by Gene Wunderlich
Fortune Magazine headlined their April issue ‘The Return of Real Estate’. ‘Forget stocks. Don’t bet on gold. After four years of plunging home prices, the most attractive asset class in America is Housing. It’s time to buy again.’
The article points out it is necessary to ‘keep your eyes firmly on the fundamentals’ and bases a good part of its recommendation on information provided by Metrostudy, a company that sends out 500 inspectors to more than 45,000 subdivisions covering around 65% of the U.S. housing market. CEO Mike Castleman describes himself as a ‘dirt road economist, one who sees what’s happening on the ground.’ I love that. We need more ‘dirt road’ economists and fewer ‘blue sky’ ones.
According to the article, the market is poised for two primary reasons – 1) the dramatic and unprecedented decline in prices since 2006, averaging 30% nationwide (and as high as 55% in our region) and 2) the massive decline in new home building – less than 25% of the 2006 peak nationwide and only about 12% of its former volume in our region. Hmmm, sounds a lot like what I’ve been saying for awhile.
As a result, many markets, our own included, have become anywhere from 11% to 33% cheaper to own than to rent. And while there are still downsides ahead, i.e. continuing foreclosures, tighter regulatory climate, difficulty in obtaining loans, lack of consumer confidence; these factors should largely mitigate within another couple years. That pent-up demand will come flowing back into the market and there will be no buffer of new home inventory to absorb it. Castleman says ‘it takes three years from the time you mate a bull until you get a calf to market. Housing’s about the same way. From acquisition to permitting to ramping up labor to move-in ready – the demand will be here long before new houses will be.’
The article points out that non-distressed markets that suffered fewer foreclosures are ready to launch right now. San Diego, San Francisco, Indianapolis and virtually all of Texas are examples. But even in distressed markets the outlook is brightening – again due to reduced inventory, reasonably strong demand and a strengthening jobs picture. Even with anticipated foreclosures continuing at the 1 million level for the next 3 years, nearly 2/3 of them are being gobbled up by investors who love this market, so the continuing impact on inventory will be much reduced.
If there is a downside in the article it’s the notation that ‘some foreclosure markets won’t rebound for years because they’re both vastly overbuilt and far from big job centers. A prime example is California’s Inland Empire, a real estate disaster zone 80 miles east of Los Angeles.’ Phew! Thank heaven we’re Southwest California and much closer to San Diego than that IE disaster zone.
Looking at our local market this month, our sales of single family residential homes took a nice bounce in most cities in March. We’re still off last year’s record sales pace by anywhere from 11% in Temecula to 18% in Murrieta and 22% in Lake Elsinore for the quarter. Last year we also had a very strong 2nd quarter which we may not see this year even though 1st quarter trended strongly upward. If we can avoid sales falling off a cliff like they did last June through November, we’ll still finish the year with strong numbers.
Prices continued to hold steady entering their 3rd year of stability. Temecula’s prices were up 8% over 2009, Murrieta, Wildomar & Lake Elsinore were almost dead even over 12 and 24 months. Canyon Lake was down 13% from last year but up 9% over Q1 2009 and Menifee showed a 10% decline over 2 years – again mostly due to the incorporation of Sun City into their housing mix, the same reason their unit sales were up 24% over Q1 2010.
If you have questions on the market please contact me at GAD@srcar.org or to keep up with the latest legislative and real estate trends go to http://gadblog.srcar.org/. It’s a great time to buy low – just don’t expect to sell high anytime soon. Your house is a home, not an investment.