REAL ESTATE PREDICTIONS AND FORECAST

05/14/08

How is the real estate market doing presently? In general terms, it is a buyers' market. The outcome of the bad loans gone wild syndrome has increased the normal inventory to unhealthy levels that caused a bulk of unsold homes to compete with the extended bank reposesed inventory.

This has caused prices to spiral down in most cities. Most of the homes purchased in 2004, 2005 and part of 2006 where purchased with some kind of exotic financing like zero down, one percent initial interest rate, interest only payments, negative amortization and or no income no assets verification. Most lenders and buyers are suffering the hangover of flexible borrowing. These loans became insolvent due to inability by the borrower to repay when the payments adjusted to higher monthly payments and inability to sell due to lack of equity and lack of qualified buyers,

It all happened concurrently. The flexible loans were decreased, the housing inventory was increased by overbuilding by developers, the equity of the homes was evaporated by over borrowing and abused as piggy banks to buy second homes and expensive toys like travel trailers, and, and the realization of speculators that there was no longer money to be made in flipping decreased the demand for housing even more.

Most sub-prime lenders that got stuck with sub prime loans were forced to foreclose and reposese such homes and resell them at 40 cents on the dollar. the houses that were selling at $300,000.00 in 2005 are now selling at $118,000.00.  Just look around your neighborhood and you will see at least two foreclosed homes in every street. This is happening in Perris California and in most cties that experienced the 2004 and 2005 boo.

The regular sellers are not even attempting to sell their homes because they don't want to compete with bank reposesed prices. 80% of the inventory is either short sales or bank reposesed. This was due to happen. It happens every 10 years by economical nature. Sometimes sooner if an unforeseen event happens like war, natural catastrophes or terrorism tragedies.

The normal 10 year cycle happens due to expansion and contraction of the natural supply and demand law. If at any given time there is a demand for housing like the one started in 2003, builders, speculators, and investors start buying at increased paces which in turn creates a higher demand and builders start building to keep up with demand and lenders start easing on the credit criteria to compete with availability of purchase money. This expansion period usually lasts about 4 to 5 years if is sustained with real values. In other words if is not fed by exotic loans, creative appraisals, and or unqualified speculators and borrowers. It is almost impossible for builders to measure and time the satisfaction of the demand for housing so most of the time they end up overbuilding and most lenders end up overextending credit in order to compete with each other. Eventually the inventory increases and the demand decreases. Greed and undiciplined speculation inflates values and eventually create an economoci bubble.

When the buble is not susteianed with real values like demand due to increase of population, shortage of supply, in this case shortage of availabele homes for sale is a valid reason to increae the prices. Easy availability of credit, pure speculation, vougus loan aplications and appraisals feed unsustained values. 

This phenomenon reaches a point to where the demand decreases. in other words, there are not enough buyers out there to buy the overage of homes so the builders gradually slow down the production. The lenders start to get more conservative again because there is no evident appreciation in housing so is riskier for them to give sup rime and risky loans. Less available credit and more inventory to choose from makes the buyers play hard to get. The same builder employees that purchased homes at a time when they were making $5900.00 per month are the same borrowers that are now making $3500.00 per month if they are lucky to have job.

To make things worst the adjustable loans increased the monthly payments so now these borrowers can no longer make the payments and the lenders foreclose. The foreclosed homes increase the inventory to higher levels making the demand less and creating a spiral down in prices like the one we are seeing in 2008. This is a contraction period because the market is correcting itself and it will take approximately 4 of 5 years to correct itself under normal inflation rates. In other words, if you want of see normal appreciation in the real estate market and normal sales activity like in 2002 and 2003 you may have to wait until 2013. We need to get rid of the foreclosed inventory first and this is going to take approximately one year. Onother year to for the average consumer to regian confidence in the market and start buying, and about another year for the lenders to flex the funds.

Most of the homes purchased in 2005 and 2006 with bad loans that went bad are just now being foreclosed upon.
Luckily in 2007 there were not that many bad loans issued so most of the foreclosures are going to happen in 2008 and most of the price depreciation is going to happen in 2008. The homes that are purchased in 2008 will eventually gain equity by its own nature due natural economic inflation but at a normal pace of 3% to 4% per year until another boom is created by sustained demand like an over increase of population, unregulated rent control, and or government regulatory changes. This correction period normally picks up speed toward the end of the cycle because by this time teenagers living at home are now finishing college and thinking about marrying and forming a family. There is also the group that posponed buyng a home in sellers market because they could not qualify or they just had a very consrvative approach towards over extending themselves financially. Sso a new demand is created. and new cycle is reborn. 

 In 2002 the residential retail square feet was going for around $100.00, $167.00 in 2005 and back to $103.00 in 2008
The most recent figure will be a temporary window of oportunities for investors and first time buyers. This window will close as soon as lenders dump all the repossesd homes they got stuck with from bad loans.

Timing is the key. If 1300 homse sold in 2005 and 60% of those homes defaulted in 2007, this means that banks have aproximately 780 homes to sell at discounted prices in Perris California alone. Assuming that no new listings come on the market in the next 6 months which by the way is not realistic, it will take aproximately 11 months to get rid of the existing reposesed home inentory. 18 months if you account for the new listins that will come up on the market during that period. This inventory will erode eventually and will allow room for demand and apreciation.

What are the good news in a correction period? If you have money, this is the time to buy. The best time to buy is when nobody wants to buy. When you don't have competition. When the sellers are desperate to get rid of their "bad investments". There is never a bad real estate investment, it's only bad timing and good timing.

A good rule to follow if you are not sure if is a good time to buy is to compare your monthly mortgage payments with yur rental payments. If the last is more, it's a good time to buy. That is exactly what is happening in 2008. and will to continue to happen until the first part of 2009 when housing appreciation starts to increase at a faster pace.

Why?  Because there will be no more foreclosures to bring the values down and no more overage of builders to oversupply the market. Most of the foreclosures will be purchased by investors in 2008 and first time buyers that either could not qualify in the wild purchasing years of 2004 and 2005 or had enough sense to not get into those exotic loans. These homes will be flipped for a profit in 2010, 2011, and 2013 at the peak of the expansion cycle.

So what would you like to do? buy now in 2008 at 2002 prices of around $100.00 per square feet and sell in 3 to 5 years at $167.00 a square foot like in 2004 and 2005. Do the math. Appreciation is expected to be at 60% in five years from now.

Things to consider, in California, the minimum wage is $8.00 an hour. This is at least $2768.00 gross income a month for a newlyweed couple. The average person reserves 45% of the income for housing expenses. This enables a person with a spouse or domestic partner to make $1245.68 in mortgage payments per month confortably.

With this monthly payment you can buy a house up to $165,000.00 in southern California all day long in 2008.Will it be hard to get buyers with that income in 2009? The answer is no. Major warehouse are coming to southern California and they can afford to pay $8.00/hr minimum wage. Yes buy all the repos you can now. Let the procatinators think about while your equity increases.

Think of all the people that have told you that they wished they had purchaed in 1998 when the average square feet of residential living space selling for $75.00/sq. ft.

Remember this is a correction period not the collapse of real estate.

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