Homebuying frenzy ignores California’s risky history
One troublesome trend in the pandemic era is a curious lack of hindsight for the state’s historically volatile housing market.
The unusual coronavirus mix of low mortgage rates and a desire by many households for larger living spaces has collided with owners’ unwillingness to sell. The ensuing tight market pushed prices to record highs as sales soared while others facing economic hardship skipped their house payments.
The California Association of Realtors statistics on singlefamily house pricing dating to 1990 tells us that despite the extended upswing in values over three decades, there are more years of decline than you might imagine.
The talk of “risk” isn’t a subject frequently heard among housing analysts and industry insiders. Too many seem certain this recent sales surge is the beginning of an extended upswing.
Yes, it’s great to sell into a buying frenzy. It’s also a good time to be in the transactions business with the quick pace of dealmaking. (Note: Many of these upbeat “experts” are paid by the real estate industry.)
This same thinking, though, overlooks the high possibility that today’s cheap loans and coronavirus fears could soon become memories. Not to be a buzzkill, but all this enthusiasm seemingly forgets that buyers hold most of the risk and nobody should overlook the yo-yo-like trends in California’s real estate market.
By my math, California houses have appreciated at a 4.1% annual pace since 1990, boosting the median sales price from $193,100 to its $650,200 peak last year. These same results clearly show that if you want to avoid buying into a downturn, owning for a long time will lower the risk.
Let’s look at the short-term odds of a loss, using the frequency of depreciation over one to five years. Since 1990, 29% of these short-run periods ended with California’s price benchmark below where it began.
Chances of avoiding a loss don’t improve much when considering six-to-10-year spans in which price dips were found 27% of the time.
So if you’d like guaranteed advances, history strongly suggests lots of patience — such as 11-to-15-year ownership. Losses were found in just 3% of these lengthy spans since 1990.
Be warned: The cost of being wrong can be steep.
Look at California’s largest price drops in annualized terms. In the short-run, worstcase losses averaged 26% a year since 1990. In the medium-term, price depreciation
was as bad as 6% a year. For lengthy ownerships, you essentially broke even.
Please note that this unpleasantness isn’t just residue from California housing’s bubble-bursting collapse into the Great Recession. That debacle took 11 years, from 2007 to 2018, for the market to return to its old peak price.
You see, the painfully stagnant real estate market of the 1990s is often ignored. That sluggish statewide economy translated to eight years (1990 to 1998) between record highs.
Deep geographical divide
California housing’s volatility also is regional.
Over three decades, Southern California appreciation translated to belowaverage gains of 3.5% annually, turning the 1990’s $205,400 median into $583,800.
The substandard profits came with a higher frequency of losses: 32% in the short-and-medium timeframes (one to 10 years) versus a 6% chance of decline in the long run.
Southern California’s worst periods were price drops averaging 27% a year in the short run vs. 6% drops a year in the medium-term versus a dip of 0.4% yearly in the long run.
The Bay Area, however, enjoyed above-average 5% annual gains, turning the 1990’s $232,600 median into $1 million by 2020.
Again we see longer periods with lesser risks: Losses came 19% of the time in the shortest ownership versus 22% over medium-term periods versus merely 1% in the long run.
The Bay Area’s worst periods saw 12-month drops at 27% in the short-run versus 6% declines in the medium-term versus gains of 0.5% in the long run.
It’s a reasonable hunch that Northern California’s dynamic and lucrative technology industries are a differencemaker.
Crazy as a stock
Let me now put these gyrations into a Wall Street prism to offer a simple measurement of volatility.
Watching stocks daily, compared with monthly reports on housing swings, might convince you to believe the real-time oscillations of share prices are crazy. However, when I did the same loss analysis for three decades of trading activity in the popular S&P 500-stock index — monthly data like Realtor stats — Wall Street looked relatively sedate.
For starters, the S&P 500’s pace of 7.9% annual average gains since 1990 easily beats California housing’s history.
Bonus: Stock dips were less common. Shares fell 22% in the shortest ownership timeframes; off 10% over mediumterm periods and 5% in the long run.
And the big losers were muted, too. Stocks’ largest 12-month drops averaged 22% in the short-run versus 5% in the medium-term and a gain of 0.4% a year in the long run.
To be fair to housing, the “standard deviation” of three decades of ups and down — a very geeky measure of volatility — shows stocks are 21% jumpier. So let’s conclude that California housing has an erratic track record; a track record that’s on par with stock market fluctuations.
Of course, this housing legacy’s storyline has enjoyed one constant: evercheaper money. Mortgage rates over these past three decades fell from 10% — yes, 10% — to under 3%. That basically doubled a borrower’s buying power. That can’t repeat itself.
So house hunters, please factor this history into your 2021 purchasing logic.