Posted: 02 Mar 2011 02:30 AM PST
Will the housing market bottom in Irvine in 2011? What about nationally? Today's post is a review of the current conditions favoring a housing market bottom this year.
Irvine Home Address ... 25 RIDGEVIEW Irvine, CA 92603
Are we at the dawn of a new bull market in residential real estate? Is the bottom close at hand? The double dip recently became official, both nationally and in Irvine (see below), so perhaps it is premature to call the bottom just yet. The current trend is decidedly down. The price plot intersects the bottom right corner of the two-year chart reflecting the worst possible market condition.
It always looks very dark at the bottom, and after a little more weakness, we should see the seasonal pattern take over and the first of many seasonal rallies will mark the bottoming of prices in the $300/SF to $360SF range over the next three years, perhaps five. This next bottom may not be our last. If interest rates remain low while jobs and incomes recover, prices may bottom this spring. However, if interest rates begin a multi-year or multi-decade climb, higher financing costs will be a constant market headwind.
As for the Irvine housing market, in my Predictions for 2011, I stated the following:
FEBRUARY 27, 2011 -- By SIMON CONSTABLE
We might have good news? The bad news could stop? There is a man who is hedging his predictions before he even makes them.
It may be a welcome relief to some, but higher house prices are not a relief to future buyers. I guess they don't count.
When a market is at the bottom, despair is widespread. The homebuilders show this classic signal. They rate affordability an A+ while volumes and inventory earn Fs. Builder sentiment indicators are at historic lows. That is the dynamic at the market bottom.
The opposite is true here in Irvine as well, but affordability is improving as evidenced by the daily posts where nicer and nicer properties are starting to appear at rental parity.
I have stated repeatedly for four years that a bottom is formed when it is cheaper to own than to rent. Once that condition is in place, then supply and demand issues predominate. For instance, affordability is not the problem in Las Vegas. Prices are 30% to 40% below their historic relationship between the cost of rental and the cost of ownership, yet there is little chance of appreciation until the overhang of supply is processed.
Many of the properties I look at each day in Las Vegas have already declined 70% from the peak. Another 5% is a rounding error compared to the decline that already occurred. If the property is being purchased at a significant discount to rental parity, any temporary declines in value can be partially offset by the monthly savings.
Properties locally will likely decline another 5%, but this too is not so significant as to be a major reason for worry. The slow decline followed by a tepid rally will leave most buyers over the next few years unable to sell without losing money -- which is a good reason not to buy.
With no savings over renting, there is no compelling reason to buy; however, with the likelihood of another 30% decline being remote, unlike four years ago, there is no compelling reason to rent either.
Cash buyers are required to take up the slack in areas where the indigenous population cannot qualify for loans. Sales volumes remain so low partly because unemployment is high, but partly because so many in the buyer pool now have bad credit and are unable to buy.
Over the next several years, we will see many bear rally buyers price their homes at 6% more than they paid and pray that a greater fool comes along. It will be a property profile you will tire of seeing.
The plethora of semi-discretionary sellers holding out for purchase price plus commissions will create the downward stickiness usually associated with real estate markets. It will create an environment of low sales rates for many years to come as buyers cannot afford to pay the prices sellers require to sell.
The level of debt distress will be less in this new housing market. Many will still maximize their debts to play the Ponzi scheme, but they will be doing so with stable amortizing mortgages, hopefully with fixed rates.
Sellers have a high discretionary price because they don't want to take a loss. Therefore, transaction volume depends on how much demand can be generated at preset price points. If many people go back to work and earn large wages, then transaction volumes will pick up as buyers can meet the high asking prices. However, if unemployment lingers and wage growth is tepid, real estate prices and transaction volumes will remain depressed, and the market will take years to clear out.
Perhaps they will come up with some innovative loan programs....
The flip-side of that transaction is to wait and save 20% and buy when prices are cheaper. That's what I told everyone to do four years ago. Now, I don't think prices will drop far enough to worry about or to wait for. Although, I don't think they will roaring upward any time soon either.
With homebuilding activity at historic lows, buying ETFs that will benefit from increased residential investment is a good value play depending on your timeframe.
Now, how about that elusive market bottom....
Irvine Home Address ... 25 RIDGEVIEW Irvine, CA 92603
At the very top of Turte Ridge, this is the ONLY Plan 3 that's hit the market and worth the wait. Highly sought after, this property is the largest of the LACima plan homes, with over 6,055 of living space on a huge lot at over 23,000 square feet at the end of a very quiet cul-de-sac. Absolutely no view obstructions. You can see all the way from the ocean to the Saddleback mountains with no roofs! Upgrades throughout the interior including faux wall painting, additional fireplaces and highly upgraded bathrooms. Wait till you see the view from the master bedroom!! This home is priced to sell.
|You are subscribed to email updates from Irvine Housing Blog |
To stop receiving these emails, you may unsubscribe now.
|Email delivery powered by Google|
|Google Inc., 20 West Kinzie, Chicago IL USA 60610|