So, as we continue to examine the market with a view towards a Lafayette, Orinda, Walnut Creek and surrounding area real estate forecast, we still need to look first at the big picture. As one of the early comedic geniuses, Stan Laurel, once said, “What a fine mess you’ve got us in.”
By late 2008, the mortgage crisis had began to shift from subprime loans to the prime loans typically reserved for some of the best qualified borrowers and Credit Suisse is now predicting that there will be more than 6M new foreclosures by the end of 2012. Many of these are expected to be at the upper end of the market, driven principally by the unemployment/under-employment problem.
Looking at California, before we eventually delve deeper into our local markets, we are seeing a reduction of inventory at the lower price points. Even the statewide range of $300-500K is down to about 3 months of available inventory. Much of this has been driven by the $8,000 Federal tax credit for first time buyers and probably has just simply shifted the demand curve forward for many of these buyers. The California $1M+ market segment, principally dominated by buyers well beyond their first time purchase, now stands at about 16 months of inventory. This only tells part of the story because “shadow inventory” lurks behind the scenes… homes in serious default that have not reached foreclosure yet, and in some cases Notices of Default have yet to be filed. The latest stats show that loan defaults are significantly outpacing foreclosure liquidation, so the shadow inventory continues to build. On a national basis, the market overhang created by this situation was at about 7 million homes as of November 2009, and new defaults are running at about 300,000 per month! If we look at San Francisco data from the Case-Shiller Index, we’ll find that when shadow inventory is included, the actual inventory is about 279% of what is publicly listed for sale.
Studies have shown that most market bubbles eventually return to the historical trend line. Based upon this theory, real estate economists generally believe that prices need to decline another 5-10%, on average, to reach trend line. Some market bubbles have seen prices cross over below the trend line, so that risk is present in the market.
Some recent signs of stabilization in home prices may be due to factors that are misleading people to reach the wrong conclusions about what is really happening on a short-term basis… ultra-low interest rates, the $8K first-time buyer credit, an increasing number of higher priced homes sold in foreclosure (raising average price calculations), a temporary reduction in the introduction of new foreclosures in the market due to government pressure, and MASSIVE Federal support for the market via FHA loans.
The August 2009 Deutsche Bank report stated:
While subprime and Option ARMs are currently the worst cohorts with underwater borrowers, we project that the next phase of the housing decline will have a far greater impact on prime borrowers (conforming and jumbo) … By Q1 2011, we estimate that 41% of prime conforming borrowers and 46% of prime jumbo borrowers will be underwater, a significant increase over the percentage of these borrowers in Q1 2009. The impact of this is significant given that these markets have the largest share of the total mortgage market outstanding.
T2 Partners believes that US home prices will fall further and reach bottom in mid-2010, but that there won’t be a quick rebound due to the enormous amount of unsold inventory coupled with tepid economic growth for many years ahead.
Wrapping us this not-so-encouraging chapter, we must take these macro factors into serious consideration as we seek to forecast local market such as Lafayette, Orinda and Walnut Creek real estate. We are not immune from the national and statewide issues. It was a wonderful ride up, but it’s important to acknowledge the present market reality and make our future decisions based upon fact and not fantasy. With that said, we have seen where micro markets can and sometimes do behave differently than national average. We’ll see.
Next chapter… a look at the local performance numbers for Lafayette, Orinda and Walnut Creek real estate.
Great articles! Your macro analysis is spot-on. Having just studied many of these very issues under some of the top Ph.D.’s in the country, I can say that your views are in line with theirs. I personally don’t see significant economic recovery/growth until unemployment gets under control. Given how many jobs have been lost, coupled with extremely slow growth projections going forward, I believe there will be a substantial unemployment for the next few years. Only once that slack is tightened will the housing market truly regain its footing and return to ‘normal’ growth (ie: 3-4% annually).