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1. California's population increases by about 500,000 people per year. This results in between 230,000 and 250,000 new households being formed each year in California. There were only 64,000 housing/apartment units started in the first six months of 2007. That equates to about 130,000 new housing units a year which is not nearly enough to meet the demand.
2. Rental vacancies are declining in most major metropolitan areas in the western United States.
3. California has an extremely slow planning process. It takes about 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 turn around.
4. Government fees continue to increase and will limit new home construction. For example, the City of Yuba City recently enacted a new fee structure. When the new fees are fully implemented in a few years, total government fees will rise to about $70,000 to $75,000 per house. These fees are being collected to pay for sewer and water connections, building permits, new parks, fire stations, police stations, schools and levee repairs. Builders are even being charged a fee that goes into a special fund for “affordable” housing. While this seems high, many other communities charge higher fees than Yuba City and I hear no move to cut any of these fees. Forcing builders to pay higher fees will squeeze their profits even further and will limit new home construction.
5. The Federal Reserve has done a good job of creating an environment where mortgage interest rates have remained stable.
6. Some experts predict that a booming Chinese economy will generate enormous wealth and that much of this money will be invested in real estate in other Pacific Rim Countries. If this happens, it will be similar to what we saw in the early 1990's when the Japanese economy was surging.
7. The economy continues to grow at a modest pace. |
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1. Home sales remain lackluster and the supply of unsold homes in Yuba City is increasing. There is currently an 8.7 month supply of homes for sale in Yuba City and 10.1 month supply for the Yuba-Sutter area as a whole.
2. Builders are still sitting on a large quantity of land. History has shown that most builders will reduce prices in order to maintain sales volume in a declining real estate market. Expect a steady stream of new homes to be built in the near term while builders use up their existing land.
3. Many prospective buyers are choosing to rent instead of purchase. Their logic is simple. Why pay $2,000 a month or more in house payments to buy a home for $300,000 when they can rent the same home for about $1,300 per month while they watch home prices decline?
4. Current home prices are keeping most investors out of the market. An investor buying a $300,000 home and borrowing $240,000 will likely face a monthly $700 to $800 negative cash flow when the home is rented. That increases to about $2,000 a month between tenants.
5. Problems in the sub-prime sector of the home mortgage market do not appear to be over. Declining real estate values combined with home owners having problems making their payments will likely force even more homes onto the market either as short sales or foreclosures. However they start out, most of these will eventually end up as foreclosures since 90% of short sale attempts locally are unsuccessful.
6. According to some experts, the volume of some other types of loans known as "Alt A" and "Option Arm" loans was far greater than the volume of sub prime loans. Even with lower default rates, the total number of these loans defaulting could be greater than the number of sub prime loans that have or will default. According to these experts, we won't see the bulk of the defaults in the Alt A and Option Arm programs until the last quarter of 2008.
7. Many lenders have been forced out of business. Most of the remaining lenders are tightening credit standards and raising interest rates on their non-conventional loans. For instance, one lender recently announced that it will stop making "Stated Income" loans (sometimes referred to as "liar loans") to people whose income is based primarily on income that is reported on W-2 forms. Another lender has raised the rate it charges on "Jumbo" loans (loans that cannot be sold to Fannie Mae or Freddie Mac because they are over the $417,000 limit set by those institutions) to 9% plus two discount points (the same borrower could probably get a smaller, conventional loan at about 6.75% with no points). Tightening credit standards and higher interest rates will further dampen home sales.
8. Problems in the real estate sector may cause problems in the economy as a whole. When home prices were appreciating sharply, many homeowners were using the equity in their homes to pay for consumer spending. In fact, more of the foreclosures I have seen are related to loans that were used for refinancing consumer debt than they were for home purchases. Now, with declining home values, the refinance market has dried up. The manager of a local Les Scwab Tire store says that they are still selling plenty of tires but when home prices started falling, they noticed a real drop in the sale of high end accessories like fancy wheels and lift kits. Another friend that owns a Harley-Davidson dealership in the Sacramento area said that his business dropped noticeably when home prices started falling. If the economy goes into a recession and consumer income levels suffer, that will add a whole new dimension to problems in the housing sector. |
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