If 2011 was any precursor, it makes it difficult to make any prediction for what the market will do in 2012. As a result, many of the predictions you will hear about for this year may be totally worthless given the amount of change that is in store. In the past we’ve offered insight as to what the market will look like and what we can expect moving forward and throughout the year, and we’ve had success in this regard. However, something is different for this year. It seems that there are too many “ifs” out there to pin-point exactly where we stand and to justify a full blown economic recovery in 2012, especially where residential real estate is concerned. There are far too many outlying macro-economic and Geo-political instability issues that fly in the face of what a foundation for a recovery looks like. Many pundits and “experts” predict nothing more than a sputtering real estate market for 2012 and not the type of housing recovery that spurts the economy the way we need it to. Nevertheless, regardless of what’s going on in terms of a national or global scale, it’s important to remember one thing: everyone needs to know that real estate is local. What I mean is that what is going on globally doesn’t really affect the value and desirability for homes in San Diego County. In other words, if a listing is not selling, it is probably due to the fact that it’s priced too high and not because the stock market tanked today, or because of the earthquake in Japan. Conversely, the price of oil and the tensions in the Middle East shouldn’t take a commanding role in the decision making process when buying a home. Yet, buyers and sellers tend to complicate the issue and bring the context of their real estate outside the realm in which it should be, which is local.
For buyers in this market:
For San Diego, our market is looking quite good relative to what is happening in the rest of the country. This market is now 5 years removed from the onset of the housing correction. We don’t predict a full blown recovery this year, however we do see a fantastic buying opportunity for this and next year. Affordability for a home buyer today is the highest that it has been for decades. We see that San Diego has corrected, on average, about 25% below its peak and prices have stabilized for some time now. To further sweeten the current situation, we should all know that mortgage interest rates have been hovering around 4% which is near the lowest ever seen. To underline how substantially different a buying opportunity is today, and why it’s such a great time to buy a home, let’s consider what the typical buying situation right before the peak of the boom looked like, and compare it to today’s market.
For this example, we take a 2 bedroom 1 bath entry level home in the metro area of San Diego. This area of San Diego has corrected lower about 25% off the peak values of 2005, which is right about the average of the downturn/correction in price for the county in general. In 2005, this home would be selling for $500,000+ and you would absolutely be competing with several other buyers in the market place. There were only a few thousand homes available throughout the county at that time and the market had a crazed atmosphere, and many a times a buyer would have to write several offers on several properties and compete aggressively before being able to get their offer accepted. Many times your offer would have to be several thousand dollars higher than list price to win-out on a home over the stiff competition. Mortgage interest rates around this time were in the mid 5% range, and because everyone could qualify for a loan, there were a lot of people looking and able to buy. In terms of a monthly payment, this home with a 20% down payment would be about $2800 per month.
Today, on the other hand, this same house can be bought for about $375,000. Mortgage rates are hovering around 4% meaning that this same home at a 20% down payment would cost roughly $1800 a month for the mortgage. Furthermore, the supply of homes on the open market is much greater than that of 2005, meaning that, for the most part, buyers aren’t normally having to compete with other buyers on every home they see. Deals are out there and many of the potential buyers are still on the sidelines waiting for some sign to let them know that it’s OK to enter back into the market. Well, this is me telling you that THIS is the BEST time to get in the market if you are able. Lots of people would love to buy, but the stringent loan guidelines force many to take measures to improve credit or save more of a down payment – they couldn’t buy even if they want to because they cannot qualify for a loan. Even so, many buyers are fearful that prices will continue to erode and there is a lack of consumer confidence within the housing market and the economy in general.
With that in mind, I truly feel that 2012 will essentially bring a change of attitude and perception for the housing market. It won’t happen immediately, but how did you feel reading the above comparison on the same house from 2005 compared to now? Not only is the home $125,000 less expensive, but your payment would be $1000 less each month and you can lock a 4% loan fixed for 30 years! The prices in many places are nearing the point where it costs almost as much to rent compared to buying – this unique market situation (where rent vs. owning being nearly the same cost) isn’t supposed to be happening in San Diego because it’s such a prime real estate market, but here is where we find ourselves in 2012: a market with ample opportunity, and the only direction I see the real estate market going in this county is up.
Over the past several decades we have been witness to booms and busts (recessions) in the economy. The average boom lasts between 3 and 4 years, and the average bust, or recession typically lasts 12 to 18 months. This is what has been experienced historically since the early 20th century. Put into today’s context, the boom that preceded the “great recession” that we have been muddling through the past several years was an economic boom of fantastic proportions, so it would make sense that the bust that follows is somewhat equal in its extent as the economy works out the kinks and problems that got us to where we stand today. In 2012 we are now 5 years beyond when the correction and recessionary phase first began. This is a long time, but after a 10 year boom, the economy needed just as substantial a bust to bring the fundamentals to a more healthy position in order to move forward into the future for the economy and housing market as well.