Soft Landing or Hard?

I am always amazed at what I will call “waves” of interest in all topics relating to human beings. For a long time, you saw advertisements for ED, but those have now been taken over by a huge number of ads for pills that ill alleviate insomnia, the current “disease de jour.” I already think that some ads for prescription medications ought to be outlawed, and some are surely distasteful and I wonder, “What’s next?”

This is true in all aspects of journalism too. A few years ago I think that I was among the first who started talking about potential bubbles in real estate values. For the record, I did not believe we had a bubble and said so many times.

It took over a year for the mainstream media to latch onto the word “bubble” but they sure did. The word has had a pretty good run for a couple of years with thousands of writers in almost every mainstream publication talking about the likelihood of the real estate bubble, and, if there was indeed a bubble, when it would pop, and what the consequences would be.

The new buzz word is “landing” and the talk has shifted to discussions about whether the slow down in real estate activity would result in a soft landing or a hard landing. I didn’t hear a “POP” so I guess there wasn’t a bubble after all.

My analysis is simple: there will be a soft landing in some areas and a hard landing in others. There are several factors that impact real estate values and the number of transactions. It might be valuable to talk about these.

The health of real estate is fundamentally dependent upon jobs. In places where jobs are being created, there will be income and people who need housing. In California , we have been creating more jobs than housing for more than a generation, so there is still an unfilled need.

That doesn’t mean all areas will be healthy. San Diego appears to have been the first market out here that has become saturated, meaning it has more sellers now than buyers and prices have actually declined. I don’t know about particular market characteristics down there, but I have heard a number of stories about speculators buying properties under construction with the intention of flipping them when them when construction is complete.

Builders who are building for the speculator market instead of for real buyers who would move in and live there were taking a lot of risks, and it may come back to haunt them. They and speculators will get burned, but the sadder part is the ripple that will damage other innocent bystanders who just want a home.

The stories I hear from Las Vegas and the Miami area are similar. Las Vegas has been the hottest housing market in the country in the last few years. The market can absorb people who are buying homes to live in because they got a job and have moved there. It can even absorb people who don’t think the hotels are nice enough and they want a second home.

The statistic I heard and have no reason to doubt is that there is a nine month supply of homes available for sale in Miami and that 75,000 additional condominium units are under construction. I find it hard to believe that jobs are being created in that market that will handle that number of homes.

Speculators in Miami and Las Vegas own their own home, and may already own a unit bought on speculation. That unit is for sale, and have a deposit down on another that is still being built. Do you think they will buy that one too, or will they walk away from the transaction and lose their initial deposit? Bottom line, I think that there will be trouble in these markets.

Phoenix is another one that looks a little fragile. The last report was that the new home builders are experiencing more cancellations every week than new sales. That’s a problem.

Detroit has a problem in that many auto industry employees are taking early retirement. Their plan always was to sell their lovely home in a Detroit suburb and move to some nice warm area. Maybe that was what was going to keep the Las Vegas and Miami markets moving along! But of course, the auto industry is not hiring new executives and there is no demand for the homes the recently retired people are trying to sell.

There are other markets where buyers and sellers are at an impasse. I think that is true currently in my area, Southern California . Sellers still want big prices for their homes but buyers, sensing overall weakness in the market (probably because of all the “landing stories” they are reading) are increasingly afraid of making a commitment. They want lower prices before they buy. We’ll find out whether they are right or wrong but in the meantime, the sales rate has slowed and will not pick up until the market figures out what it is going to do. The result, however, is that sales are off 27% in southern California and off 30% in the Bay Area. That’s not yet had much of an effect on value yet, but don’t exhale yet.

Bottom line, there will be no nation-wide happening that you can characterize as easily as the pundits would make it seem. An old joke went, “A recession is when your neighbor is out of a job. A depression is when you are out of a job.” It’s not much different here.