Housing Prices are Declining But Not Declining!

Housing Prices are going down, but not really!

That sounds confusing.

Let's start with the market overview.

Nationally, housing inventory continues to track down below every year but 2021 is the lowest year in history. This is the strongest indicator of market health, and this shows the market is still very healthy and nowhere near a crash given current conditions.

The decline is even more obvious in the Los Angeles market, shown here:

And, yet, the headlines are declining numbers, always bad. for example, here is Fortunae Magazine citing the Case-Schiller report with drops in sales prices, including a drop of 6.1% in Los Angeles.

So, are prices declining? Well, yes and no.

The total sales are less, but that is explained that fewer large homes are being purchased in this post-pandemic period, yet for the same size home prices are continuing to increase.

Let's look at the data.

here Altos Research breaks down Los Angeles and shows the per square foot dropping from $743 to $723. OK, does that mean home prices are going down?

Well, yes, on average, but that is because there are fewer larger homes being purchased than last year. When we look at the breakdown by market segment, each segment, even the larger homes are selling for a higher dollar per square foot than last year or 2 years ago. So the mix of fewer larger homes and a larger portion of smaller homes makes the average decline, but for any particular product, the cost is going up per square foot. 

To put the market in perspective, Lance Lambert of Fortune Magazine puts the Case-Schiller data in perspective when you see that of the 41.3% price gains the average homeowner experienced they may have given back 3.33% in the most recent correction.

When you combine this new equity with the limited inventory, a housing crash is almost impossible going forward unless there are major changes in our economy.

Another red herring the real estate news talks about is the lack of affordability. Now, obviously, if homes are not affordable, they are by definition more valuable. That said, look how dishonest the statistics are. 

So, this graph would appear to say it is more expensive to own an average home than to rent it by $1,000 a month. So, let's count the ways this is misleading.
1. The monthly cost of ownership includes the principal, which is the portion of the loan being reduced by the loan payment. But that is not really a cost, that would be a benefit, and the principal should be removed from this calculation;
2. Tax benefit of owning; most homeowners are able to deduct a portion of their home payment, as well as the property taxes;
3. Tax-deferred appreciation. The main reason people buy a home, in addition to the principal reduction and tax benefits, is that over time the property goes up in value. When you put only 5% down, your investment is levered 20 times, meaning if the house goes up in value by 3% per year it is the return on the investment of 60% per year. When a $400,000 value property goes up 3% in a year, the homeowner not only gets 3% since they only put down $20,000 the 3% appreciation of $12,000 is a return of 60% on their investment in year 1.

So, then the press cannot predict a housing crash, look for more articles on the lack of affordability, but I would not fall for any crocodile tears.

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Bill Gross, The LAProbate Expert
I am a real estate broker in Los Angeles, CA focused on probate real estate and the leader of a team of over 1,100 agents nationally probate experts.

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