in 2006. And in 21 of those 35, the median home value has reached this point. The housing boom and bust didn’t affect every market equally, though, and nor has recovery been the same for all of them. Half of all US homes haven’t fully recovered.

Market stability was a large contributing factor. The boom was enormous in Las Vegas — and the bust shattered the market, with less than 1% of homes having fully recovered value. The Denver market was more stable a decade ago when the crisis hit, and enjoys values higher than 2006 levels for 99.6% of homes.

Other lasting effects of the crisis are rent values and inventory. Though the rate of acceleration is slowing, rent values are still going up. Similarly, the decline in inventory isn’t as fast as it has been, but it’s still dropping. Inventory will eventually recover, but inflation means rent values will continue to go up even when the market stabilizes.

If there is a particular market you are interested in, or just want more info, check out the article and table provided by Zillow here:

Here’s Why 2018 is the Year to Sell

Many people who are seriously thinking about buying or selling are familiar with buyers’ markets and sellers’ markets. Realistically, though, the real estate market can be divided into three phases: buy phase, hold phase, and sell phase.  So what are the indicators of each of these phases, and most importantly, which phase are we in now?

The buy phase is characterized by low prices, interest rates, and sales volume, but high inventory. Paradoxically, another characteristic is low demand, because high demand represents more competition and thus lesser chance for each individual buyer to strike a deal. This is when the average buyer can afford the highest percent of the homes currently on the market.

Hold phase may be an unfamiliar concept to some of you. That’s the time when real estate investors want to hold onto the properties they have bought so that they can accrue value before being sold later. The hold phase is simply a period in between a buy phase and a sell phase that likely has characteristics of both.

One may guess the characteristics of a sell phase are opposite those of a buy phase, but this isn’t strictly the case. Yes, the sell phase has low inventory. Each other category is slightly different. Prices and interest rates are typically rising, not simply a high, flat value, and sales volume is still slow. The other factor is not number of buyers but a statistic called yield spread. Yield spread is the difference between the rates of a 10-year Treasury Note and a 3-year Treasury Bill, and a value below 1.0 is an indicator of coming recession. 1.0 was the exact value of the yield spread in June of this year, and is expected to hit zero around the same time next year. In fact, the current market meets all five criteria to be considered a sell phase, as prices and interest rates are still rising, and sales volume has been flat since 2015. Home prices are expected to drop within the next 12 months, though, so if you are planning to sell, do it now.