When I talk to people about California real estate prices and what their opinion is of the market I get a few typical answers.
– The California market is going to be great in the long run. It always goes up in value.
– California real estate is going to be great again, people will move here because it’s sunny.
– California is at the bottom of the market so it’s time to get in now!
The problem is that most people in California, heck, most people around the world obtain these types of opinions based on what someone else tells them or they are strictly emotionally based. We all get information like that in one way shape or form but how do you know what is really going on and what is brainwashing. You look at the data! Well here is some of the information I see coming down the funnel to make California real estate prices drop once again.
(1) I speak to multiple real estate investors in California daily and they are telling me they can “feel” the pricing in the market declining. The reason they feel this is because it is taking them 2.5 buyers to actually get a property closed, the comparable sales when they bought the property are different 3 – 6 months later when they are going to sell the property to the end buyer and appraisals are not coming back from the banks accurately.
(2) In California we see the most option arm loans coming due through 2012. Option arm loans are those loans that adjust after 3 – 5 years to the current market rate and continue to adjust going forward. Things are great right now when the rates adjust lower than the 3 – 5 year fixed rates. People will have lower rates and their payments will be lower. However, when the U.S. government loses control over rates and the option arm loan rates rise, homeowner’s payments are going to skyrocket. When that happens and the homeowners are already under water by $200,000 because their loan is greater than the market value of the home there are going to be massive strategic defaults. That coupled with knowledge that the banks are stealing from the public, fraudulently signing foreclosure documents can be a receipt for disaster.
(3) Median income levels across the U.S. are not rising with inflation but are staying steady if not declining. That means that people will have much less disposable income, and can afford less, as the middle class and poor are squeezed by the rising cost of living. In states like California, the historical median house price to historical median income is 200%. Right now the historical median house price is 300% of income which means prices have to come down to historical standards (a 30% drop) in order for them to become affordable. The only reason the prices are still as high as they are is because of the governments’ quantitative easing programs and artificially keeping the rates low making them more affordable. This is just another way to bail out the banks and have Americans pay more for a property than they are worth.
(4) 40% of the GDP comes from California, Texas, New York, Florida, and Illinois. California accounts for 12% of GDP and has an unemployment rate above 12%, the third highest in the nation. If these states lose more jobs, which is almost inevitable given how much financial trouble those states Municipalities are in, then the U.S. income will go down significantly hurting growth even further.
(5) If you look at the California economy you will see major economic challenges. The California municipality is way over leveraged and is close to going under. There is over a $20 Billion dollar gap in the California budget, it’s an unfriendly business state, tax rates are rising, it’s a hugely volatile real estate market and it’s still over valued compared to the median income.
The point is to invest in markets that are undervalued, not overvalued if you plan on investing for the long run. If you are flipping in California you had better get something at 65% of the market value in order to have the proper downside protection. And unless you are a professional real estate investor with multiple contacts and can act extremely quickly (within hours) you will not be able to pick a property up in California for that type of price. I personally invest in Memphis, Tennessee one of the most undervalued and affordable places to buy in the U.S. It has great economic indicators and cash flows like crazy based on the amazing rent to price ratios there.
Invest where it makes financial and economic sense, not based on emotion.