Lord knows what we’d all like to happen with real estate prices next year. How ’bout a return to a balanced supply/demand picture? Enough inventory so that average market times are maybe a tad less than 90 days? How ’bout some reality in the analysis for a change of pace? 
As always, price trends will vary from region to region as the diverse factors in each one work their way to equally diverse conclusions. Diversity aside, the overall trend(s) will be dominant nationwide, with the usual few exceptions.
What factors?
I have a love/hate relationship with the concept of ‘shadow inventory’. It’s not that the idea isn’t more or less adequately conveyed, it is. It’s that it’s far to vague and convenient for a truly objective analyst. A silly but wholly illustrative example would be ‘shadow gravity’. Go ahead, define that one for me. Put 10 real estate experts in a room and they’ll give ya 11 working definitions of shadow inventory.
My point? Simple — it either exists or it doesn’t. It either has a current or potential impact or it doesn’t. Most of what I read seems designed to engineer a preordained conclusion, which, oh so conveniently, is supported by their description of shadow inventory.
Great, BawldGuy, but what’s your take on shadow inventory?
I think even calling it that is too cute by a mile. We have a lending system. Pay as agreed and the bank leaves you alone. Stop paying and you’ll eventually lose the property to the lender. When this happens in the ginormous numbers we now plainly see, there’s nothing ‘shadow’ about it.
100′s of 1,000′s of homes already reside on lender’s ledgers An equally chilling number are 30-60-90 days delinquent Short sales are abundant and not going away Lenders are treating loan modifications as a shell game
That list could, of course, be longer, but you see the picture, right? Right.
Oh yeah?! Then how come prices rose in places like San Diego, one of the worst hit ‘high appreciation’ markets around? I’m so glad you asked.
1. The first time buyer tax credit — double duh. Artificially increased demand will artificially increase prices — temporarily.
2. California’s extension of the federal moratorium on foreclosures. Again — does it take a Captain Obvious to realize this? Really?
Here’s why I think I’m relatively safely predicting a fall in 2011 housing prices nationwide, including California, AND San Diego. This will be especially tough for San Diegans to swallow, as they’ve believed in their market’s invincibility since Day 1. I know, as I used to be a charter member. It’s a stealthy virus. Shame on me. In my defense, my fever broke in late 2003.
As interest rates rise, lenders’ desire to lend at those higher rates increases. Unemployment won’t change much in 2011, causing more foreclosures, and dampening potential demand. ARM resets are scheduled in mass for 2011. How would a payment increase of $300-1,000 effect your ability to hang in there? Markets residing in high tax, high spending states will exacerbate already staggered markets. As employers and high-wage earners in ever growing numbers vote with their feet, real estate prices will suffer even more. The ability to quickly access reliable info on the internet allows the average family to more clearly understand the options on their menus
If we set aside what we all wish would happen, at what other conclusion does one arrive, given the above list of empirical evidence above, except for decreasing prices?
Will there be exceptions to this trend? There almost always are. For example, compare California income property with other regions. Even factoring in the brutality of the ongoing market correction, price/income ratios offered by most California residential income properties are woefully inferior to a small handful of markets around the country. Don’t gloss over that statement. Just cuz a duplex has gone from $570,000 to $370,000 doesn’t transform it, de facto, into a great investment. Yet many doomed investors apparently believe just that.
However, numbers don’t lie.
That duplex, ‘an incredible buy’, sports a gross scheduled annual income of about $26,500. It’s over half a century old, and suffering from classic functional obsolescence. Compare that to a duplex in one of the markets alluded to above. Brand new or at least under 10 years old. Modern everything. Annual income over $30,000. Over $100,000 lower in price — in a better quality location.
That’s merely another reason why prices for 1-4 unit properties on the west coast, especially California, are gonna be less a year from now. As the number of investors realizing how poorly California and regions like it compare to other, far better performing regions, they’ll take their capital to what they perceive as lower risk regions. Triple duh.
My crystal ball is just as cracked as the next guy’s. I don’t think this prediction is the equivalent of the third tablet Moses dropped on the way down the mountain. Tell ya what though. If you think I’m wrong, you should go ahead and bet your real estate investment capital on the California market.
What’s that I hear? Ah, it’s the pleasant sound of crickets.
Gimme a call at 619 889-7100 and let’s try to predict what’s possible for you and yours in 2011. I’ll wager there’s more on your menu than you suspect. Have a good one.
Related posts:
About BawldGuy
I’m planning on keeping a second home in California, but domiciling elsewhere at some point in the future. Oddly, most of the folks I know commuting back and forth to the adjacent low tax/no tax states now are retired folks. Most of the working professionals and small business owners I know are sticking it out because their income source is local. The devil you know and all that.
The 30/60/90/90+ delinquencies are what tell the shadow inventory story. Not sure there is a completely accurate count of those publically available. How many of these cure or modify and how many more enter the pipeline is largely a function of the employment numbers. No job and a mortgage equals an eventual short sale or foreclosure.
Like you, I don’t see the employment picture improving much in 2011. Some of the ARM’s may get renegotiated or postponed, and the interest rates are so low that some resets may not be that unbearable. But I don’t really see any reason to predict increasing prices.
On the other hand, I think it’s a good if not great time to invest. If you have capital and can qualify for a mortgage, you should seriously consider buying quality rental properties. Twenty years from now you likely will be very glad you did.
In a nutshell, AI, in a nutshell.