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Bubble Watch: Do homebuying binges signal trouble in Southern California?

Bubble Watch” digs into trends that may indicate economic and/or housing market troubles ahead.

Buzz: Southern California homebuying in 2020 produced a record-smashing, second-half rebound during a coronavirus-tethered economy.

Source: The DQNews/CoreLogic database of monthly purchasing trends — counts of closed transactions and their median pricing for all residences, existing and now — dating to 1988.

The Trend

Let’s quickly replay 2020, with some help from my trusty spreadsheet.

The pandemic first hit in late winter. Next came economic lockdowns — not to mention skittish psyches, healthwise and financially. Homebuying in six local counties for the first half of 2020 was running 24% below the second half of 2019 — the worst start of a year on record.

A slow but erratic reopening of the economy comes with historically low mortgage rates along with generous government help for financially strapped owners. That combination helped fuel 2020’s second half as Southern California home sales soared 51% from the year’s start — the best finish of a year in the 33 years we can review.

The Dissection

Does that late-year push mean anything?

To find out, I sliced a third-of-a century’s worth of annual homebuying trends into three groups, ranked by the size of their second-half sales gains.

First, look at how the best SoCal second-halfs compared with their worst. We’re looking at sales gains averaging 19% vs. 5.5% drops.

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Remember, homebuying comes down to house payments. That translates to buying power and how mortgage-rate changes impact what one can borrow.

SoCal’s second-half booms were usually in years of falling rates — much like 2020 — averaging 5.4% of extra buying power vs. an 0.5% decline in the years of worst finishes. In 2020, buying power ballooned 11%, the third-biggest jump since 1988.

Sizzling second halves occurred as prices fell 1% on average. One exception was 2020 when prices rose 8%! Conversely, years that finished poorly saw home prices up 6% on average.

To me, some sense of bargain hunting — amid economic instability and falling rates — powers these buying binges.

How bubbly?

On a scale of zero bubbles (no bubble here) to five bubbles (five-alarm warning) … ONE BUBBLE!

We’ve heard lots of speculation as to why SoCal homebuying reversed so sharply last year — cheap money (thanks, Federal Reserve), a need for larger living spaces due to remote work and learning, and perhaps improved demographics as more adults entered the typical homebuying age.

Let me add “FOMO” to the list — that’s “fear of missing out” for the un-hip crowd. You know, “keeping up with the Joneses,” or the like.

Rational thinking or not, my spreadsheet strongly shows late-year buying binges have staying power. At a minimum, it’s a hint that Southern California housing will see an upbeat 2021.

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Look at local purchases in the year after second-half booms: Sales rose on average 7%. Now, that’s not guaranteed as homebuying dropped in 1988 (end of ’80s boom); 1999 (dot-com crash jitters); and 2009 (giant bubble bursting).

Year-end momentum carried over to pricing, too. SoCal’s best second halves were followed by buyers willing to pay an average 6% more the following year. Caveat: Prices fell in 1993 and 1995 (part of ’90s housing malaise); and 2008 (that bubble thing).

By the way, the end-of-year flops created momentum, too. However, it’s a downdraft — sales dropped 9% on average even as prices fell 1%.

These gaps in momentum may very well be an “affordability” issue. The combined impact of rates and pricing after second-half surges left SoCal house hunters starting the next year with 6% more buying power. Yet, in the following years with weak finishes, the same “affordability” yardstick was down 7%.

FYI: This year starts with local home seekers having 2% more buying power, by this math.


Source: Orange County Register

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