When Will Home Prices Go Up For Good?

Westcoe Realtors, Riverside California…This was a question posed to us by one of our many clients who owns a home, is making the payments, is not going to lose it, but wonders when the market will begin a comeback.  In other words, when will the market favor those who retained their homes and not lost them during this economic mess?

Well, that is a very good question…and while our crystal ball may be no more clear than yours with regards to any sort of specific date for permanent recovery, we can tell you what to watch for that will indicate we are heading towards a long term pricing recovery.  Right now, we are getting some starts and stops with regards to housing pricing because some of the following are in alignment for increased pricing…but when all four below are lined up, then we can assume the recovery is here to stay for a while.

Demand

In order for housing prices to sustain long term growth, demand has to be stronger than supply…and we have that right now.  In fact, our demand for housing in the Inland Empire is so strong, that we have far outstripped our available supply of homes.  Therefore, we are currently in great shape in this department. 

Our demand is also strong because of very favorable interest rates available for home buyers in today’s market.  Fixed, 30 year financing can be obtained at around 5%, which is a very low rate when viewed historically.  These rates  could still rise and be affordable, so we should be fine here for some time.

Lastly, on the demand side, the unemployment figures can affect demand as well, but even though unemployment has reached approximately 12% in our area, remember that leaves 88% of the people who may still be able to purchase a home at the low prices of today.  We are not suggesting that 12% unemployment is OK…just that the media forgets the other side of that equation sometimes.  For now, the unemployment issues have not adversely affected the demand for housing in our area.

 Supply

 As we said above, demand needs to exceed supply for prices to rise, and we have that now as well.  In fact, we are currently suffering from a huge decrease in supply that is seriously adversely affecting our marketplace.

In one of our more recent blogs, we indicated that the amount of homes for sale in the Riverside area in January of 2009 was approximately 2800… and as of November 2009, that number had fallen to around 980.  This has lead a huge dogfight for the available properties, multiple offers, and more importantly, very frustrated buyers and real estate professionals.  This frenzy has caused many potential buyers to simply get out of the melee and sit on the sidelines for a while, content to let someone else fight this battle.  Those that do remain patient and stay in the mix are rewarded with a home at a historically great price.

So…given that supply is down and demand is up, why aren’t we ready to state that prices are beginning their long term rise?

Because of the two market forces listed below.  Supply and demand has lead to some of the starts and stops mentioned at the outset of this blog, but for a sustainable pricing growth, we need the following two areas to “shape up” as well…since they are both artificially holding us back.

Repos

In a very recent blog, we offered that the banks are artificially holding on to their foreclosures for extended periods of time in an effort to make their quarterly profits look good for Wall Street…and nothing has happened to change our minds in this area.  As a result of this “slowdown” in moving through all the repos and potential repos, our local real estate market is being prolonged because we have very little to sell.  The Catch 22 here is that as long as banks remain in the home ownership business, this market cannot sustain recovery…because the repos will always be there to undercut the pricing desired by a “normal” homeowner.

Therefore, what is best for our local market is for all the foreclosures (estimated at tens of thousands in the Inland Empire area) to move through as quickly as possible…and if the banks opened their “repo closets” and let them all out, our demand could easily handle what they gave us.  However, the banks feel that what is best for them is a long, slow trickle of homes being let out of the closet so they can control when they take their losses…and look better for Wall Street.  That is the conundrum of our supply market…and who do you think will win that battle…the local real estate market, or the banks?

Yeah…the banks.  That’s why we will take longer to get out of this market than most people think.  The banks will simply not let us get where we want to go in the time frame we want.

The Appraisal Industry

The appraisal industry got blamed for far too much of the market run-up of the early 2000’s…and as a result, there have been so many changes to this branch of the selling process that everyone in it is now running scared.

Centralized appraisal management companies have created havoc with local appraisers, but more troubling is the fear local appraisers have of the “appraisal review” process. 

In today’s market, because of the fear that now dominates the appraisal industry, almost all local appraisals are “reviewed’ by an appraisal reviewer…who’s primary concern is not the buyer or seller, but the bank and his/her own skin.  This appraisal reviewer rarely sees either the subject property or the comparable sales, can be 2 states away, and only knows what their computers tell them…and what their computers tell them is that our area still has lots of foreclosures to come, so prices must still be on the decline.  It doesn’t matter that each property generally has 10-20 offers, or that the banks are holding the repos from the market which could all be sold, or that our demand for housing is through the roof…all they see is a computer screen that shows many more repos to come.

The result of this convergence of data is that many of our local appraisals are being slashed by reviewers from afar…reviewers who ultimately have control of our rising…or not rising…housing prices.  It is not unusual for the local appraiser to have their appraisal slashed by up to 10%…and once this happens a few times, the local appraiser looks bad, and may not get any more appraisal jobs.  Therefore, they see the writing on the wall, and start keeping the prices down on their new appraisals…and the snowball just keeps rolling down the hill.

Until this entire industry stops being afraid to let the market expand, and starts allowing for the growth that is ready to explode in our area, then supply and demand can do what they want…the housing prices will be artificially be held down by the appraisal industry…which is what is happening at our local level today. 

Therefore, until the repos and appraisals get sorted out, we cannot begin a sustainable housing price recovery.

In the end, real estate markets come and go, as will this one.  The frustration is that if everyone would just relax, this market would go away much sooner.  We will get there eventually, but until then, as a “normal” homeowner, at least you now know what to watch for to see when the market will finally start the sustained price increases you have been so patiently waiting for.