Overview
It looks like it's time to saddle up the horses and ride. The dramatic decline in home prices has reduced the gap between the cost of renting and the cost of owning to levels typical of an active real estate market. At this writing, the number of single family homes and half plexes listed for sale in Yuba City has dropped to about 260 from a peak of over 500 in September of 2006. The number of months of inventory has dropped in the Yuba-Sutter area to 4.0 months and to 3.0 months in Yuba City. We expect that high levels of foreclosures will continue to drive the market through much of 2009. Prices are continuing to fall but declining prices are bringing more buyers to the market. Closed Yuba City sales have more than doubled as compared to this time last year. We expect that any further price declines will be met with increased buyer activity.
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 112,000 new housing units built in 2007 — not nearly enough to meet the demand.
- 2Renters can purchase homes with a small down payment using 30-year, fixed-rate financing and experience total housing costs not much more than the cost of renting.
- 3Investors can achieve positive cash flow with a 25%–30% down payment using 30-year, fixed-rate financing.
- 4Declining stock market prices have caused many investors to look at real estate as an alternative investment.
- 5California has an extremely slow planning process. It takes about two to 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.
- 6Government fees continue to increase and will limit new home construction. These fees are being collected to pay for sewer and water connections, building permits, new parks, fire stations, police stations, schools and levee repairs. Forcing builders to pay higher fees will squeeze their profits even further and discourages new home construction.
- 7The Federal Reserve has done a good job managing interest rates. Interest rates the last five years have been at their lowest levels in at least 35 years.
- 8Most knowledgeable sources expect that FEMA will put Yuba City into a designated flood zone within the next few years. This will further complicate meeting the housing needs of our growing population.
Factors Pushing the Market Down
- 1The economy is in a recession and many prospective buyers are unwilling to purchase a home given the current economic uncertainty.
- 2Renting, in most cases, is still cheaper than owning. Many renters are still of the mindset: why buy a home while prices are still declining?
- 3Builders are still sitting on a large quantity of land. Any increases in home prices will likely result in more new home construction.
- 4Problems in the mortgage market do not appear to be over. Declining real estate values combined with homeowners having problems making their payments will likely force even more homes onto the market as short sales or foreclosures. A Bank of America study indicated that most foreclosures were due to defaults on loans that should never have been made — not ARM resets. The peak of ARM resetting activity was expected in Q2 2008. Combined with the 6-month delinquency threshold and 4-month foreclosure process, high foreclosure activity is expected through mid-2009.
- 5Many lenders have been forced out of business. Most remaining lenders have tightened credit standards and raised interest rates on non-conventional loans. These tightening credit standards are keeping some prospective buyers out of the market.
Conclusion
While we continue to forecast lower home prices, we are definitely turning more bullish in our recommendations to home buyers. It will take a long time for real estate prices to turn around so there is no need to be in a rush. The most important factors continue to be these:
- Find a home that meets your long-term needs.
- Find a home that you can afford using a fully amortized, fixed-rate loan.
Questions About Today's Market?
These forecasts are historical. For current market conditions, give Lloyd a call.