Much of the current real estate media attention has been focused on foreclosures and sub-prime lending practices. The media’s relentless impending doom stories have certainly rattled the nerves of the many would-be buyers. The question is should a buyer stay in the housing market hunt or let it go?
Buyers tend to fall into at least one of three groups; buyers who believe the market will go down and are waiting on the sidelines, ones who can no longer qualify for a loan due to tighter lending guidelines, and buyers who see the new opportunities to own a home.
The Buyers who can no longer qualify for a home loan are probably better off not trying to get in over their head anyway. Stretching the ability to repay a loan is a recipe for disaster and many of the people who find themselves in foreclosure are probably wishing they had never bought in the first place.
The buyers who are aggressively looking for a home and seeking the market’s opportunities will most likely fare the best in years to come; buyers who wait until the media gives them the “all-clear†sign, will find they waited too long. Warren Buffet of Berkshire Hathaway, arguably the best investor of all time, states very succinctly in his business model that investors “…will understand that volatility provides investment opportunities and will use market drops to make good purchases." Mr. Buffet has also been quoted as saying “A good investor learns to insulate himself from market emotions and to make a distinction between market price and intrinsic value.â€
Therein lays the dilemma. Is there any intrinsic value in Bay Area homes or are the prices overinflated?
Much has been made of possible housing bubble and many would claim it has burst while others feel the air is slowly being let out. Looking at historic trends in real estate we see that indeed the California and the Bay Area in particular outperform the country as a whole in housing appreciation.
This graph illustrates the median home price in the United States since 1968 as compared to California’s—the Bay Area was included as of 1982.
As one can see California has outpaced the country and the Bay Area outpaced California. It’s interesting to note that California and the Bay Area are more-or-less in step with each other while both clearly have grown faster than the country as a whole. But is this value real? Why does the Bay Area command these high home costs and can it continue? This is the very sort of data which leads many to conclude that California as a whole, and particularly the Bay Area, cannot sustain the price discrepancies with the rest of the country.
The Dual Income Infusion:
Twenty years ago, more and more California families became dual income families which increased their incomes by 75% and the ability to pay more for a home; and since a larger percentage of California families earned two incomes at higher pay, California began to outpace the rest of the county. Additionally, the advent of technology rich companies in the Silicon Valley infused a great deal of wealth to the Bay Area perhaps forever altering the discrepancy in home values. This added ability to spend more on housing is easily seen in the above chart discrepancy between the cost of a home in California vs. the country as a whole.
Where will the next infusion of income growth come from? It seems highly unlikely that another source of income, as significant as when dual incomes materialized, will develop–leading one to speculate that the rapid increase in home values experienced in the last 30 years is unlikely to continue at the same pace.
Buyers who are looking to home ownership should consider their job security. There are better opportunities than in recent years but the days of 7-15% appreciation are over and flipping a home in a year is currently all but impossible. Qualifying on a dual income bases means you are also reliant on two incomes and should also be considered. Having to move due to job relocation or layoffs could put a financial hardship on a new homeowner if values have declined or not increased enough to cover selling costs.
Locally, there has already been a slight decline in home values but we feel if economic conditions remain the same—or improve—this will be a short-lived adjustment. The market rebound will likely be slow to moderate with less aggressive growth and a healthier more sustainable market.
Housing is clearly a necessity. If you feel your job is secure and you have the wherewithal to afford housing now is an excellent time to entertain the possibility.
Read tomorrow’s article on The Dual Income Dilemma
