Business analyst Mark Lacter joins KPCC once a week for an in-depth look at economic issues in Southern California.
Hosted by Steve Julian and Mark Lacter
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Competition in the sluggish U.S. housing market

KPCC's business analyst Mark Lacter explains why the weak housing market has a competitive side.

Steve Julian: Mark, if the housing market is still sluggish, why are there bidding wars?

Mark Lacter: Yeah, it might seem a little strange, Steve, but there is an explanation, and it has to do with home prices, which in L.A. County are still down, down almost 5 percent from where they were a year ago. It’s not that people aren’t buying – home sales are actually up compared with last year. It’s that the homes being sold are at the lower end. Anything over, say, $500,000 is in fairly short supply because people are concerned about not getting a large enough offer. That’s resulted in a big drop in the amount of housing inventory available for sale - the real estate people measure supply by looking at the number of months it would take to sell everything that’s currently on the market.

Julian: What’s the ideal inventory level?

Lacter: Six months – not too many homes, not too few. L.A.’s housing inventory shrank quite a bit during the first quarter, and it’s now at 4.7 months. Actually, inventory is way down is many of the cities that were hardest hit by the real estate slump. Phoenix is at 2.4 months, Miami 4.1, Sacramento 1.5. Again, anything under 6 suggests a tight inventory. And this shows you the reluctance of homeowners in those areas to sell.

Julian: And yet, what happens in a market where the supply is limited?

Lacter: Well, demand is likely to be strong. And that explains why some properties are receiving multiple offers – some higher than the asking price. Actually, seven out of 10 offers in Southern California have been competing – a little like the old days. Of course, it’s really not like the old days – if you bought an average L.A. home in 2000, it has appreciated by about 60 percent, which might sound pretty good until you look a little closer and see that the appreciation rate between 2000 and 2006 – that’s right before the recession – was closer to 180 percent. And that’s why these inventory levels are well below what they should be: People are unwilling to accept the fact that in most cases they won’t be getting anywhere close to what they could have gotten for their home five or six years ago. That doesn’t necessarily mean taking a loss – it just means making less of a profit, and for now, that idea is simply unacceptable.

Julian: But aren’t many of those homeowners going to sell at some point?

Lacter: They are going to sell because many of them are baby boomers who have reached their retirement years, and who for various reasons have decided that they don’t want to own a house anymore. (It could be that their kids have moved out, or they need extra money to live on, or they’re running into health problems.) You know researchers at USC just did a study on California’s future population growth and they concluded that the number of people 65 and older is expected to quadruple over the next 20 years, while the primary working age population – mainly folks from 25 to 64 – is expected to grow at a slower rate. And that 25 to 64 group might not be interested in buying the surburban house that an older baby boomer wants to sell – certainly not at the price that’s being offered.

Julian: Just curious – what percentage of US residents own a home?

Lacter: Only 62 percent, according to the Census Bureau, and that’s a 15-year low. Now certainly, the market will pick up as the economy improves. The question is how much of a pickup are we going to see. One interesting development is a rebound in apartment construction – local developers say that you have to go back to 2006 to see as much activity. And with that activity we’ve seen a steady increase in average rents (along with a drop in vacancy rates).

Julian: Why is that happening?

A lot of it comes down to the general unwillingness and inability of people in their 20s and 30s to buy a home. Now if these folks are more inclined to rent, and if baby boomers are more inclined to rent, you have to wonder about the housing market, not just in the next year or two, but really well beyond that.

Mark Lacter is a contributing writer for Los Angeles Magazine and writes the business blog at LA