Wednesday, January 30, 2008

Why it is OK to Buy Now

Just as the stock market is volatile and subject to emotional whims, so too is our real estate market. By getting beyond the fear, to the basic economics of supply and demand, we will see that it is OK to buy now.

Our supply of homes for resale stands at 18,117. Using 2007 resales volume of 24,013 homes, we have a 9-month supply. But, new construction, condominium conversions, and building permits are down to 1/3 of where they were in 2004. With this reduction, part of 2007’s 6,368 new sales will likely be replaced by resales, chewing down supply.

Although foreclosures increased 3 ½ times since last year, they have only gone from 0.19% to 0.67%, still less than one percent. Without the emotional and media components they would have much less overall effect.

In 2000, average home ownership in the US was 67.5%. Current San Diego home ownership is 49.5%. Demand exists, we need affordability – our other housing crisis.

The median home price dropped to $430,000, just below April 2004 prices. Interest rates just reported by Freddie Mac are the lowest since March 2004. Simultaneously, family household income is estimated to have increased by over 5%. The net result is that housing affordability has come off its 9% and is estimated to be where it was in late 2003, early 2004 – somewhere north of 24% (according to the California Association of Realtors as of the third quarter 2007).

Finally, it comes down to relative cost. Buyers priced out of the market were forced to rent. Vacancy rates are down nearly half, to the 2.5% range. Rents are increasing 3-5% / year.

With prices and interest rates coming down and income and rents increasing, a tipping point is reached where for more and more people, it makes more sense to own. And, buyers have negotiation room now.

Despite fears of recession, our basic economy appears relatively stable. Unemployment rates have dropped for the fourth consecutive week. If the Federal Reserve Board drops interest rates another ½ point as expected, mortgage interest rates are likely to drop further. These things are helping to stabilize our real estate market. A $150 billion national economic stimulus package can’t hurt either.

The average homeowner in California lives in their home for seven years. This time horizon is long enough that small price declines will be wiped out. These people have the green light to buy now.

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