I recently posted an article from USA Today titled "Home Prices Could Sink without Tax Credit" to my FaceBook account. The reporting discusses the anticipated effect the expiration of the various Federal Tax Credits available to both first time buyers and more recently repeat buyers will have on prices. Basically, they regurgitate the usual drivel that in the absence of an incentive for first time buyers, the market will collapse. The market may implode, but for entirely different reasons.
There are three significant determining factors that may move prices down again this year and into 2011 and for the most part, I have not seen much discussion on the blogs or elsewhere mentioning the following.
1. There is not an endless supply of first time buyers: Any recovery predicated solely on first time buyers is built on significantly false assumptions. Not every first time buyer will, or even wants to be a home owner. There are many valid reasons for renting and it serves many people's financial requirements and lifestyle well. In speaking with brokers in the area, everyone is noticing a slowdown on the buy side, particularly first timers. A reasonable conclusion might be that almost everyone (FTB) who is going to buy has already taken advantage of the low interest rates, tax incentives, and depressed prices.
2. The published numbers of "underwater" home owners is understated: I have seen numbers thrown around in the 25-30% range on a national basis. In Southern CA, the true number is over 40% and in some areas over 50%. What I am specifically referring to is home owners who either owe more than their home is worth or who don't have enough equity to sell when transaction costs (5-7%) are taken into account. Consequently, there are many potential sellers who simply are stuck where they are for as long as they can make their payments. These may be families who in other times were move up buyers or even downsizing sellers.
3) This gets very ugly when the investors leave the table: In this example I am referring to the investor who is buying rental properties (not the flipper). Real life example. A few days ago, my partner and I submitted an offer on a 2 unit rental property in the Hancock Park area. The property was priced to sell at $400,000. Our client offered $450,000 (although I did advise him to go higher). He is an all cash investor who can close in 10 days. The REO listing agent informed us that they have over 100 overs many of which are all cash and most of which are significantly above list price. Our client is just one of dozens thinking the same thing. Owning real estate pays a lot more than bonds, CDs, or other "safe" investments. Once there are other reliable safe harbors (not gold or stocks) and prices rebound a but more, many of these all cash investors will be long gone.
In conclusion. While tighter inventory should push prices up (standard supply and demand), artificial elements (government supported lower interest rates and tax incentives) may have boosted a market that was otherwise on life support. It will probably only be apparent in the rear view mirror as to whether it was pent up demand and a new affordability which collaborated to stabilize the market or other elements entirely. Let me know what you think.
Remember, you can search the entire MLS for Southern CA as well as access a powerful foreclosure database at www.socalistings.com. Follow me on Twitter for daily Real Estate "tweets".
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