MB Had Its Slowest Quarter Since Late '08

By Dave Fratello | January 8th, 2019

Buyers for Manhattan Beach real estate were more picky and reluctant to act in the 4th quarter of 2018.

As a result, the city just posted its slowest quarter for new escrows since the last 3 months of 2008.

As you may recall, the financial markets were in free fall in late 2008. So that's an awkward comparison.

Late in 2018, there was no obvious crisis in the financial world, though maybe some storm clouds were forming. Several stock market measures ended the year down by 4-6% for all of 2018, largely due to a challenging Q4.

But it wasn't such market upheaval that would explain why Manhattan Beach real estate listings weren't finding buyers.

Before we ask why this happened, let's start with what the data show today.

First, as we foreshadowed in a mid-December market update, the 4th quarter did wind up notably below recent years in terms of new contracts to purchase. Inventory of homes for sale was medium-to-high throughout the period, but buyers weren't taking the leap.

With 56 new escrows between Oct. 1-Dec. 31, the period fell 10 short of recent years 2015 and 2016, and represented a steep dropoff from late 2017's 84 new escrows. (We have often referred to 2017 as a "sugar-high" year in the local real estate market. Here's more evidence.)

We backed up from the 2013-18 period to check more historical data.

This was where we found that the recent 4th quarter was the slowest of any 4th quarter since those ill-fated last 3 months of 2008.

It was a little more of a surprise to look at every single quarter's worth of real estate activity since January 2008 - our third chart here. Look at a full 11 years' worth of activity, and you see that no quarter at any point was slower than the 46 sales (new escrows) in Q4 2008 and the 56 sales in Q4 2018. They are each the low record-holders for this span of time.

Our chart here will show you the ebb and flow of each year by quarter.

For reference, the higher numbers, mostly labeled, are all associated with Q2 of a given year.

More homes typically go into escrow in Q2, between April 1-June 30, than in any other quarter. (The first quarter usually has a slow start before the market kicks into gear in February.)

The lower figures that are labeled are all for Q4 of the years listed. Q4 is always, without exception, the slowest quarter of any year for new deals to be signed.

Now we can ask: What's going on here?

Tracking pending sales (new escrows) is a good way to gauge demand in the market. So that's what we're trying to assess.

Inventory is a factor, obviously. There have to be enough homes available to buy. But homes were plentiful in 2018.

Affordability for buyers is another factor. If all other things are equal, home prices and interest rates are the major factors here.

Rates ticked up during the 4th quarter, while home prices have been fairly steady. So we begin with a hypothesis that rates are to blame. Even if they remain historically low, mortgages began to be pricier. (A bit of sunshine: Rates have come down again after a November peak.)

Don't forget the tax man. The 2017 federal tax law, designed baldly to punish homeowners in pricier coastal markets, seems to be starting to have an effect. As buyers map out the comprehensive costs of home ownership, they generally see a $10,000 limit on deductions, changing some of the equations that favor buying.

The x-factor in this discussion can't quite be documented with data.

In general, that x-factor would be that the market's rise may have run out of steam all on its own. Buyers may be holding back because they expect to see the market change for them.

Real estate markets are cyclical, and we're already several years into a rising, sellers' market. We would not be going out on a limb here to suggest that the market is ready to shift. In some way, people have been predicting a turn since 2015-16. So far they've been wrong.

The first half of 2019 likely will provide mixed signals on the Manhattan Beach real estate market. Buyers and sellers will see activity that supports their respective takes on the market.

First things first, we've got to recover from that slow Q4. A bustling Spring market is just the prescription.

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