Pacific Beach Real Estate - Mission Beach Real Estate San Diego County Real Estate Return to San Diego Real Estate Buyer's Reports If you are a faithful reader of my newsletters and my monthly "Market Trends Reports" and E-Mail blasts, then you know that the real estate marketplace is in transition. Sales volume has weakened and the days of quick sales and multiple offers are gone. The cooling from overheated sales conditions has helped to bring housing inventory levels up to the point where buyers now have more choices than they have seen in the recent past and the causes of our sharp appreciation have gone away. As a result, price appreciation has returned to more normal rates of growth. Translation: Homes are not selling as quickly as before and increases in value are moderating. This is good news for buyers. However, values are also not falling. This is great news for sellers. So, you´ve owned your home (or investment property) for some time now and have watched with amazement as the home´s value has skyrocketed over the past several years. I know that some of you are wondering if it´s time to "take your appreciation off the table" and attempt to sell now before prices drop? Alternatively, you may be thinking of buying a home yet asking whether you should rent and wait to buy a house until after prices fall. Well, in either case, don't get your hopes up. If history is a reliable guide and history does tend to repeat itself, home values in your neighborhood probably won't fall. But, they might stagnate for a period of time3; long enough a potential buyer´s income to catch up to prices. Now, I want you to know that this is not just Tom´s opinion although I do hope that I may have a modicum of credibility with my readers. However, the Federal Deposit Insurance Corporation recently prepared a research report titled "U.S. Home Prices: Does Bust Always Follow Boom?" And, the answer is... NO! A housing boom typically ends not with a decline in values, but with prices leveling off or rising slowly. The first thing that FDIC regulators had to do was define "boom" and "bust". The agency defined a "boom" as any market where values went up 30 percent or more in three years, adjusting for inflation. Defining a bust proved to be a more difficult problem. If the agency defined a bust as a 30-percent decline in three years, it would have a lot of booms but only five busts. The reason this measure proved to be too stringent is that home prices tend to adjust slowly (or be "sticky downward" in economists' terms) during a downturn. So, the agency defined a bust more loosely, as a price decline of 15 percent or more in five years, without adjusting for inflation. To recap: A "boom" was defined as a 30%+ rise in three years, adjusting for inflation. A "bust" was defined a 15%+ drop in five years, not adjusting for inflation. Keeping in mind that the definition of a bust is looser, the FDIC identified 63 markets in 46 metro areas that had enjoyed housing booms from 1978 to 2004 and 21 markets that had suffered busts. Eight of the areas had two booms: The California metro areas of Los Angeles-Long Beach-Glendale, Oxnard-Thousand Oaks-Ventura, Sacramento-Arden-Arcade-Roseville, San Diego-Carlsbad-San Marcos, San Francisco-San Mateo-Redwood City, and San Jose-Sunnyvale-Santa Clara, plus Seattle-Bellevue-Everett, Wash., and Honolulu. After an extensive analysis of all the available data, the study´s authors concluded that "Only infrequently do home-price booms lead to busts". Inasmuch as this analysis was originally meant to address "busts" within 5 years, they did take it a step further and went on to analyze whether "If a bust happened more than five years after a boom, would it be fair to say that the bust resulted from the boom"? Again, the answer was a resounding NO! OK, so the logical follow-on questions would then be: "If it is relatively rare for housing booms to result in a price busts, how do booms usually end" and "If booms don't typically cause busts, what does"? A look at history suggests that stagnation in home prices is often the most likely outcome of a "boom". During a typical period of stagnation, values rise about 2 percent a year for several years. As for the cause, you need look no further than severe local recessions which force people to move away to find work. As a result, home prices crater because there are many more empty houses than buyers. That happened in oil-dependent cities from Alaska to Louisiana when petroleum prices crashed in the 1980s. And, you have probably heard this before from me, it happened later in California and New England after the Cold War ended and the United States needed fewer war planes, ships and submarines. The military industrial complex literally folded and San Diego was a "poster child" for what occurred to companies which had a substantial percentage of their business with the military. Many folded while others either downsized or moved operations elsewhere. Regardless, many folks lost their jobs and put their homes on the market. In fact, all but two of the housing busts can be attributed to falling oil prices and the end of the Cold War. The exceptions were Peoria, Ill., and Honolulu. Peoria's home prices fell in the recession of the early 1980s when demand for Caterpillar construction equipment dried up and Honolulu's home values dropped when the tourism industry was bitten twice in the 1990s, first by the California recession and then by the Asian financial crisis. The conclusion then is that "busts" don't necessarily follow "booms" and "busts" do usually accompany problems with the local economy. If history is a reliable guide, most of today's skyrocketing housing markets have little to worry about. The above said and to fair (and "balanced") to the "dark side", the most recent boom was so widespread that some economists have been looking for an explanation beyond the usual local causes. If national factors may be somewhat "in play", then clearly the most important factors to look to would be the availability, price and terms of mortgage credit. Recall that the average rate on a 30-year mortgage was below 6 percent in 2003, 2004, and 2005 and rates had not been at those levels since the 1950s. The low cost of mortgage credit was certainly one factor pushing prices higher by enabling buyers to qualify for larger mortgages given the same monthly payment. Also, subprime mortgages -- home loans for people with imperfect credit -- have become popular over the last several years to the point that they now account for 10 percent of outstanding mortgage dollars. Last, many folks have borrowed most, if not all of the purchase price, with negatively amortizing loans in which minimum payments don't even cover the interest accrued. Thus, the borrower can make a payment and still end up owing more at the end of the month than at the beginning of the month. Those people could get smacked if they have to sell for less than they paid. So, to the extent that these new mortgage products promote home buying decisions that are premised on unrealistic rates of home appreciation, some borrowers may not be able to sustain such a loan over a long time horizon if home values decrease. In particular, when the payments on these novel mortgages adjust upward, the home buyer may not be able to refinance such mortgages unless the home has increased in value. People in the real estate business like to say that booms and busts are unpredictable so you might as well buy a house. I personally refuse to go down that road because in reality, there's not a person alive who knows for sure. I will say that I am personally willing to entertain the possibility that prices could drop, but like most all of the local gurus who are independent of thought (e.g., those who are part of local "think tanks", research groups, and others who are not financially tied to the local market), I very strongly believe that it is far more likely that this current stabilization and flattening out will continue for a time (until some of this current inventory decreases) and basically go sideways than we are to witness any sizable decrease. In the very unlikely situation wherein prices did drop, it would not hurt people who will own their homes for several years because prices eventually rebound. If in doubt, maybe if you might think of it this way: It's hard to imagine the entire San Diego area losing home values. So many people still want to live here and there's so very little room for expansion with the Pacific on the west, Mexico to the south, Camp Pendleton on the north, and desert mountains to the east.  And, if you are still not convinced, review the study noted above which concluded that "busts" almost always accompany problems with the local economy. If I am not mistaken, local job growth continues to increase; the region is beginning to increase the number of higher tech, higher paying jobs; and, the local unemployment rate continues to decrease and is far lower than both the national and state averages. Plus, the region is far less dependent upon the military financially and much more diversified today, than it was in the early 1990s. One last statistic. Eighty percent of the metro-area price booms since 1978 have been followed by a period of stagnation that allowed household incomes to catch up with local home prices. While neither lenders nor current homeowners particularly like stagnation in home prices, such an outcome represents a necessary adjustment in market conditions that helps bring home prices within the reach of new home buyers.Should owners who don´t need to sell, sell now? Should potential buyers rent now and wait for home prices to stagnate for a few years? Maybe but, probably not! |
