Have we recovered yet? It sure looks like it
Although it has been a much more controlled accent into recovery prices in San Diego are close to pre-crash levels and in many specific markets they have surpassed those levels. We’ve compiled data from the top sources in the industry; we’ll let the numbers do the talking.
“For the first time in 16 months, sales were higher than a year earlier,” said Madeline Schnapp, Director of Economic Research for PropertyRadar. “Pent-up demand, mild winter weather and attractive interest rates have created a wellspring of California housing market sales. Despite the California drought dominating headlines, we aren’t seeing data that suggests the drought is having a negative impact on the market. Obviously we’ll continue to monitor that closely.”
One of the best indicators of the state of a real estate market is the number of distressed sales (cash buyers) versus non-distressed sales (typically homeowners purchasing with a mortgage). As you can see, in 2008 the number of cash buyers sky rocketed as the average person was too financially unstable and unsure to enter the market.
As the economy has recovered and the sentiment of home buyers has increased they have re-entered the market. With the majority of home sales now going to non-distressed buyers we can tell the market has stabilized and we are very deep into the recovery cycle that is typical of the California real estate market.
The Home Price Index is a guide to show the percentage increase of home values in a market year over year. As with most statistics on the California market you see the big swings in alternate directions. This is why we do our best to time the market, if you do it well you can win big but if you don’t you lose big or have to sit on the sidelines until the next cycle to make your moves.
If you look closely you’ll easily notice the large upward swings of the 2004-2006 cycle followed by the huge drops in 2007-2008. 2010-2011 were more flat followed by a large run up in 2012-2013 that revived the hopes among property owners that we were back in the gold rush days of 2004. These large swings aren’t necessarily good for anyone as it is so challenging to time them properly, a more gradual and stable rise is more desirable. Thankfully for the last year and a half that is what we are witnessing. A slow and stable growth in values, although the media might want us to believe values are jumping from one day to the next. The data shows a consistent and steady price appreciation of 3-6% across the board.
The elephant in the room… Where do we go from here?
This is the wild card that has all analysts and experts scratching their heads. What effect will millennials have on this recovery? It is estimated that student loan debt has removed 8% of the potential buyers from the market as they cannot afford both a mortgage and debt servicing on their student loans.
Even though the market has seen price recovery, millennials the largest portion of the population have not been able to participate. Statistics show we are now a nation of renters. The mystery here is if and when will millennials make it through to the other side and be able to afford to participate in the housing market.
In summary, we have seen prices recover to pre-crash levels and non-investor buyers now make up the majority of home sales. Both are good signs of a stable and recovered market, the California real estate cycle tends to operate in 10-15 year cycles. We are a forgetful group and quickly those days of foreclosures, plummeting prices and that fear of the unknown are replaced with that euphoric feeling you get when you see your neighbor’s home set a new high price for the neighborhood. The main factors I will be watching to best time my entry and exit of the real estate market in California will be the following.
- Distressed sales vs. Non-Distressed sales and sales volume
- Home price affordability (cost to purchase vs. rent)
- Student loan debt and the looming bubble
- Mortgage interest rates
- Households that rent vs. own
If you are considering selling your property it is important to monitor the data and not just the opinions of those who will benefit from your business. The numbers don’t lie, and they can be your guide to timing your decisions. If you have been waiting for the “recovery” to sell, it has arrived. Now the million dollar question is how the above factors will contribute to the distance we can go.
My personal opinion is until student loan debt is addressed we will have a vacancy in the market of millennials, with this gap I expect gains in house values to stay in line with inflation.
If you have any questions, comments or would like to speak with us personally please do not hesitate to contact me personally.
Gordon Buys Homes