Where we’re Going (Part 3)


 shutterstock_60630436As is most common in life in order to know where we’re going it’s important to know where we’ve been and where we’re at.We have looked at both in our prior postings in this 3 part  series.

 But it’s always helpful to update things, so here’s a short review of past events.

 The California real estate market experienced a substantial run up in both market activity and increases in property values.  In and around 2003 the market started its run up that lasted u  until 2007 when the bottom started to drop under its own weight.  There are several age old statements that life has consequences and for every action there is an equal and opposite  reaction.  Then there is the theory of unforeseen consequences.  Each of these statements is appropriate to what happened to the California real estate market as logic was thrown to the  wind by so many smart people.

The government through The Community Reinvestment Act and other regulatory actions relaxed the real estate lending standards with the intention of allowing a greater number of people to have the opportunity to buy a home.  Loan programs were rolled out that allowed people with non-prime credit and little or no income to qualify for a home loan.  The sub-prime mortgage market was born which included the infamous “Liar Loans”, where people could get a home loan by just declaring their income, otherwise known as “Stating their income”.  In this situation the lender would just accept just about any monthly income claimed by borrowers to quality for a loan. In addition the age old requirement of having home buyers contribute a down payment was done away with and the opportunity for a home buyer to buy a house with no money down and no income qualifying requirements was made available.

As time went on through the mid 2000’s homeowners who never had the ability and should have never been allowed to buy a home were falling behind in their monthly mortgage payments, many entered foreclosure and thus started the crash that began to drag the entire real estate market down.  It has been documented that the 3rd quarter of 2006 was the turning point, it started slow but going into 2007 and 2008 the market accelerated its decline and the house of cards that had been built up from 2003 to 2007 began to crash down and fast.  The down turn has now become known as the Great Recession.  The name is very appropriate since the entire economy of the country was almost taken down.  At best the economy was severely injured and is still in the process of recovering.

Well here we are in November 2013, heading into the winter months, a time when historically most real estate sales activity slows down from the summer sales activity.  So at this time let’s look into some of the available economic data that just might indicate where we are pointing heading into 2014.

It is clear that mortgage interest rates are up and real estate sales are down from earlier this year.  The common practice of every seller getting multiple offers for their homes has decreased dramatically.

shutterstock_147480173The inventory of houses available have increased since the spring and summer buying season, which is putting some pressure on tempering prices due to the balancing of the supply/demand ratio.

Asking prices have decreased from the standard monthly increase which has been seen over the past year as has been compiled by Trulia.com and Dataquik.  Both these and other companies closely track the market and have determined that market activity has slowed down.

Home prices have remained flat since June, indicating that the real estate market has returned to a generally normal sales condition. The medium home price remained at $385,000 which is unchanged from June and July prices.  This is a 24% increase over August 2012 medium prices. This price run up was fueled by record low mortgage interest rates. This has given many would be home buyers the possibility of having the ability to purchase a home before being priced out.  The leveling out of prices will help offset any possibility of a drop in prices due a real estate bubble busting.

The available properties on the market are primarily coming from homeowners as opposed to banks reselling foreclosed properties that would have a negative impact on the market.  The percentage of foreclosed properties on the market has dropped to 7.1 % from a high of 56.7 % in February 2009.  The real estate market is returning to normalcy which is very good for homeowner and investors alike.

Currently today there is only a 3 month supply of houses on the market for sale, historically a very low number which should assure that prices will stay at current levels and not drop off from current market prices.

The following chart indicates the current slowdown in price appreciation in the Los Angeles market.

The outlook for the California real estate market is neutral to slightly positive.  The market has returned to a more normal supply demand ratio that should assure current prices will remain intact.

The activity of investor involvement in the market has turned from Fix & Flip to a Fix & Hold mentality.  In addition Wall Street and hedge funds firms have entered the real estate market supplying additional support for long term appreciation.

The lingering effects of the recession and the remaining employment problems will put a limit on available income from buyers who now must go through an extensive underwriting approval process in order to get approved for a real estate loan.

Since there remain many economic and governmental variables that could put negative pressure on the real estate market caution is the only watch word we can offer.  The market is unstable enough to allow for a sudden downturn in sales activity and market prices.  While there is no single economic variable that is looming on the horizon that can put potential negative effect on the market caution is still offered as the economic foundation is just not stable enough to allow anyone to let down their guard.

The possible negative effects that the extremely rocky roll out of the new government health insurance program is causing uncertainty along with the additional financial burden that most financial and business experts have suggested could add additional variables to the future of the real estate market.

The best advice that we can offer is just stay put.  If you currently own real estate now appears to be a good time to sell if you have been considering selling since there is no evidence that prices are going to continue their upward climb going into 2014.  If you are a buyer looking to possibly buying your first home then now is a good time to buy since values don’t appear to be headed downward so most likely buying now would not be a bad financial decision.  Under current tax laws interest and other costs are still deductible against annual income so even buying into a possible flat market will still prove financing beneficial after allowing for tax ramifications.

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