As an article in the Los Angeles Times so aptly put it, “There is no consistency or predictability in the real estate market in Southern California.” The market is “still going up” or “it is finally going down” as prognosticated by market gurus the last five years or “it is running sideways, a flat market.” These are the most frequented opinions by local writers and predictors of future real estate values. So, which is it? I think it is all of these in Southern California…..depending on the neighborhood.
The primary driver of real estate values is perception. When people feel good about the way things are going and the media supports that point of view the discretionary buyer group is more active in the real estate market. When they don’t feel as comfortable because of the barrage of negativity in the media they tend to operate more in the “wait and see” mode.
When that 15-20% of the market is less motivated to buy a home, inventory builds causing an extending of the “time on the market”. This slowdown in-turn takes the urgency out of the marketplace causing more buyers to delay decisions to buy. As this happens, some sellers become unnerved wondering if their house will sell. At this point some sellers will reduce their asking price, others will take their home off the market and the rest will do nothing.
Some areas are experiencing a reduction in values: areas of the San Fernando Valley, Palm Springs, Las Vegas and downtown San Diego, to name a few. Other areas, like the Westside of Los Angeles, prices appear to be holding, but properties are remaining on the market for much longer periods of time.
Why does the Westside appear to be an anomaly? Two things….one there is an inordinate concentration of wealth, way beyond the late eighties and early nineties. Two, the lack of inventory is more pronounced now than at any time in history. There are more people now who want and can afford to live on the Westside. You can’t make dirt! The only new building lots available to the marketplace in the last thirty years are the formerly unbuildable lots up in the hills.
Where are we headed? Again, confusion abounds. The National Association of Builders reported last summer that the current “slump”, which started early in 2005, would bottom out in the summer of 2007 with a rebound in 2008. A few weeks ago the National Association of Lenders predicted that the “downturn” is at the bottom and would rebound in 2008. Real estate reports from Yale, Harvard, UCLA and various other predicting agencies have had conflicting prognoses. I read a prognostication from another agency last week stating the bottom point of this downturn would be the same price point as the peak of the last upturn (1989 prices).
Again, who really knows and as you can see the predictions are all over the board. It is greatly dependent on where you reside. I wish I had a crystal ball so I can see what the future holds, but until then…the consensus seems to be that this potential downturn will be much shorter and much less severe than the last.
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The Median Home Price Does Not Matter At All
Everyone knows that the median home price in San Diego is well above $500,000. The high median home price is often cited as being the main reason that San Diego is unaffordable for first time home buyers. Taken at face value, the statement appears to make sense. Upon further examination however, that statement proves to be incorrect and very misleading. The major reason that the statement misses the mark is that first time home buyers almost never buy homes near the median price. The median price does not apply to them at all. First time home buyers are buying homes priced much lower than the median. Typical San Diego first time home buyers purchase condos in the range of $200K to the low $300Ks. Houses bought by San Diego’s first time home buyers are normally priced in the low $400Ks. It is rare for a first-time home buyer in San Diego County to purchase a home near $500,000. An important point to remember is that first time home buyers are purchasing starter homes, not their dream homes.
The median price is defined as the price point at which half of the homes are sold above and half are sold below. First time home buyers normally purchase nowhere near the median price. A price point that is much more indicative of affordability for first time home buyers would be the median price of home in the overall lower half of home prices.
Other factors that make homes considerably more affordable than many renters think are the tax advantages of owning and the increased availability of first time home buyer assistance programs. The tax advantage can typically put an extra $200 to $400 of additional after-tax money into a new home owner’s pocket every month. First time home buyer financial assistance programs enable nearly any renter with reasonable income, responsible use of credit, and a little money saved up to become a home owner.
The real concern for the first time home buyer should not be the median home price but what overall payment would the buyer feel comfortable with and whether any acceptable homes are available in that price range.
by Mark Harmon
www.1866SwiftSource.com
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