Today’s Voice of San Diego hits on a key driver of home price movements: what they refer to as "desperate sellers"—people who, for one reason or another, need to sell their homes.
To understand their importance, let us first imagine a world without desperate sellers. In such a world, a home price decline of any significance would be highly unlikely. If housing demand declined such that homes weren’t fetching the desired prices, most homeowners would just take their homes off the market and stay put. They would, in the words of my friend Gary London, "lock their doors instead of locking in losses." The resulting decrease in the supply of homes for sale would balance out the decline in demand and stabilize prices.
Enter the desperate seller. This person has gotten divorced, lost a job, gotten a new job out of state, had a financial setback, etc. The end result is that he does not have the option to lock his doors and wait it out. He must sell at whatever price the market will bear.
There are always a few such people, of course, but problems begin to arise when their numbers grow significantly. If this happens, supply of for-sale housing does not decline along with demand. There are too many homesellers chasing too few buyers, and the most desperate of sellers are forced to lower their prices to ensure that they are able to sell their homes. This dynamic will continue, and home prices will continue to fall, until most of the desperate sellers have been able to unload their homes. Thus do housing crashes occur.
The optimistic consensus for Southern California housing, whether knowingly or not, assumes that the number of desperate sellers will remain low for the forseeable future. I find this assumption to be questionable. Any or all of the following groups are at risk to enter the "desperate seller" category over the next few years:
- People employed in the now-enormous real estate, mortgage, remodeling, and construction industries, some of whom will inevitably lose their jobs if the trend towards flattening home prices and declining home sales volume continues.
- Holders of adjustable-rate mortgages whose payments will increase if interest rates continue to rise.
- Holders of negative-amortization, interest-only, payment-option, etc. mortgages whose payments will eventually increase whether interest rates rise or not.
The above list is certainly not complete (now that the flood of new home equity wealth is drying up, for example, BMW salespeople might want to start working on their résumés). But it makes the point: the number of "desperate sellers," while still quite small, could grow substantially over the next couple of years. Should this occur, it is highly doubtful that California home prices will remain at their rarefied heights.