Re: Question/discussion on CA market - Posted by Killer Joe
Posted by Killer Joe on August 01, 2005 at 13:29:33:
Dennis,
The current mindset is that unlike every other cycle in RE that has come before, this cycle is ‘special’ and won’t be subjected to the same pressures that have caused corrections in the past. I personally don’t buy into that hype.
If we were to look at just two simple items that are basically ‘outside’ of RE, yet will have an overall bearing on the market, we can see that RE is not as isolated a realm as some believe. There are many factors that can change a market, let’s just talk about these two…
The first one is historic highs for gasoline and fuel oil. The second is the recent trend of credit card companies to double the minimum payments from 2% to 4 %, with the last of the CCCs instituting this change by Oct, 05.
The overall effect of these two seemingly unrelated items will be a ‘cash crunch’ for those that are at or near their limit regarding discretionary income. As an example, if you are a ‘renter’, and your financial profile is such that you are living as close to ‘hand to mouth’ as you can and yet still stay afloat, you may have one ‘Titantic’ of a winter coming up. If you are the landlord to this tenant, you may feel the impact to this individual as well.
Additionally, if you have ‘stretched’ to become a landlord such that your staying power will not allow you to carry a property through a prolonged vacancy phase, you may face the same troubles as your tenant. In effect, his house of cards fell down and landed on yours.
One predictable outcome of the above scenario is a rise in the RE inventory available for purchase. There is a direct correlation between inventory and prices. Markets that stagnate or retreat are historically led by investors hoping to ‘cash out’ or ‘bail’ before the whole ball of wax melts. Homeowners do not subject the market to these same pressures because overall they are in no hurry to disrupt their lives and relocate for the sake of market pricing.
While it is true that all markets are local, and they all have unique tendancies, the overall trend regarding interest rates, financing, allocatable resources such as fuel and gas, both for transportation and housing et al, are becoming national in nature if they weren’t already. In reality they are becomming global in nature. (If you don’t believe the recent overtures of the Chinese Government to buy Cheveron won’t affect you, you’re not paying attention.)
One trait of human nature is to seek a position that will lessen the overall stress endured on a daily basis. In the last two RE recessions I have witnessed in SoCal, I have watched people literally walk away from properties that are causing them too much stress. This, BTW, was in spite of any and all monies invested in the properties. They simply cut their losses and moved on. This drove an already heavy inventory to the point of no return as far as apprieciation went. In fact it fueled the deflationary fires even more. This led to a situation where people stopped investing in fixing up the structures, and allowed the physical decline of the structures to influence prices as well. This last effect is more pronounced toward the end of the down cycle, although is initiated shortly after the crest when people realize that no matter what improvements are done to the property the monies invested will not pay a return, only be buried.
If you have trepidations about the SoCal market reaching the boiling point, and realize that the pace of housing costs is way ahead of income at this point, I share those sentiments. As a student of the last two cycles I see no circumstances that will change the cycle to one of being impervious to market pressures. In fact, I just gave you two more pressures to add to the list. HTH
KJ