FORECAST - It looks like it's time to saddle up the horses and ride. The dramatic decline in the home prices has reduced the gap between the cost of renting and the cost of owning to levels typical of an active real estate market. At this writing, the number of single family homes and half plexes listed for sale in Yuba City has dropped to about 260 from a peak of over 500 in September of 2006. The number of months of inventory has dropped in the Yuba-Sutter area to 4.0 months and to 3.0 months in Yuba City. We expect that high levels of foreclosures will continue to drive the market through much of 2009. Prices are continuing to fall but declining prices are bringing more buyers to the market. Closed Yuba City sales have more than doubled as compared to this time last year. We expect that any further price declines will be met with increased buyer activity.

Here are some of the major factors we believe are now having or are likely to have an impact on the real estate market.

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 112,000 new housing units built in 2007. That is not nearly enough to meet the demand.

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

3. Investors can achieve positive cash flow with a 25% to 30% downpayment using 30 year, fixed rate financing.

4. Declining stock market prices have caused many investors to look at real estate as an alternative investment.

5. California has an extremely slow 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 turn around.

6. Government fees continue to increase 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 and levee repairs. Builders are even being charged a fee that goes into a special fund for “affordable” housing. Forcing builders to pay higher fees will squeeze their profits even further and discourages new home construction.

7. The Federal Reserve has done a good job managing interest rates. Interest rates the last five years have been at their lowest levels in at least 35 years.

8. Most knowledgeable sources expect that FEMA will put Yuba City into a designated flood zone within the next few years. This will further complicate meeting the housing needs of our growing population.

1. The economy is in a recession and many prospective buyers are unwilling purchase a home given the current economic uncertainty.

2. Renting, in most cases, is still cheaper than owning. Many renters are still of the mindset, why buy a home while prices are still declining?

3. Builders are still sitting on a large quantity of land. Any increases in home prices will likely result in more new home construction.

4. Problems in the 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.

A report in the Wall Street Journal (November 24, 2007) pointed to a Bank of America study that indicated that most of the foreclosures at that point were due to defaults on loans that should never have been made and were not, as had been widely reported in the news media, the result of adjustable interest rate mortgages (ARM's) "resetting." The BofA study went on to say that large numbers of ARM loans had started to reset but that the peak of the resetting activity would not take place until the second quarter of 2008.

In today's climate, lenders will not normally begin a foreclosure unless the borrower is at least six months behind in their payments. The foreclosure process is approximately four months long. Combined with the information from the Bank of America study, this would indicate that we will likely see high levels of foreclosure activity through the middle of 2009. This process may be hastened by borrowers defaulting on their payments before their loans reset.

6. Many lenders have been forced out of business. Most of the remaining lenders have tightened credit standards and have raised interest rates on their non-conventional loans. These tightening credit standards are keeping some prospective buyers out of the market.

While we continue to forecast lower home prices, we are definitely turning more bullish in our recommendations to home buyers. It will take a long time for real estate prices to turn around so there is no need to be in a rush. The most important factors continue to be these;

1. Find a home that meets your long term needs.
2. Find a home that you can afford using a fully amortized, fixed rate loan.

You can see the latest real estate market charts in our most recent Real Estate Market Newsletter.

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