Optimism is in the air. You cannot see it or smell it, but you can certainly feel it.
A window of opportunity for real estate
It was widely recognized that real estate and its boom to bubble to burst scenario brought us to the dance and then left us with no ride home. It was only logical for the real estate market to complete the circle and if the economy would eventually improve, people would have to start buying homes again. There is evidence that the circle is closing.
Real estate market reports are beginning to sound more positive. Warren Buffet says that he sees the recession ending. Home sales in Southwest Florida may be trending higher. Sacramento can actually be turning the corner. There is even evidence to suggest the San Diego housing market is on the rebound. Why is San Diego important? It was our neighbor to the south that began reporting softness in the housing market just a few years ago. The signs were there, it is just that most everyone ignored them.
A Window of Opportunity?
If real estate has turned the corner and is now beginning to lead the economy out of the recession may not be known for a while. The debate could easily continue with no discernable answers. But what does appear based upon the past two years performance is a definite a window of opportunity forming, Most articles cite the increased buyers interest attributable to three factors (1) lower interest rates (2) an $8000 tax credit for first time home buyers and (3) lower prices as a result of the last two years of real estate malaise. I guess the question we should be asking “Is this a solid foundation built on sound economics or is the government building us a house of cards which can support only a couple of levels before a collapse?
Road to Recovery Passes Through Retail
If real estate is to be the designated flag bearer of the recovery we should be keeping an eye on other industries. When people are buying houses we usually see home furnishing, furniture and home improvement stores reporting increased sales. I don’t think that is happening yet. I am not sure if it’s not happening or the increased activity is too early to report and has yet to be reflected in company’s quarterly earning reports. My hunch is we are not there yet. When we start seeing retail sales increases we will also begin to see the commercial real estate market begin to pick up.
The commercial market has lagged residential, both in the downturn and again in the expected upturn. Should we have some incentive programs for the commercial market as we do in the residential areas? The real test will be after the artificially created incentives expire and we return to the free market system.
About Doug Willis
Warren Buffett seeing an end to the recession is hardly a sign for optimism. Its just a statement that nearly everyone sees, its just a question of when. Even the biggest bear of them all, Nouriel Roubini, sees an end to the recession eventually.
But what happens when real estate prices bottom and/or stabilize. I think many people are under the mistaken impression that once we’re at bottom, we’ll see automatic rebound and rising of prices. There’s really nothing to support that notion. Since we’re citing Warren Buffett, he’s also said that he sees no sign of an end to the downward spiral of housing prices or housing-related retail. Of course he sees an eventual stabilization, but in his estimation that could take many more years. To add on, he’s also said that once prices level off, all bets are off as to which direction they move.
People ready to buy that I’ve spoken to say prices are now cheap, but they also got so used to the insane run up in prices that they don’t remember what prices were like when they held a close relationship with incomes. When I look at average prices in Pasadena, we’ve dropped from unaffordable to expensive. I don’t really think interest is cheap enough to match median home prices to people’s incomes. And for most houses in Pasadena, the $8000 credit is really pathetic. Assuming this is of big value to someone, they still need to come up with the $8000 first, before claiming the credit on next year’s tax returns. You need more qualified buyers with the right income, credit score, and down payment, and I just don’t think there are enough yet to support a true recovery.
I came across this article yesterday
http://www.nytimes.com/aponline/2009/05/06/business/AP-US-On-the-Money.html
For you, being a real estate professional this is all extremely obvious stuff and I wouldn’t recommend you thoroughly read it. I still can’t believe that most people are really this clueless. I too remember a time before the recent bubble when a 20% down payment was obvious before I decided if I could buy a house or not. Buyer sentiment still seems to be used to the easy money days, so we either need easy money or sellers to wise up to reality that most buyers don’t have the money to buy their houses.
Hannah,
Your friends that are considering buying a house, what area and what price range are they looking? The reason I ask is because there are so many areas that seem to offer better values than other areas. Take NE Pasadena for instance, it’s been a fairly good indicator of what a median priced home has been selling for and homes in that area have come down quite a bit. On the other hand looking at zip code 91105 in San Rafael, these homes don’t seem as affected. Overall prices are higher, maybe its less supply and demand.
As far as your other comment, we have written about what it may cost to fix up that $400,000 house with remodeling and repairs. Lets face it, most homes in that price range do need some work, at least the ones I have seen. Inspections are another issue. A genreal home inspection is a must. I think its a good idea also to have the sewer line inspected and if there is a fireplace, add that to the list. That could easily be $1000.
There should probably be another study done on true ownership costs of owning vs renting and the quality of life (amenities and features) would somehow have to be figured in there subjectively in some fashion.
My friends looking are fairly mixed in income and what they are looking for. I’ve had friends looking throughout Pasadena, except for North Pasadena such as east of Rose Bowl 91103 and 91104, and the area around PCC.
Most of my friends that have been looking, seem confused at how much to spend. They know how much they want to spend, but what they want doesn’t fit.
For example, one friend has been looking at houses around $700,000 near Hastings Ranch. Though I don’t think she wants to spend that much. She says she’s been preapproved, but the mortgage would be a high percentage of her income. She’s in the top 30% of income earners in the 91107 area, and what she wants isn’t unreasonable, but the prices aren’t. For her income, she shouldn’t be spending more than $500,000, but that seems unlikely at this moment given the area’s current median price.
Another friend has been looking in San Rafael Hills/Flats, but has been a bit disappointed. I know she doesn’t want to spend more than $600,000. She makes a very good income and was a bit surprised at how many neighborhoods had some fairly run down looking or unkempt houses.
I have to say, San Rafael Hills is strange. Maybe it reflects the wide varieties of income ranges in Pasadena from the $250,000 to the $30,000 earners. Because the area is so small, I think the whole area benefits from the higher priced homes that sell, which is probably what keeps the area’s median so high. Though I have noticed the average price/sqft go down.
Doug,
There is a positive vibe in the air here in Las Vegas thanks to home prices in the lower end being very affordable and mortgage rates still so attractive. Yet, even if the bottom is here, or nearby, the housing recovery likely will be gradual. Current high unemployment has a lot to do with it.
Esko,
Unemployment may be the party pooper that puts a premature end to any housing rebound we may see. Although we are seeing some positive signs in the housing receovery there are many storm clouds on the horizon including rising interest rates, and possible inflation.