How Much Farther Will Prices Fall…and What Happens When They Hit Bottom?

Westcoe Realtors, Riverside California…Given the challenging nature of the real estate market we have chronicled here in the past few months, there appears to be one pressing question that is on everyones mind:  HAVE HOME PRICES BOTTOMED OUT YET…AND IF NOT, WHEN?

While I am loathe to get too fancy with any sort of predictions, I think I can get you close on the answer to the above question.  However, more importantly, I need to answer the underlying reason people keep asking this question…because I have come to recognize that the above question is really a code for another subliminal thought that has far more  implications than “have we bottomed out yet?”  Allow me to explain.

To answer the almost daily question about home prices…YES, IN A GENERAL SENSE, WE ARE NEAR THE BOTTOM OF THE PRICING SLIDE.  There maybe another 5% or so of pricing declines, but for the most part, we have taken the worst of the hit, and what is left is much less than what we have already absorbed.  The banks have pretty much determined the bottom pricing level with their repos, and they have no need to go any lower.  Why?  Because they have been very aggressive in their pricing and are now getting multiple offers on almost every property.  As a result, many of the repossessed homes being sold by the banks are now selling for more than the list price.  Given that, why would the banks go any lower on their pricing?  Hence, since they are the 800 lb. gorilla in the pricing arena, as they to, so go the rest of us…and they are not going any lower.  However, the above comes with a few caveats.

First, for some homeowners, their pricing still has a long way to drop, because some of these homeowners are still not willing to price their home as the market conditions dictate.  Unfortunately, everyone is competing with the bank prices, whether we like it or not.

Secondly, if the Fed decides that inflation is a far more dangerous animal than the housing market decline, and adjusts monetary policy accordingly (read this as higher mortgage rates), then our real estate market could soften further…which would lead to increased pricing declines.  So far, there is not indication of this, but stranger things have happened.

NOW FOR THE REAL REASON EVERYONE IS ASKING ABOUT THE PRICING BOTTOM.

On the surface, pricing is important for every homeowner to know…but I am afraid that my travels indicate that the real reason so many people want to know the answer to the pricing question is that they think THE MINUTE WE REACH THE PRICING BOTTOM, HOME PRICES WILL START TO RISE AGAIN AS THEY HAVE IN THE PAST, AND I AM AFRAID THIS IS NOT THE CASE.  All indications are that once we hit bottom, we are destined to bounce around on the “floor” for some time before we can see prices rise again.  How long will we bounce?  We have no crystal ball, but based upon what we hear, it would not be unreasonable to expect pricing to remain level for approximately 2 years, give or take.  Why?  BECAUSE HOUSING PRICES CANNOT RISE UNTIL THE LENDERS GET OUT OF THE HOMEOWNER BUSINESS…(AND BELIEVE ME, THE WANT TO EXIT THE OWNERSHIP MARKET AS BADLY AS WE WANT THEM TO GO)…but unfortunately, it will be quite some time before lenders sell all the properties they own, or expect to own.  We work with a lot of banks at Westcoe, and they are telling us that their number of repossessions are still increasing, with no short-term end in sight.  The bottom line is that after the ”bottom” comes a substantial period of pricing stabilization, not increases.  In the short term, this means it will be a buyers paradise for a while…and in the long term, this will benefit everybody…if we can just get there!