As Yogi Berra famously put it, prediction is very hard, especially about the future. And so it is. But if you are in the eminent domain business, having some ideas about real estate pricing trends is essential. Of course, such prediction is the business of appraisers and investors, not lawyers. Still, lawyers are not forbidden to form and express their opinions on this subject, so here goes.
Two news items have caught our eye, that seem worth mentioning. First is the headline in the Los Angeles Times of April 11, 2011, p. B2: Housing Market Stays Unremarkable in March. It brings the unremarkable dispatch that, according to property valuations, home prices in Southern California have declined (as compared to March 2010) by 1.6%. No big deal in itself, but being as we are told that the recession is ending, one would have expected a rise or at least stability in prices. Which may be the market’s message that homes – after their dizzying rise in prices during the last decade or two – simply have not justified what people have been paying for them. Oh sure, “worth” is what the market says it is. But that is not the whole story. Whatever “the market” may say, buyers still have to have an income that is adequate to make the mortgage payments, pay taxes and maintain the ol’ homestead. And in Southern California, folks, things are still loony tunes in the housing department.
Around here, a decent but by no means luxurious townhouse goes for around $400,000 to a half-million. We recently checked out some homes being offered for sale in Burbank – mostly a solid middle to lower-middle class community – and discovered that in spite of all the talk about shrinking home prices, they were being offered for sale at high $600,000s to low $700,000s. And those were no McMansions. They were small (two bedroom, plus an add-on third bedroom), old (1940s vintage), crackerboxes. If you want something better, something that is consistent with upper middle-class living, you better start thinking in terms of seven figures or at least very high six-figures. Local Sunday real estate advertising tabloids are still full of seven-figure homes being offered for sale, and even in Burbank, if you head for the more upscale hills, that’s what you will have to pay.
Oh sure, there are economic low-end places in Southern California, like the inland Empire, Riverside, Palmdale, etc. where during the “bubble” homes were sold en masse to folks who had no business going into debt on that scale, that are now being foreclosed on, and in many cases are sitting empty in droves. But those are not what we are talking about.
The other item, in the same issue of the Times, tells us that The Rich Buy Into the Idea of Leasing Homes, front page (B1) of the business section. “High-end rentals are up as buyers wait for prices to stabilize,” and are increasingly waiting things out in $10,000 per month houses. This, of course, benefits property investors who can make use of exchange 1031 rules to upgrade their current ownership of a property in favour of one that could be deemed even more profitable.
If you put these two items together it seems plain that what is sometimes called “the smart money” does not believe that home prices are heading back up, but rather will continue to drift or slide downward, which come to think about it, may not be a bad thing since our housing market is still overpriced. People — whether rich or not so rich — are willing to invest what to them is serious money in housing if they believe that prices will move up. In the recent past they came to believe that buying an upscale home was a great leveraged, tax-advantaged investment. And so it was. But the music has stopped – the days when home buyers got to contemplate their growing equities with satisfaction, “felt rich,” and spent accordingly are gone. A house has become a home, not an investment. So it shouldn’t be surprising that affluent folks with many options available to them now refrain from buying homes likely to consume rather than ehance their net worth.
So is that idea of the future what is driving the Southern California housing market? Maybe. Then again, maybe not. We tend to be pessimistic, and consider a house to be a place to live, not a way of making money. Which in the past has been a contrarian view, so don’t rely on it. We have always been amazed at the prices people are willing to pay for housing, considering their incomes. But what do we know?
Follow up. The L.A. Times of April 15, 2011, at p. B2, reports (State Home Sales Still in Slump) that
“So-called distressed properties made up well over half of the state’s market. Of the previously owned abodes sold in March, 39.3% were foreclosures, down from 40,1% in February and 40.3% in March.
“Short sales, in which the sales price fell short of the amount owed on the property, made up an estimated 17.6% of the resale market. That was down from an estimated 18.8% the previous month, but the same as in March 2010.”
Which means that 56.9% of all California home sales were distressed properties.