As my weekly readers know, I write an annual “fearless predictions” blog for the South Bay real estate market for the coming year. Like always, this blog will be posted in early January of 2021.
I have also made it a habit each year to hold myself accountable and share with readers if the predictions came true…or were wildly off. Well, that time has come to look back at my predictions and see what happened.
If you would like a refresher on the 2020 fearless predictions blog in its entirety, you can find it here.
In a nutshell, my predictions could not have been more wrong for this year.
I wonder why?
A global pandemic, unprecedented government and Fed stimulus, and a “stay-at-home order” that made owning space and land more valuable than ever.
Below you will see the horribly wrong predictions and how we can learn from them…
Prediction Recap: Price Declines Between 5% and 15% in 2020
My Prediction: Prices will decline between 5% and 15% in 2020 depending on interest rates. This was a longer-term prediction I had made from two years ago. It was not a doomsday call, but a correction that would be healthy for our market.
Recap: What a wild ride this prediction rode! Up and down, but ultimately, very wrong.
Last year, I started out the fearless prediction post with a “Real Talk: The Market is Soft.” In that “Real Talk,” we realized that the market seemed to be slowing at the end of 2019 with Manhattan, Hermosa, Redondo, and both Palos Verdes 90274 and 90275 zips all being down at the time. Essentially, there was weakness throughout the entire South Bay market.
The 2020 year started off strong, and then…the market essentially collapsed for a month or two with the pandemic and stay-at home orders in place.
Following that, the market through May has had an incredible recovery and surge higher, thanks to stimulus, even lower interest rates, etc.
There were some buyers, with absolutely no fear, who ripped deals during the stay-at-home order that were 5% to 15% off; however, that was short lived and now the market is much higher.
In short, my prediction was totally wrong.
Prediction Recap: Interest Rates a Negative for the Market
My Prediction: Interest Rates need to hold to avoid being a negative effect on the market.
Recap: My “you’re damned if you do, damned if you don’t” regarding interest rates proved to be correct in theory, but it played out wrong, yet again.
I truly believed that interest rates needed to stay firm. If rates went higher, it would hurt the market with reduced buying power. And if rates went lower, it was because the economy was slowing which was a bad omen for the housing market.
Well, the economy fell off a cliff, but I never expected stimulus even larger than the Great Recession. Turns out, generationally-low rates and a unprecedented stimulus in huge magnitude can prop up and grow markets no matter what.
Rates now being insanely low, stocks surging to all-time highs, and many workers throughout the South Bay able to work from home, that is a recipe for surging prices.
As a pure prediction, I got it wrong again.
Prediction Recap: Income Properties/SFRs with ADUs Outperform
My Prediction: Small income properties throughout Southern California, single-family homes with large lots, and anywhere that allows you to add an ADU will outperform the market.
Recap: Wrong again…for the most part.
Small income properties have underperformed the market for a multitude of reasons. Banks have been stricter on loans due to eviction moratoriums, rents have fallen, and buyers are not wanting to take on risk amidst the pandemic.
Homes with larger lots and/or ADUs are catching fire thanks to buyers’ desire to own a home. The ADU helps with affordability or enables family member to “stay-at-home” on the same property during the pandemic.
All in all, the pandemic put this prediction on hold.
Prediction Recap: East Manhattan Beach New Construction Risky
My Prediction: East Manhattan Beach new construction homes are one of the riskiest investments in the South Bay.
Recap: Horribly wrong!
Thanks to the pandemic, large homes and large lots have outperformed dramatically.
East Manhattan Beach offers exactly what buyers desired heading into the pandemic recovery. Furthermore, plummeting interest rates are the perfect cocktail to drive new construction prices and demand. If prices are expensive or rising, then those lower interest rates can offset the cost.
With ultra-low interest rates, it makes little sense to build when you can buy something turnkey and borrow at 2% rates. Buyers with Manhattan Beach budgets saw their buying power increase and East Manhattan Beach stood to benefit.
Conclusion
I think there is a lot that can be learned from this year’s predictions recap:
- No one saw the once-in-a-lifetime, black swan pandemic event coming. For any prediction that came about on January 1st, you may as well have thrown out the window when the Coronavirus hit in February.
- I got all predictions wrong this year, but I am not beating myself up. Without fast acting and unprecedented government and Fed stimulus, our markets would likely have dropped more than 15%. And, I would not have taken credit for calling something like that. This was just a crazy year.
- Speaking of stimulus and the Federal Reserve, I think their actions need to be examined closely when it comes to our real estate markets. If you have not heard of the “Fed Put,” it is the widespread belief that the Federal Reserve can and will always rescue the economy and financial markets in times of distress. Is our real estate market immune from large macroeconomic events that could depreciate our real estate values? Can we expect no worse than a drop of a few percentage points, thanks to the Fed Put? That is something to explore in later blogs.
- Finally, this year has been a lesson to never buy real estate unless you are 100% confident you can afford it, through thick and thin, with a huge emergency fund to help you sleep at night when the economy and your job is at-risk. From an investment perspective, this furthers the idea that the short-term is impossible to predict and that long-term trends are the only thing you can count on.
Even with the last point said, you better believe I will continue to make those impossible short-term predictions each year. You have to do your homework and come up with a thesis in all investments, and the same is true with our local real estate markets. Sometimes you will get it right and sometimes you will get it wrong, but in the long-term, it will all turn out just fine in the end.