My wife and I were speaking this morning about our experiences with the CA real estate cycle. We have been married for 17 years, and I have lived between Los Angeles and San Francisco for most of my life. It seemed to my mind that about every 15 years or so a family was presented with a 6 to 9 month window to buy a home, preceded by a lull of about 2 years to make up their mind and get their ducks lined up.
If a family didn't take that window of opportunity, and the real estate cycle left the train station, it was a long long wait before you could ever get back on. In my San Francisco neighborhood in the 1970s the Victorians sold for about $40,000 to $60,000, Urban planners had even stupidly torn some of them down in the 1960s. There was a recession between 1979 and 1981, and then suddenly, that summer, the prices of homes in San Francisco began to soar and in 2 years they had doubled. Then by 1989 they had doubled again. $550,000 was the going rate for a Victorian and $240,000 for a single family residence.
There was a recession, the overblown housing market crashed for the better part of 7 years, and property values went down about 25%. Anyone who had bought from 1986 to 1996 was underwater.
And then it happened again. After prices had leveled off, there was a brief period between January and July in 1997 when the economy was getting better and housing hadn't taken off just YET. After July 1997, housing prices out here rose a $1,000/wk for the next decade, almost 520 weeks in a row.
I think we are in a similar place right now, having just passed through January to July, 2012. I can remember three brief windows of time in 1981, 1997, and now 2012 (spaced about 15-16 years apart) when opportunity in CA real estate came knocking. If you answered the door, you were in, but if you didn't, you were out and couldn't get in later. We tragically delayed twice, and when the opportunity came again in January, 2010 we jumped in - early, as we were later to discover - but nevertheless "in". Now - in the last 3 months - everyone in our neighborhood who had been underwater for 5 years got it all back in a single quarter.
As an enegineer contractor for the past 15 years, and the rest of my time focusing it on the stock market, I do believe in cycles, but not this time. We're headed for a double dip recession by next year. Those who bought into this housing recovery will be handing their keys on both knees. Don't forget, on average there is a recession about every decade. If you got spared on this last one, you might not be so lucky with the next. You have 30 years living check to check, all you need is one layoff and you're done. The odds are against you. Next recession in 2013, you can bet this time investors will pull their money out faster than 08.
There is no double dip, we have never came out of the first one. We have been in a down cycle in real estate for the last 5 years without an up cycle. It is not normal to have a down cycle that last this long which will lead to an up cycle that will last 2 to 1 or 10 years. Real estate is just starting to turn now and the economy will turn as we can not have a recovery without a recovery in housing.
And if you look at the business cycles you do find a recession or a slow down every 10 years, but the duration of the recession is less than 2 years and the expansion last 8 years. And if you pull up the historic time line, you will notice that the increases in the expansion years started after we went off the gold standard. The reason for this is that technology advances has greatly increase productivity. With the increased productivity, cost of goods and services will fall. In order to maintain stable and slightly increasing prices, you need to increase the money supply to keep wages in line and encourage future investments.
Housing is coming off the bottom and I feel the wrong move is to short the builders as I see continued profits and other markets returning to a normal appreciation.
BTW...and this is perhaps why I am so tied to KBH as a turnaround story. They are a CA company; they build more homes here than the other builders; and unemployment in CA is still in the 10-11% range, very high. It could be that KB's poor numbers are also a reflection of the poor economy here, and conversely, a change in the CA economy will mark a steady change in the CA part of KB's fortunes. This is their 7th or 8th CA real estate cycle since KB was founded in LA in 1957. They are no stranger to this phenomena, and probably why they chose to be so extremely leveraged at this point in the cycle.