I predict a flat market…for a while.*

 

Absent seasonal market fluctuations, or some catastrophic economic collapse or act of God, here is why prices aren’t moving up or down (significantly) anytime soon.

 

 

What drops a real estate market is foreclosures.

 

But not one or two foreclosures. You need thousands of them.

 

For example, we are listing a foreclosed home in Hollywood for $2mil next week. Zillow and Redfin value it at $4mil, but man is it a mess - empty pool and everything. So, it will sell at a sizable discount compared to its neighbors.

 

Will this single panic sale drag the neighborhood average down? No way. There are 146 homes for sale in 90046, and this one will likely be flipped to market price anyway. It’s a blip on the radar.

 

But what about 2008? Will we ever see a repeat of that? That year (through 2011), prices plunged by a third (or more in some areas), a result of the global financial crisis specifically tied to the American home mortgage industry.

 

But things were very different in 2008 when market sentiment shifted. Owners had to sell, and if their house was worth $1mil, they usually owed $1mil. It’s a little-known fact that most foreclosures were on refinance loans, not purchase loans. Banks let you borrow up to 100% of the home's value, and it felt like everyone did. Unlike today, no one had equity.

 

So if the house didn't sell, owners couldn’t reduce the price (and no one wants to bring money IN to escrow to sell). So they stopped paying, walked, and Wells Fargo owned it six months later—weird times.

 

And a foreclosure to a bank is a hot potato. They cannot get rid of it fast enough. So they discount them in bulk, and it’s a race to the bottom. 

 

Research shows that 40% of homes for sale must be foreclosures for any real price damage to occur. Last year, there were 2,947 foreclosures in the entire state (out of 14 million homes!). We are a long way off.

 

Until next Friday,