Friday, April 28, 2006

Buying in a Changing Market

The last few years have been tough on buyers. While interest rates remained low prices shot up dramatically in California and especially in our local South Bay. Inventory was limited and 15 -20 offers on a desirable property was the rule not the exception. If you liked a house so did twenty other buyers in your price range. Buyers learned to be quick and literally gave the seller anything demanded to get the winning bid. Many buyers went so far as to give up inspections and any contingency in order to secure a home.

Now that the market has slowed a bit many buyers see this as an opportunity to reverse the process and make sellers sweat it out. Newspapers have front page articles on foreclosures, slowing sales and gleefully point out that the boys at UCLA look to a huge crash in the housing market soon. But they have been predicting a crash for the last five years and so far it just hasn't happened.
Buyers are trying to figure out how big a discount they are going to get on the list price instead of how much over they will pay. So it is easy to understand why many buyers are shocked that their low offers are not being snapped up by sellers. Worse yet while sales are slowing prices are rising. Welcome to a normal market!

In a normal market prices don't drop 20% in a week. In a normal market prices will continue to rise just at a significantly slower pace. In a normal market a buyer will have a choice among a number of properties instead of one. In a normal market buyers get a chance to breathe before making a purchase. They can take a day or so and compare the features of property A as opposed to those of property B. .

The smart buyer will still get pre-qualified by a lender and have the funds necessary for the down payment readily available. If the buyer needs to sell an existing property they will get the property in market ready condition and list it with a contingency that the sale is subject to the purchase of a new home. In some instances a buyer will be able to purchase a new property with the contingency of closing escrow on his current home if it is priced right and in good shape.

Our area has not seen the influence of speculators on our market. Most of the price increases over the last 5 years have been due to low interest rates, high demand and very limited supply. Barring a major recession I don't think we will see huge price reductions. Fifteen years ago aerospace firms employed most of the residents of the South Bay. Boeing is the last airplane manufacturer in Southern California. Last week they may have rolled out their last planes and hardly anyone noticed or cared. In 1990 slowing government contracts brought massive layoffs in aerospace and thousands of South Bay residents found themselves without jobs and no prospects for new ones. The massive layoffs and the residual of the Savings and Loan debacle of the late 80's created a huge number of foreclosures. Banks had to get rid of their bad properties so many underpriced the market to get excessive inventory sold. It is unlikely we will see that type of scenario again.

Interest rates are still at historic lows. Even if rates rise to 8% that is still much lower then at any time in the last thirty years. As interest rates rise prices will stabilize and may fall a bit as it will be harder for many buyers to qualify at the higher rates. The market will adapt to changes by leveling prices.

What should a savvy buyer do? Smart buyers will buy a home that best fits their needs when they need a home. They will balance price and mortgage rates that fit their budget. Savvy buyers know that real estate is a long term investment and plan to hold their property for at least 5-7 years. There are too many people who want to live in Southern California and we haven't built enough homes to satisfy the needs of our population. The South Bay is built out and each time an older home is torn down and a new one built two things happen. The supply of inexpensive rental housing is diminished and prices on the new construction increase. Housing is a basic need. People need shelter. People will always get married, have children, get divorced, get raises or lose their jobs. People will get transferred or decide to move to a new area. Young people will want new larger homes and older adults may want smaller homes with lots of amenities.
Housing markets will change and the smart buyers will buy the best home they can afford. In Southern California that means they will almost always make money on their purchase. In 1952 when my family came to CA homes were $5,000-$10,000. The 1,500 square foot home my Dad built in 1953 for $5,500 is worth about $725,000 today with all the ups and down of the market. He would have been amazed.

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