Hat tip to Kingside for sending this along:
Remember the days when residential real estate gained equity each year? It’s happening again in California, and a year from now homeowners could see as much as a 20 percent increase in the median price of homes across the state, according to Bruce Norris, a Riverside-based real estate analyst and principal of The Norris Group.
“My best guess is that California we will have significant price inflation. Prices could escalate so strongly that we will think we are in 2004 instead of 2013.”
Some may ask how this is possible. But Norris has experience predicting the unpredictable.
A real estate consultant, investor and educator for the past 30 years, Norris publicly predicted the current sub-prime lending and foreclosure crisis in January of 2006, more than a year before the nation’s leading economists and real estate industry analysts would even acknowledge the possibility of a downturn. Norris also correctly forecast both the real estate boom that began in 1997 and the subsequent doubling of home prices.
Norris now says he has identified three reasons why median home prices in California will go up.
For starters, he said, policy decisions have resulted in record low inventory levels.
“In many areas,” Norris said, “there’s one month of inventory. Inside of that one month of inventory are very few REOs and a lot of short sales that may or may not really be available to buy and close anytime soon. The properties that would normally be purchased by owner occupants are being snapped up by billion dollar hedge funds. These hedge funds, unlike the smaller investor types, are keeping all of the properties as rentals. There’s a little inventory for sale by ‘normal sellers with equity,’ but, right on cue they are getting the idea their property just might be worth more than the last sale.”
With the absence of inventory, Norris predicts, prices will escalate.
A second factor paving the way for the rise in median home prices in California is the return of the former homeowner who was foreclosed on in 2008 and 2009.
“The numbers of trustee sales in those years were staggering,” Norris said, adding, “As a percentage of whatever had happened in the past, 2008 and 2009 will go down in history as the California Real Estate Collapse of all time. The numbers differ across the state but the percentages are similar. In San Bernardino, the numbers of foreclosures exceeded the number of sales in 2008 and 2009. Fast forward to 2012 and you now have those same people ready and capable of buying a home again.”
So, how is it these people can buy homes so soon after going through a foreclosure? The answer, Norris says, resides with FHA, which will now make a loan to a buyer who lost their home via foreclosure after three years. “Buyers have realized that their house payment would be less than their rent, and that’s fueling demand and pushing up home prices,” he said.
The third factor setting the stage for a significant increase in median home prices is interest rates. “Interest rates are at all-time lows, and that allows for price increases to take place without significantly increasing mortgage payments,” Norris said, adding that he expects California’s median prices to up by as much as 20 percent during the coming year.
IF things go up 20%, Jim, I may be enlisting your services next year to get rid of some of those rentals I bought just a couple short years ago. 😉
Best,
Larry
The fourth factor is the the fraction of inventory allowed to progress to the retail market.
The other issue to consider is rehab resales. Case-Shiller presumes that purchase from bank assets is an arms length transaction thus making the rehab and subsequent resale to owner/occupants is a matched pair. this clearly misses the often substantial capital investment to make the property retail material.
Thanks for the post. I know that there is effectively no inventory priced below $500k in my town of sebastopol and plenty of qualified buyers.”Effectively” because the 5 homes that are active listings are ALL seriously overpriced. Nothing price can’t fix…
OMG, two of my favorite RE pros in one place. Why that leaves only… well nobody. 😉
I have only one word for what is coming. INFLATION. It will dwarf what we had in the late 70’S and early 80’s, Buckle up, gonna be a wild ride.
Zillow says the home we bought 13 months ago in Carlsbad with Jim the Realtor’s help is up $280k from what we paid…something is in the wind and I’m liking the news…on paper atleast.
Inflation? That’s an easy prognostication. The trick is not the “what” but the “when.” Tom, Jim and I probably remember when our dads were burning mortgages that were less than a car payment.
Inflation? Sure, it is coming. The trick isn’t predicting a tide but catching a wave.
The Case-Shiller excludes flips that occur within six months, which around here leaves out most of them.
It is so hot on the lower end that flippers are making $100,000 minimum in 2-4 months after carpet and paint and/or maybe a $8,000 kitchen off the boat.
But those same-house sales are included in the median jumps.
Good to see you Dawg!
Norris appears to be ignoring a number of significant differences between now and then, but hey, we’ll see what happens.
If he is looking at the Inland Empire only, then 20% is do-able. It doesn’t take much for a $250,000 house to go to $300,000.
If we isolated the lower-end parts of Vista/Oceanside, they probably saw +20% this year.
SD Nov Sales +22.4%, Median price +13.7% Y-O-Y:
http://www.dqnews.com/Articles/2012/News/California/Southern-CA/RRSCA121212.aspx
The party will last as long as rates stay low. Expect another crash once rates go up and people get “priced out” again. Fog-a-mirror stated income loans are the thing of the past.
But, is the government going to let the rates rise?
rates will not rise for years. seniors are stocking up on alpo due to expected inflation fears.
Wages in Riverside or Vista are going up 20% next year?
Aren’t those types of comments getting dated?
Wages haven’t gone up, yet sales are blowing through the roof, and we could sell more if there was more inventory. (Vista detached-home sales for Jan-Nov up 23% YOY).
You have a good take on the market. Can you consider the reality, and give us a hand here with explaining it, instead of snarking it up?
I attended Norris’s presentation at SDCIA on Tuesday. Well worth attending.
He acknowledged that wages have not gone up, but he believes we are truly in a new normal. The phrase “lowest interest rates in 50 years” we hear is because they don’t keep records older than 50 years. He recently went to DC to research the history back to 1850 and said that rates have never been this low. It is an unprecedented event.
His perception of course is based on the Riverside market, but he made a big point of saying that a 20% price increase will not significantly affect a buyer’s mortgage payment, and even after such an increase the rent to buy comparison will still be overall cheaper for the buyer to buy than rent. This affordability comparison is a rare event for California. He believes there is a lot of room for price increase in California as long as rates stay low, and everything he sees is that there will be no government policy change that will affect rates.
Some of the many other points he made:
A 20% increase will eliminate a lot of negative equity. Banks know this and there will be no dumping of inventory. Their stratagy to not foreclosue for years and leave the borrower alone might actually be better for them financially.
If the fiscal cliff or whatever creates a national recession next year, the national government response will be to lower rates further, and California real estate prices may actually benefit from a national recession.