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Real estate market forecast...


September 19, 2011


Cautious is a good word to describe our forecast for the rest of 2011 and into 2012. We think the market will see some small declines over the next year but we also think there are good values for homeowners and investors with a long term view of the market. Interest rates remain low and affordability is high.

Owner/occupants can purchase for about what it would cost to rent a similar home. Investors can see a 5% to 6% yield as compared to less than 1% for a bank CD. Both groups stand to benefit from significant upside potential as real estate values improve in the coming years.

One of the market's down sides is in California's budget problems. Closing an
estimated $28 billion dollar deficit will likely result in increased unemployment as the State scales back it's work force. Schools, cities, counties and many non-profit organizations will also be forced to make layoffs as State funding cuts are made to these entities. Companies that do business with the State may also be affected.

Another problem facing the market are the estimated 5 million borrowers nationwide that are already seriously delinquent. One estimate is that the number of foreclosures will increase about 20% over 2010.

Below is a more thorough list of the factors we believe are now having or are likely to have an impact on the real estate market.


Positive Market Factors
Negative Market Factors
1. Housing inventory numbers remain relatively stable. The supply in the Yuba-Sutter area is currently 2.7 months.

2. Sales activity remains relatively strong. Yuba City is seeing 50 to 70 single family home sales per month. The housing recession of the 1990's saw only 30 to 50 sales per month.

3. Renters can purchase homes with a small down payment using 30 year, fixed rate financing and experience total housing costs less than or not much more than the cost of renting.

4. Investors can achieve neutral cash flow with a 20% to 25% down payment using 30 year, fixed rate financing. Alternatively, they can receive positive cash flow in the 5% to 10% range on all cash purchases

5. Interest rates the last five years have been at their lowest levels in at least 40 years. Today's rate for a 30 year fixed rate loan is about 4.25% and the 15 year fixed rate is 3.25%.

6. Very low bank CD rates are causing many investors to look at real estate as an alternative investment.

AS THE ECONOMY IMPROVES, WE THINK THE NEXT SIX FACTORS WILL CAUSE A SIGNIFICANT INCREASE IN HOME PRICES.

7. Historically, California's population has increased by about 500,000 people per year. This results in between 230,000 and 250,000 new households being formed each year in California. According to figures from the California Building Industry Association, there were under 23,000 new single family housing starts in California in the last 12 months.

8. Approximately 85% of college graduates move back home after graduation according to a CNNMoney.com article from November 15, 2010. This represents a significant source of pent up demand for housing as the economy improves and graduates find jobs.

9. The Mortgage Bankers Association reported on 4/7/2010 that "1.2 million households were lost from 2005 to 2008, despite the population increase of 3.4 million..." explaining, in part, the sluggishness of the rental and housing market as financially strapped families move in with friends and relatives. This group represents another source of pent up housing demand when the economy recovers.

10. Nationwide, foreclosures began surging upwards in 2006 and 2007. FHA prohibits loans to people whose foreclosures are less than 3 years old. An ever increasing number of foreclosed homeowners are becoming eligible to purchase homes again.

11. California has an extremely cumbersome and expensive planning process. It takes about two to three years of studies and planning to get approval for a new subdivision. It won't be possible to create new building lots over night when the market starts to rebound.

12. Government fees remain high and will limit new home construction. These fees are being collected to pay for sewer and water connections, building permits, new parks, fire stations, police stations, schools, levee repairs and other community wide improvements. Builders are even being charged a fee that goes into a special fund for “affordable” housing. Forcing builders to pay high fees to cover a wide array of community wide improvements associated with a growing population discourages new home construction.
1. The State of California's budget problems will likely cause, among other things, layoffs at state, county and city agencies as well as school districts and colleges. Not only will these laid off workers not be buying homes, they will be buying less of everything thus exacerbating our economic recovery. This may not affect the real estate market directly as most who are facing potential layoffs have already pulled themselves out of the buying market.

2. Lenders' inventory of unsold homes has been increasing. Bloomberg reports that "In the first nine months of 2010 Fannie and Freddie took in 319,243 foreclosed properties and disposed of 210,105." There has been a steady stream of news stories indicating that banks are increasing the rate of foreclosures. Government and bank programs to modify existing loans have been largely unsuccessful.

3. Current home values have left large numbers of homeowners owing more than their home is worth. Many of these homeowners would like to sell but are waiting for prices to improve creating what is being referred to as "closet inventory." This supply of homes will likely moderate any price improvement as these homeowners begin selling when prices improve.

5. Massive Federal government deficit spending may lead to higher interest rates.

6. Those who have a recent foreclosure or short sale on their record will be out of the market for a significant period of time. FHA currently requires that three years must have elapsed since a foreclosure before buyers can contract to purchase another home.

7. Lending and appraisal standards have tightened dramatically in the last few years. These tightening credit standards are keeping some prospective buyers out of the market.


It seems to us that prices will continue to decline slightly in the near term because, in our view, negative market factors will have a larger impact on prices than the positive facotors will.

You can see the latest real estate market charts to get a bird's eye view of the Yuba City market.

So, is now a good time to buy or sell?

Here are links to some of our previous market forecasts:

March 7, 2011
November 24, 2009
December 4, 2008
December 6, 2007
October 23, 2007
Septemer 5, 2007


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quotes"I have nothing but great things to say about Lloyd and his wife, Tracy. They sold my home in four days and helped us get the home that we wanted. He followed up on all details above and beyond anything I expected. He has my highest recommendation.
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Contact

Lloyd Leighton Realtors

Address: 1212 Highland Ave.
Yuba City, CA 95991

Phone: (530) 671-6152
Fax: (530) 671-3904