Thursday, September 10, 2009

Are we there yet

One of the very first posts I did on the blog was a chart showing the "normal" median price line over the last 30 years with the actual median price line. I also showed the median price to income ratio. Last Sept I look at it again. In last years post we were still about the normal; trend lines for both price and price to income ratios. In 2007 the median price in Riverside was $420K!, last year it was $247K and this year it is $185k.

How do we look now?

This is the median price chart. The red line is the one I put in that goes through the peak of the last bubble. That line would place the median at about $250k in 2010. If you run the line through the low of the mid 90's it comes out at about $150k. Taking the middle we should have a median price of about $200k in 2010. Last Sept the median was $247k. It was still well about the middle mark of $200k. This Sept the median is closer to $185k. Judging by this it would appear we have reached the level where solid fundamentals are once again in place. This could go a long way in explaining the increase in sales numbers this year.

This is the price to income ratio chart. Traditionally the price to income ratio for the IE stays between 2x and 3x (2.3x was the long term average till the mega bubble). Since median incomes are actually falling we are not doing quite as well when looking on this ratio. Although if you take the high end of the ratio we are still in the ball park.
The super low interest rates means that people can comfortably afford more home on less income. I think this is what's helping keep the ratio on the high side. This is ok if those people stay in the homes. It's a trap though if the rates shoot up and you need to sell. If the rates go up in late 2010 as most economists are predicting it will put another large drag on the prices. Higher rates effectively means homes cost more. People have a choice, buy less or wait for prices to fall. My guess (knowing the mentality of Southern Californians, is that people will go for option 2). When rates go up, look for prices to stagnate or fall. This will screw those people that need to sell.

My personal feelings regarding the current market.... I think that the prices are good in the less desirable areas. Anything east of the 215 is good, Anything south of Corona and even the Southern most parts of Corona are probably a solid buy. But I feel the better areas are still a little on the high side. I think if you buy a $400k "average tract home" in Corona, you could find yourself $100k upside down in a couple of years. Eventually those areas will fall into equilibrium with the rest of the market.


Indite07 said...

Wow the median price went down more than the double in two years, that is scary for sellers but good for buyers

Costa Rica Real Estate

David said...

The US housing market has not hit bottom and, depending on which view you take, has quite some room to move down further. The truth is that we are still in the middle of a historic crash.
"There are four items in place that are tricking people into calling a bottom, when in fact three of these items are temporary. The result is an artificial restriction of supply and artificial pumping of demand.
1) It’s the seasonally strongest buying season
2) There’s a foreclosure moratorium about to end
3) Federal tax credits offered for 1st time homebuyers
4) Historically low mortgage rates (this may or may not change soon)

Foreclosures will continue to come as long as the job market does not get better. Also, borrowers who have Alt-A loan products will have those coming due in the next couple of years and many of the loans will not qualify for the current values resulting in their homes being foreclosed on. The result is that the market will be flooded with new supply, and without artificially increased demand, prices will continue to drop."

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