Housing Prices About to Get Crushed in Southern California?

Our Divorce Financial Planning business offers an interesting insight into the real estate markets of our communities. We see more homes bought and sold by our clients than all but the top 2% of realtors. In most cases we are also actively engaged in helping our clients make decisions about if or when to buy and sell. In doing so it is important to keep our finger on the pulse of prices and the factors that affect them.

In 2012 real estate prices in Southern California were stable seeing minimal growth in valuations. The market was slow and listing versus selling price spreads were negative meaning most property was selling at or below list prices. The higher the price the bigger the spread and the longer it took to sell. In early 2013 mortgage interest rates sank to such low levels that buyers began to realize they could be missing an opportunity to lock in low rates. At the same time the inventory of homes for sale was anemic thanks to the perception in the sellers market that prices were stagnant and it was not a good time to sell.

I believe the combination of low inventory of homes for sale and buyers starting to come into the market has created a bubble. I started to notice this in full swing during the Spring when homes first began universally selling above list prices and getting multiple bids. The low inventory of homes meant multiple buyers were competing and forced to offer continually higher purchase offers in order to risk getting out bid. The neighbors started to see homes selling at 10% premiums to their list price and realized they could now sell their own home and break even when two years ago they would have done a short sale. Here comes the bubble.

Buyers are worried the competitive offer environment will price them out of the homes they wish to purchase so they make progressively higher bids. Sellers start flooding the market with listings. The competitive purchase offer environment drys up thanks to increased inventory and rising interest rates. I expect prices may fall back to their 2012 levels while interest rates continue to rise over the next six months.

This bubble has made it difficult for many divorcing couples and individuals to make a decision about how to handle their family residence. As part of our Divorce Financial Planning conversation we are making sure clients understand that our current outlook on real estate prices may mean they need to consider alternative methods for valuing the home or mean they need to abandon the idea of keeping the residence thanks to the inflated price level. If you believe prices will fall you may not want to appraise a home today and buy it from your spouse. I am also advising clients that now may not be the best time to buy as I expect prices will be lower by next year.