What Makes This Market Different From That of the Late 80's

Ah, the late '80's, when a seller could practically name his own price and the buyer was happy to pay it. Late 1987 thru mid-1989 was a period of frenetic real estate activity unparalleled in recent history. The trigger, of course, was the Fed's drastic lowering of interest rates following the October 1987 stock market crash, and a large part of the fuel (at least in Southern California) was defense-related government spending as the US faced down the Soviets for what turned out to be the final time. In mid-'89 when the Eastern Bloc appeared to be crumbling, and Americans were finding out what Perestroika and Glasnost meant (Gorbachev found out a little later), the Peace Dividend was declared. Remember that? Idea was that, since we no longer had to spend all those tax dollars on defense we could spend them on domestic programs, etc. Readers of my Newsletter may recall that I was a lone voice in the wilderness predicting what, to me, was patently obvious -- that shutting off the spigot of all those defense/aerospace-related government dollars was going to have a major impact on the Southern California economy. My advice in mid-1989 was that those considering selling in the near to medium term do so as soon as possible.

Right on schedule, the market proceeded to if not crash, at least go in a stomach churning dive, leveling off in early 1993, down about 33% from its 1989 peak. Unrecognized (or at least unreported) at the time was the lasting impact this would have on the market psyche. From 1994-96 the market gradually turned around and began tentatively moving upward. Again without any prediction that I saw (certainly not from me), what turned out to be the "dot-com"-fueled boom began in early 1997 like someone had flipped a switch. Realtors remember this well -- we were minding our own business when BOOM! -- everything sold. Prices soared to well over those of 1989, pretty well leveling off during the latter part of 1999, with intermittent spurts since then.  Be wary of what you read from "analysts", most of whom are ensconsed in air-conditioned offices analyzing data from the various county recorder's offices which is invariably 3-6 months out of date and probably includes a broad geographic area. In any event, the thing that distinguishes this boom from previous hot markets is the price sensitivity of the buyers -- as a seller you have to be within about 5% of what the market thinks the place was worth or nothing happens -- not even lowball offers. My theory about it is that, whereas up until the [ahem] readjustment of '91-'93, real estate values had never actually declined since the Great Depression. Buyers now have a fresh dose of caution provided by the jarring memory of '91-'93 -- it really can happen in Southern California.