Looking at the latest news about the crash of the housing market reads like some kind doomsday cult’s visions of Armageddon. Will prices continue to fall? Is it finally a buyer’s market? Should you hold or sell?
The good news is that this is Southern California and while prices occasionally rise and fall like the rolling surf off our beaches, they rarely crash completely. Consider some recent data compiled by the California Association of Realtors spanning several years and in some cases decades comparing the median prices of homes with sales volume. Statistically speaking, while sales volume rose and fell dramatically though the up and down cycles, median home prices experienced a more modest descent and have actually gradually risen over the past 37 years.
Starting in 1970 with home prices barely up to $25,000 and sales volume a little over 200,000, the Southern California housing market barely skipped a beat until it hit the market high point in 1978 with home sales volume at nearly 500,000 and median prices nearly $70,000. Sales volume fell from that lofty peak at a rate of approximately 100,000 per year over the next 5 years to just below 100,000 in 1982. Despite the downward trend in sales volume overall median home prices actually rose to just under $100,000. A less dramatic downtown in sales volume hit between the peak year of 1988 when sales were just under 450,000 and home prices reached $175,000 and 1992 when volume declined to around 325,000 and home prices remained relatively flat at $200,000. A few minor dips in the market occurred between 1992 and 1996 when things really took off again and sales volume and pricing hit historic points of slightly above 600,000 in volume in 2005 and prices just over $500,000. While sales volume has declined by about a third through this year, prices continued to rise to a height of nearly $600,000. Prices are expected to reposition down to the mid $500,000 range in 2008.
Even with the impact of the recent wildfires, overall impact on the housing market is expected to be containable in comparison with the effect of a similar fire season in 2003. According to the California Association of Realtors, the October 2003 fire season covered 750,000 acres taking with it 3,500 homes or 5 of every 10,000 homes in the area. Compared to this year’s catastrophic fire season where 518,419 acres burned along with 2,007 or 3 of every 10,000 homes. The overall anticipated impact is a temporary slowdown at best with the economic burden resting more on the insurance companies than the Southern California economy.
Location, Location, Location
The old real estate mantra of location, location, location rings true when you look at the housing market variations from town to town and neighborhood to neighborhood. Generally speaking homes in the lower price ranges have been more dramatically impacted by recent mortgage problems than their more expensive neighbors. Buyers who were marginally qualified and with little or no down payment wound up upside down on these mortgages when the interest rates started to rise and home prices didn’t increase at the same rate. Supply and demand continues to fuel the housing market with demand the highest in areas where there are the most jobs. The above statistics are of median prices; however, the vulnerability of individual areas during periods over downtown in the overall market varies widely. Consider California Association of Realtors housing sales data obtained through Dataquick, a service that tracks home sales prices which tracked pricing changes for fiscal year of September 2006 through September 2007 in 8 Southern California cities. Out of those 8 cities the most significant reduction in prices occurred in Inglewood where prices fell a whopping 17%, next came Long Beach at 14.7%, Hawthorne at 10.4%, Gardena at 9.2%, and Carson at 7.5%. Torrance remained relatively stable with a slight reduction of just under 1% and both Redondo Beach at 8% and San Pedro at 18.7% bucked the trend with significantly improved prices. Overall in Los Angeles County the median home price had declined by just 2.8% for the year by September 2007.
Market Readjustment – Turning the Tables on Sellers
The current housing market has reached a point where there is more supply than demand. Many first time buyers who make up a large portion of the market had previously relied on the higher LTV (loan to value) mortgages with low initial starter or “teaser” rates enabling them to get them into the market where they could build equity and then refinance to more stable loans as property values increased. Now these buyers are at least temporarily out of the market along with any buyers who have marginal credit. Sellers who need to sell or want to sell to move up to bigger or better homes are finding it much more difficult to do so. The increased supply of homes on the market has shifted the competitive nature of the market from buyers competing with each other for fewer available homes to sellers competing with other sellers for a limited number of qualified buyers. The California Association of Realtors measures housing inventory in terms of the number of months it would take to sell the current housing inventory. The unsold inventory of houses in September of 2007 reached a high of 16.6 months, up from a monthly average since 1988 of 7 months. Furthermore, despite the dismal picture painted by the media about mortgage woes, less than 3,000 Los Angeles County homeowners faced foreclosure during the first quarter of 2007, nowhere near the record number of foreclosures of nearly 9,000 for the same period 10 years earlier.
Turning the tables on sellers is great news for buyers. It means at the very least a cooling down in some of the hottest markets where buyers often had to compete with several others for homes. In some areas, it is even better news for buyers who can actually start looking for “bargains” and the chance of making acceptable offers well below current asking prices. It’s a market adjustment that most old-timer real estate professionals are familiar with seeing on semi-regular basis of every 5-10 years. The market will have its ups and downs. Real estate by nature is cyclical. We are entering a period where there are more homes on the market and pricing should reflect this condition. It’s what you might call a “buyer-friendly” market and a good time to buy and hold property to realize appreciation in the next up-cycle.