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Of late, the buzz about using home sales as a predictor for the next recession has been turned up. First, there was the hue and cry about home sales slowing in LA. Then, there was a more obscure discussion about yield curves. While both may carry some relevance, I am not fully sold on these trends. These are trends from the past. They may still work. But we live in some truly crazy times. Things that oughtn’t, are indeed topsy-turvy. And, of course, for people who are paid to put down, “I told you so” placeholders, there are no luxuries in waiting to put down the flag, a la General Fremont of California.

For me, there are no such pressures. Plus, given how places like the Bay Area, LA, Seattle and others have such overheated markets, a little slowdown barely makes the mark. Hell, prices are still going up in the Bay Area, because somewhere out there, there are enough people foolishly falling for the real-estate gimmicks. Did you know, there are “homes” looking onto I-880 now? Unlike before, that is. They have even stopped pretending the barriers matter. I have to wonder who wants to insure properties against a runaway fuel truck. More importantly, who the hell wants to live a stone’s throw from the I-880?

So, I was holding out for what I have known is a trend that has cost many of us our dream of a home, including, yours truly. Non-resident, cash-holding Chinese individuals who only match the greed of real-estate firms in their alacrity to buy up homes. I wont repeat all the horror stories of how a house would go into the market,and hours later be sold for twice or more, in all cash transactions. While the US did nothing, at least countries like Australia and Singapore, and territories like Hong Kong tried to do something.

All in all, during the last week, I participated in more than one conversation about people who took one or two articles as dogma, and started salivating at the idea of being able to buy homes again. I have had at least two to three counterpoints, which I will highlight here:

1. A LOT, and I mean a LOOOOOT of people are sitting on cash, what they consider to be sufficient for the 20% down, when the market slows down, so they can buy homes, especially in the Bay Area. The problem is, should the market slow down even a lot, people will immediately rush to buy up homes, and you will have an up-spiral in weeks, days, hell, even hours! Sorry if that pricked your dream-balloon, but there, you have it.
2. Even before the news about Seattle trickled in, I wanted to see if there will be a slowdown in the foreign buyers’ trend. Consider the scenario where home prices fall by 50%. You may have 20% to put down and are thinking of putting in an offer. How would it matter, if someone can, as usual, outbid you, and put down 100%?

Now, on to the Seattle, Chinese-buyers thing. Word has it, because the Yuan has cheapened against the USD, the Seattle home market might at least be slowing down. Good news, you say? Well, let’s break it down:

1. This is a temporary trend, for now. What if the Chinese and US Governments did settle their trade disputes, then what?
2. Apparently house prices in and around Seattle have “soared” 45% since August 2016 (this is why I am always amused by people imagining they can be the next Silicon Valley). And adjusted for inflation, to the average Chinese rich guy rolling in dough, it now represents a 54% post-soar price increase. Yeah, that 9% is really going to slow them down, you think?

So, what are we looking for?

I say, this temporary slowdown is a notable trend. We need to see if this will become a long term trend. What, if anything could cause this, is hard to tell. You also need to make sure another cohort, or a group of cohorts don’t swoop in and start gaming the market.

Like greedy real-estate builders have been doing.

Then, you need for the inventory to actually hit the market. The ONLY thing that will permit that is a true recession. Yeah. Who really wants that?

Whether we like it or not, I believe that only a recession will turn off speculators of many kinds, at least for a while, and the economics of the recession will force properties to become available again.

But, you see the problem right? A meaningful slow down in speculation by the Chinese and everyone else is directly tied to a recession, not just tariffs and exchange-rate volatility or manipulation.

So, we can sit here and watch home-sales trends and argue about mechanics seven ways to Sunday, but the truth is, we won’t necessarily be able to use home sales rates as much of a predictor. We’ll still have to keep watching and keep probing.

References:

1. The slowdown in the Seattle Market: https://www.cnbc.com/2018/08/02/seattle-housing-market-is-under-pressure-as-chinese-buying-dries-up.html
2. Australian Taxes to slowdown speculation: https://www.ft.com/content/16859cde-31f7-11e6-8825-ef265530038e
3. Image, Courtesy, Pexels: https://www.pexels.com/photo/space-needle-656195/

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