Overview
While we remain very optimistic about the long-term real estate market, it appears obvious to us that prices are likely to continue falling in the near term. An abundance of rental vacancies with a large disparity between the cost of purchasing and the cost of owning is encouraging prospective buyers to rent. It is also discouraging investors from purchasing. We believe that the change in the market will happen when a combination of lower vacancies, higher rents, and lower home prices encourages more renters and investors to start buying again.
Forecast Summary
This forecast is essentially the same forecast that we have been making since we first started this feature in the early part of this year. It is also consistent with the most recent real estate market forecast released by the California Association of Realtors.
Factors Pushing the Market Up
- 1California's population increases by about 500,000 people per year. This results in between 230,000 and 250,000 new households being formed each year in California. There were only 64,000 housing/apartment units started in the first six months of 2007 — equating to about 130,000 new housing units a year, which is not nearly enough to meet the demand.
- 2Rental vacancies are declining in most major metropolitan areas in the western United States.
- 3California has an extremely slow planning process. It takes about three years of studies and planning to get approval for a new subdivision. It won't be possible to create new building lots overnight when the market starts to turn around.
- 4Government fees continue to increase and will limit new home construction. When fully implemented, total government fees in Yuba City will rise to about $70,000–$75,000 per house. Forcing builders to pay higher fees will squeeze their profits even further and will limit new home construction.
- 5The Federal Reserve has done a good job of creating an environment where mortgage interest rates have remained stable.
- 6On October 23, 2007, Countrywide Home Loans announced that it would restructure up to 82,000 home loans scheduled to reset to higher rates. This could prevent tens of thousands of homeowners from being forced to put their homes on the market. To the extent that other lenders follow Countrywide's lead, it could significantly reduce the number of homes offered for sale.
- 7Some experts predict that a booming Chinese economy will generate enormous wealth and that much of this money will be invested in real estate in other Pacific Rim countries — similar to what we saw in the early 1990s when the Japanese economy was surging.
- 8The economy continues to grow at a modest pace.
Factors Pushing the Market Down
- 1Home sales remain lackluster and the supply of unsold homes in Yuba City is increasing. There is currently an 11.2-month supply of homes for sale in Yuba City and a 10.8-month supply for the Yuba-Sutter area as a whole.
- 2Builders are still sitting on a large quantity of land. History has shown that most builders will reduce prices in order to maintain sales volume in a declining market. Expect a steady stream of new homes to be built in the near term while builders use up their existing land.
- 3Many prospective buyers are choosing to rent instead of purchase. Why pay $2,000 a month or more to buy a home for $300,000 when they can rent the same home for about $1,300 per month while watching home prices decline?
- 4Current home prices are keeping most investors out of the market. An investor buying a $300,000 home and borrowing $240,000 will likely face a monthly $700–$800 negative cash flow when rented — increasing to about $2,000 a month between tenants.
- 5Problems in the sub-prime sector of the home mortgage market do not appear to be over. Declining values combined with homeowners having trouble making payments will likely force more homes onto the market as short sales or foreclosures — 90% of which end up as foreclosures.
- 6The volume of "Alt A" and "Option ARM" loans was far greater than sub-prime loans. Even with lower default rates, the total number defaulting could exceed sub-prime defaults. Experts expect the bulk of these defaults won't appear until the last quarter of 2008.
- 7Many lenders have been forced out of business. Most remaining lenders are tightening credit standards and raising rates on non-conventional loans. One lender stopped making "Stated Income" loans to W-2 earners; another raised Jumbo loan rates to 9% plus two discount points.
- 8Problems in the real estate sector may cause broader economic problems. With declining home values, the refinance market has dried up. A local Les Schwab manager noted a real drop in high-end accessory sales when home prices started falling. A Harley-Davidson dealer in Sacramento reported similar drops. If the economy goes into recession and consumer income levels suffer, that will add a whole new dimension to problems in the housing sector.
Questions About Today's Market?
These forecasts are historical. For current market conditions, give Lloyd a call.