In Blog Eric Frazier

House sales in Southern California fell in September by the biggest rate since the Great Recession according to the latest report by the California Association of Realtors. For four months straight, the Southern California house sales slipped below year-ago levels, even though the prices continued to soar up.  In five counties of Los Angeles metro area , from September 2017, the sales of existing single-family homes fell 17.6 percent, representing the biggest annual percentage drop since October 2010. This fall represents the state’s biggest drop with Los Angeles County hit the worst, and home sales falling by a whole 22 percent.

In Orange County, home sales fell 21.8 percent. Riverside and San Bernardino counties recorded an annual sales decline of 9.7 and 12.4 percent, respectively. The data also revealed that statewide, the home sales fell 12.4 percent in September, which is California’s biggest year-over-year sales decline since March 2014.   I believe that one of the reasons why homes sales in Southern California fell is because of higher home prices and interest rates have devastated housing affordability.

Compared to last year, the Southern California houses continued to sell for more, however, the price gains are shrinking. The report also indicates that house price increased 3.4 percent in the Los Angeles metro area, representing the lowest year-over-year growth rate among all the major regions.

Are the federal tax cuts affecting house sales?

According to Steve White, CAR president, sales dropped due to the federal tax cuts that were adopted late last year. This makes homeownership less advantageous by capping the property tax deduction and reducing the amount of mortgage interest deductible from the federal income taxes.

Nonetheless, I don’t think that the cap on property tax deduction and reduction of the amount of mortgage interest is the reason why sales have dropped.  These caps only affects a few rich homeowners which have additional write offs and other tax strategies to minimize or reduce their tax liability. The cap on property tax and mortgage interest deduction doesn’t affect the majority of middle class and/or  low to moderate income homeowners.

The strongest reason why Home prices are dropping is because they were never sustainable in the first place.  Every aspect of the real estate market over the last 10 years is a result of the Federal Reserve’s monetary policy to stabilize the greatest financial crises in the history of the country and the bailout of the banks and the GSEs.  Our monetary policies have only resulted in series of booms and bust since the new deal in 1934. It is also the result of our Government’s Blind Eye to market manipulation and our capitalistic bent toward Laissez Faire economic policies.  It is our Laissez Faire economic policies, that only apply to the poor and not the  rich that we have experience such a degree of incompetence and lack of Government oversight over bond and equity market supervision and the rating companies who have been,  prior to Dodd frank, incentivize to provide the highest ratings possible.  True Laissez Faire Economics would have allowed the banks to fail but instead the poor where allowed to fail and the Banks were allowed to get richer. Look at the  top five banks today.  They have never been stronger and richer.

The market is adjusting as a result of  Wall Street greed, Government incompetence and the lack of supervision of government regulators on the take,  Investment bankers and their bond Market scheme that created tranches of non performing loans from borrower’s who where hoodwinked into subprime loans resulting to fraud which manufactured the consumer demand that has been driving the housing market and economy.  

Fake consumer demand has  manipulated the entire housing economy to over build and over price resulting in massive defaults and the Great Financial Crisis.  We have had abnormal consumer demand and other anomalies in the market before and after the Great Financial Crisis due to lack of new construction of homes over the last 10 years and below market interest rates.  Before we find the “normal market” will we have another adjustment aka Crisis that will bring real estate back to normal appreciation of 2 to 4% a year and not the double digit appreciation we have been seeing in the last 10 years.  The rise in new construction of single family and multifamily homes and apartments will bring prices down because of increase supply which will bring in another crisis. Home affordability and demand will improve as prices come crashing down.   The market will normalizes to prices with a multiple of 4 to 6 times median income and normal market appreciation tied to wage growth and GDP of 2 to 3%. This is an absolute certainty in my opinion and will only be delayed by further market manipulation by the Federal Reserve.  We also see a significant rise in mortgage defaults and foreclosures the evidence of which is already showing in the annual increase of mortgage delinquencies year over year.

Bottom line

This is all happening now and you do not need to be  an economist to feel it and see it. If you want to hold on to your gain you must sell now and cash out.    The party is over. Rates are rising and will level off between 7 and 9% in the next 12 to 18 months. I am predicting that prices will fall 25% to 40% in some markets because higher interest rates are already killing demand.  Higher prices started the slow death of the market; especially in markets that have had excessive and absolutely abnormal market appreciation. Higher interest rates is the proverbial nail in the coffin. Take a hit now and sell quickly or take a bigger hit by selling later and possibly not selling at all.  Fora free consultation about your property and goals please email me at eric.frazier@thepowerisnow.com or by telephone at 800-401-8994 Ext. 703.   This is not the time to play the market. Nor should anyone ever “play” the market.  The MLS is for serious buyers and sellers. What is happening now is not new. We have been here before. History always repeats itself and the strategies to deal with a  declining markets has not changed since the founding of this country.

Source:

https://www.ocregister.com/2018/10/23/southern-california-house-sales-fell-18-in-september-biggest-drop-in-8-years/

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