On July 24th, 2018, CNBC published a story online titled “Southern California home sales crash, a warning sign to the nation.” The timing of this story roughly marks the beginning of the ‘Price Correction,’ as many in the industry are calling it.
The Price Correction stirs thoughts of the Great Recession, but it’s an entirely different beast. For years, our market in Southern California has seen staggeringly low inventory levels, bottoming out in December of 2017 at an all-time low. This super-low inventory caused prices to skyrocket. In conjunction with low inventory, the available homes that were on the market – especially new homes – were being relentlessly pursued by foreign investment, mostly comprised of Chinese cash. For several years now, the primary influencer of home prices and sales (at least in SoCal) has been that Chinese cash and it’s propped our market up disproportionately to the reality of it.
The reality of our market, over the last several years, is one in which home price appreciation has outpaced wages, rising interest rates have decreased buying power, and limited options have pushed some buyers to the sidelines and decreased demand. These factors should have made an impact earlier, but they were negated by the seemingly endless injection of Chinese cash into the market, as well as the significant housing shortage across California. The Chinese cash, however, has dried up, and inventory is rising.
China implemented currency-exchange regulations in 2017 that restricted its citizens from using foreign currency to buy overseas properties. New, tougher regulations by the Trump administration have also played a very big role in decreasing foreign investment in 2018. Together, China’s own policies and America’s have almost reversed Chinese investment in our real estate market. News headlines dot the web:
- “The astonishing retreat of Chinese investment in America,” – The Week, August 7, 2018
- “Seattle housing market is under pressure as Chinese buying 'dries up',” – CNBC, August 3, 2018
- “Mainland Chinese real estate buyers are drying up,” – Business Insider, September 11, 2017
The drop off in Chinese cash left a void that other buyers weren’t (and aren’t) going to fill until prices stabilize and inventory increases. This void caused the rather sharp decline in activity beginning in June and became more pronounced as this past Summer wore on. This void is what the Price Correction is correcting for.
The median sales price, at least in Orange County, has plummeted roughly $25,000 since the Price Correction began. Homes are taking twice as long to sell, now, and time on market is anticipated to continue to increase for the near future, especially as we head into the seasonal lull of winter. This has lots of people, mostly sellers and listing agents, worried. But it shouldn’t.
The Price Correction, as I see it, and as other professionals in the industry, including economists, see it, is simply that: a correction to the market that atones for the influx of Chinese cash over the last several years and the extremely competitive nature of the market that pushed prices up too fast to a point that wasn’t sustainable for ‘normal’ buyers. We’re experiencing a ‘reset,’ and the market will normalize and, in my opinion, continue to be strong, as well as fairer for buyers. Where the Price Correction ends is the big question. There is most certainly a soft landing to it, however. The market is not in freefall. I expect the median home price to take about a 10% hit through early 2019, partly driven by the Price Correction but also by the cyclical ‘cooling off’ period typically encountered through winter.
Any damage beyond that will most likely be a self-fulfilling prophecy driven by nervous sellers and scared listing agents. As sellers and listing agents see price drops across the market and days on market that they haven’t seen for 5-6 years, some panic. They lower pricing too far and too fast. This scares other sellers and listing agents, who then mirror their actions. The result is the ‘threat’ of a declining market that sellers and listings agents turn into a reality.
Inventory has already nearly doubled since its low in December 2017, and the current climate only suggests it’s going to continue to grow. This is great news for buyers. Many will come off the fence as they see prices drop and options increase, and there’s still the threat of three more Federal rate hikes in 2019 to motivate buyers to get into a house sooner rather than later. Overall, it’s going to be more affordable to own a home, which is much needed news for an area where home ownership has always been a financial challenge. As more buyers come back into play, there’ll be more competition which will help prices stabilize and rejuvenate a steady, healthy appreciation rate for our market that is in line with reality. The Price Correction is good for real estate.