General sentiment is negative

Last month I spoke personally to over 50 potential home buyers and for a great majority the attitude was similar "housing is too expensive." That is, they are not willing to borrower to obtain an asset at its current price. While reading an article authored by Steve Roach and recently published by John Maudlin, I began to think more deeply about the relationship of buyer psychology to asset prices. While the article's focus was not the housing market the article did cause me to think that buyer psychology could in itself cause home prices to fall.

Liquidity is moving out of housing

To see if this thought had any merit to the Southern California market I researched more completely the cause of the increase in home price appreciation. It is now generally believed that the home price appreciation was caused by unprecedented world wide expansion of liquidity. Increasing liquidity causes inflation. The inflation can be in consumer prices or in asset prices.

Why liquidity matters

 This inflating has been going on for decades beginning with the Japanese real estate and stock markets. As that market collapsed the liquidity then moved. Some of it was lost, some of it was withdrawn from the systems by central bankers and some of it went on to fuel the US stock market. The reactions to that boom turned bust was an increase in liquidity by central bankers that fueled a real estate boom in major cities worldwide and also fueled a worldwide commodity price boom. Now there is evidence that the liquidity is causing general price inflation. Liquidity looks for a return on investment that is at a minimum greater than inflation. So if liquidity leaves one market, as it is leaving the mortgage market, it must go somewhere else. Thus, it is not likely that decreasing mortgage liquidity will help the Southern California real estate market.

With reduced by still available liquidity buyers still won't necessarily buy

 The real estate market is traditionally driven by incomes. Your income has to be such that a lender believes that repayment can and will be made through your income. Additionally, a borrower has to believe that the assets being purchase will go up over time, because even at zero percent interest it makes no sense to buy an asset that will decline in value.

Little upside potential and an opportunity of some

 There is so much pressure on prices that I have difficulty seeing the upside potential in most homes now. However, there are some homes and some situations where it makes sense to buy. It almost always makes more sense to own rather than rent if you and your lender are comfortable with the deal, you have a sizable down payment and/or ample cash reserves, and you are going to occupy the property or one of the units. Much of the reason that this is so has to do the tax advantage of home ownership. This is way the very affluent will always own and purchase real estate.

Prices must fall if these views are held or come to be held by most buyers, regardless if there is ample liquidity and high employment.

For very honest conversations about current market conditions and what they mean to your situation contact me. I can be reached at 626.205.8142 or by email.