Bubble, Bubble — Toil and Trouble (Cont’d.)

A short time ago, on January 30, 2013, to be exact, we posted a short item bringing our readers the dispatch that market values of homes are zooming upwards, in some areas at double-digit rates – raising the question of whether another real estate “bubble” is in the offing. We now have a partial explanation of what is going on, at least in California.

It turns out that the big money boys on Wall Street are sitting on piles of cash and are looking for investment opportunities. Their latest strategy is to spend some of that money buying up homes at depressed prices and renting them out for now, in the expectation that in time their market value will go up, whereupon they will be able to sell them at a profit, and in the meantime they will be collecting rents. According to the Los Angeles Times. this phenomenon has reached the point where ordinary prospective home buyers are being squeezed out of the seemingly depressed home market because the aforementioned big boys are buying up those homes for cash, free and clear, leaving only slim pickings for ordinary, would-be home buyers. So while ordinary Joe Homebuyer has to arrange for a loan, get credit approval, and do the usual song and dance with lenders, loan brokers, real estate agents etc., the home in question is long gone from the for-sale lists. As an example of what is going on, the L.A. Times cites the case of a qualified, employed would be home buyer who so far has made 200 offers on Inland Empire (San Bernardino County — “the epicenter of the Southern California housing crash”) homes, all unsuccessful. Why? Because they all got sntched by the aforementioned financial “big boys” snapping up everything in sight. Alejandro Lazo, Inland Empire Housing is More Affordable But Still Out of Reach, L.A. Times, February 16, 2013. Go to http:www.latimes.com/business/la-fi-inland-empire-recovery-20130217,0,5814396.story

“The Inland Empire has gone from bust to boom with a vigor few could have predicted, mirroring Western regions such as Phoenix and Las Vegas. Surging demand has tightened inventory, driving up mediam home prices in San Bernardino County by 18.3% and in Riverside County by 25.2% from the last year according to reaol estate fi8rm DataQuick.

The median, the point at which half the homes sold for more and half for less, hit $226,000 in Riverside and $177,500 in San Bernardino in January.

That’s  great for the real estate industry and helps the localm economy. It also boosts home equity , or, at least decreases negative equity for the thousands of Inland Empire residents still mired in underwater mortgages.

But it’s bad for many buyers. Now that housing is finally affordable, it’d unavailable.”

But that raises an interesting problem in eminent domain valuation. Just compensation is usually fair market value which is usually determied by looking a comparable sales. But what happens if the FMV experiences a short-term “bump”? Can that be used as a comparable figure. As far as we know there isn’t much California case law on point. As we recall there is some decisional law on that point in New York some of whose courts allow a deviation from strict applications of fair market value on the date of valuation, where the price deviation is the result of abrupt, temporary changes in the market. We will leave to our expert readership to come up with the answer to the question of how such properties shouold be valued. Good luck.

But more important, what does this portend for home prices? Is California creeping back up into bubble territory? Who knows?

 


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