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Thursday, Feb 9, 2023
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It’s Time to Buy in the Residential Market

It is now time to buy a home. I have been saying this for the past several years, but now the market statistics back up the recommendation. The purchase “window” is still open, as prices are well below their last peak and interest rates are low.

But buyers beware: This is already changing, and the window is closing. Prices are up about 25 percent from the bottom, and climbing. There seems to be a chronic dearth in homes to purchase, and with limited supply forecasted over the next several years, that situation may only get worse.

Home prices are still about 40 percent below what they were in 2005 and interest rates are 30 percent less. This means that a savvy San Diego homebuyer can acquire a home with substantially lower payments.

Still, you have to qualify, and lenders remain reluctant to lend, except to the most qualified buyer — the kind of buyer that weathered the national economic crisis intact. If that is not you, expect a grinding mill of “prove up” that you are their kind of borrower. If you have the stomach for that, you are rewarded with the lowest interest rates of a lifetime.

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Here is a primer of the residential market over the past 7 years:

It peaked in 2006 (median detached price in San Diego county was $622,000 in May 2006);

It troughed in 2009 (median price in March 2009 was $326,000);

It wallowed at the bottom — in terms of value and sales activity — for two years thereafter.

‘Clear’ the Market

Over the past two years, the market has struggled for traction. I call this market “clearing” because the distressed sales had to “clear” the market before viable transaction activity could begin. The median price today is $408,000.

That period is over and the market has evolved to predominantly nondistressed sales.

Now consumers face a different problem: shortages. Sales volume is up 12 percent this past year, according to the San Diego Association of Realtors, SDAR. This includes listing shortages — most homeowners are reluctant to list too early in the cycle recovery — as well as shortages caused by failure to replenish. There have been record low building permits sought since 2006.

Expect this year to be characterized by a continuation of supply shortage, both on the resale side and in the delivery of new homes. Prices have already escalated 9 percent during 2012 (SDAR figures). They will continue to rise.

At the same time long-term interest rates are at historical lows, hovering around 3 percent.

Availability Crisis

Over the next few years the home market will see continued price escalation, coupled with an availability crisis. This is a crisis that will go essentially unabated as a region that has mostly run out of developable land can no longer deliver single family homes in sufficient quantity. This will eventually be made up by the delivery of condominiums — but not for several more years.

The best current real property investment is rental. Rental rates have been on a strong upward run, partly stemming from the dearth of inventory (reflected in 95 percent plus occupancy rates), partly a result of so many “Gen Y” persons (now aged 20-32) now forming households, unwilling or unable to purchase a home. Expect rental rates to continue to be bid up.

Eventually expect a “re-peak” of price levels that peaked previously in 2006. I don’t know when, but perhaps sooner than you might think. It is inevitable unless our economy collapses, interest rates spike out of control or the homeowner interest deductible is dealt a fatal blow.

The latter concerns me.

One last cautionary note: Remember that all real estate is local. While some indices go beyond our region such as interest rates and tax issues, the real dynamics of the market — supply and demand — are defined locally. I would write a different forecast for noncoastal California markets that are not short on land, or the path to entitlement is easier or price base is substantially lower. That is a lot of places. Expect their recovery to take longer.

Gary H. London is president of The London Group Realty Advisors.

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