The months ahead in the housing market are still a mystery to those of us closest to it. While I believe it will be a much better market than 2009, some aren’t sharing my optimism on this subject. A recent Wall Street Journal article discusses economist Dean Baker’s belief that the recent six month run-up in nationwide home prices has been likely fueled by government support props for the housing market, and that prices are still artificially high when adjusted for inflation. Specifically, he states that “Adjusted for inflation, home prices are still 15-20% higher than they were in the mid-1990s.”
And, what’s his rationale for this? It’s as follows:
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Economic fundamentals are moving in the “opposite direction”
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Rental vacancies are reaching record highs
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Many segments of the housing market still have excess inventory
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The demographics of aging “baby boomers” supports downsizing over the next several years… buying less house, not more.
While much of what Baker says is true, the application of his theory to our area may need to be adjusted. First of all, we have not experienced a run-up in prices over the last 6+ months. In fact, the prices of Lafayette real estate and Orinda real estate have been absolutely flat over this period, averaging about $430 per sq. foot since April of 2009. Economic fundamentals may be problematic on a nationwide and statewide basis, however our “oasis” of Contra Costa County has historically been modestly buffered via the diversity of its economy… drawing upon industries such as financial services, health care, tech and other divergent sectors. This may serve to buffer us from Baker’s prognostication for the future. Our residential rental market within this geographic sector is a minor part of the real estate landscape. Many who formerly owned, are now renting.
The “excess inventory” issue could be a factor in 2110 and 2111. Inventories are down now, but that’s part of seasonality. Inventories will clearly increase rapidly in the coming months, and the “wild card” is the “hidden” bank inventory of foreclosure properties that they may have been holding behind the curtain. Finally, the baby boomers are aging and many are downsizing. Some are downsizing ahead of their anticipated schedule due to financial need. This, too, may soften prices a bit as they may have little alternative to accepting market price for their homes.
So, is Baker right or wrong? I have yet to hear a local economist call for further reductions of 15-20% in our prices. Personally, I don’t see it, given the steep corrections we’ve seen in the last couple of years and the relative economic strength of this slice of the Bay Area. I believe there are unique attributes to our local market that will partially buffer us from the broader housing market. However, there are numerous variables that have yet to unfold, so none of us should be absolute about any predictions for the future.
