Market Matters - the FSBO Seller's Market
This article discusses how buyers and sellers assess risk in a FSBO seller's market.
Listing the FSBOSellers only have one house to sell, so technically they only need one buyer willing to pay the price they desire. However, statistically the most effective way to realize the full market value of a home is to list that home on the MLS and receive multiple offers. (Listing as a FSBO requires the services of a flat fee MLS listing company). Then with multiple offers in hand, a seller can confidently navigate a counteroffer process to allow buyers to compete for what they feel is the home's true market value (the price a buyer is actually willing to pay after competing for the home with other potential buyers).
BubblesTo understand why the current California real estate bubble has not yet popped in 2018 (even though multiple economic indicators have been pointing to a pop since at least 2015), you can look primarily to income. It is the classic bellwether. As long as most homeowners continue to enjoy strong personal income (from their jobs), then they continue paying their mortgages and continue buying houses. But once income starts dropping (due to unemployment or recession), then the many economic indicators that already point toward a downward adjustment become primed for realization. We saw the same economic indicators and phenomenon in the California housing market circa 2008-2010, which the film The Big Short explained.
You see, around 2006 several top economists predicted the American housing bubble would pop any moment, but for some reason it didn't pop for a couple years (until circa 2008). The reason is complex, but it was basically 'income' that propped it up. When people have high income, they pay the mortgage and buy houses, even at irrational prices and high interest rates. But when people don't have high income, they start walking away from their mortgages (especially high interest mortgages). And once a housing market reaches a tipping point of approximately 6% of people walking away from their mortgages, then the housing market becomes flooded with low-price homes and a shortage of new buyers. That combination creates a cascade effect that drops home values for everyone (yes, your home too), with many homes (especially in cities and suburbs) dropping upwards of 40% to 80%, or more. That's what appears to be on the horizon circa 2018. So if you are buying California real estate right now, then it is probably more honest/accurate to say that you are investing in California income levels, because that is what is really sustaining this bubble. Once income drops, so too will home prices, according to precedent (especially 2008).
Economics -- MinskyAn insightful and humorous economics documentary that explains this pattern is called Boom Bust Boom. It's pretty popular on Netflix - it was produced by one of the Monty Python guys. The main economic theory featured in the film comes from a deceased economist named Hyman Minsky, who argued that 'stability leads to instability' in the context of the accumulation of private debt -- I know, that sounds boring -- let me try to explain in a more interesting way... Minsky argued that as our memory of past financial crises fade (i.e., we forget/ignore the lessons of 2008), then the pressure to deregulate and relax credit standards leads to the gradual reappearance of instability, not as a result of interference with the market but purely as a result of fallible human decision-making (that's what is happening in 2018, as people have been buying homes since 2014 that they can barely afford).
Minsky believed government had an important role in limiting speculation. And yet, markets need uncertainty to be able to function properly (rather than government regulation) -- that's an important thing Minsky said, because he was pointing out the Catch-22. Do you see it? Trying to take away uncertainty with forward guidance and trillions of dollars just leads to uncertainty, so it is a move that cannot be predicted by regulation. Markets are populated with people, and if you try to take uncertainty out of people's individual lives, there's no telling what they'll do, other than it's probable they'll increase the risks they take. And why not, if they think nothing can happen to them? It's a matter of risk assessment. So, uncertainty happens regardless of government intervention.
And in the end, the bubble pops, for that is the very nature of a bubble... pop.