Bearish Outlook
In the past five years we have seen an explosion in California real estate with values jumping on average a dramatic 22% a year. Since 1999, the median price for a California home has soared from $200,000 to a record $490,000 with trends continuing to show robust housing sales and climbing values.
In an up cycle like this, it is essential to understand that market psychology lags reality. Quite simply, fear-based decisions are pumping new life into a market that has topped out in terms of real demand and affordability.
In the past 18 months, a housing euphoria has set in, driving speculators to throw caution to the wind as they rush to get in to the market.
Aggressive financing programs and relaxed lending guidelines have significantly lowered entry barriers. People without a significant equity stake, down payment or the income to support the traditional debt to income ratio of roughly 1:3 are entering the real estate market in droves. Buyers now can leverage real estate with zero down, no income verification and a debt-to-income ratio in excess of 50% of their gross income.
Rising interest rates and tighter credit standards could turn the inevitable housing correction into a glut of foreclosures hastening a rapid fall in prices.
Affordability is another factor driving the ultimate fall in California real estate.
Even with record-low interest rates, the average monthly housing payment has hit an all time high. Only 13% of our population can afford the median priced home and the average buyer is $56,000 short of the funds needed for a housing purchase.
Such numbers shed light on why lenders are doing back-flips to come up with creative financing for buyers who conventional wisdom says can’t afford the home. And as long as banks foresee a demand in housing, they will continue to approve these loans because, for the time being, such loans are backed by collateral that continues to appreciate.
The only time housing payments (adjusted for inflation) ever approached this level was in 1982, when interest rates were at 19%.
The booming real estate market of the late 1970s and early 1980s was flattened. Today, any upward move in interest rates will further decrease the record-low affordability.
Risk ratchets up with leverage. Those entering the market this late in the cycle with no equity can end upside down very quickly. When the cyclical downturn begins, it will be more prolonged and severe because so many people will be forced out of their homes in foreclosure.
The state of the economy drives the demand for housing. The California economy is not booming. The job market is tenuous, at best. Another possible negative factor is the spike in oil.
We urge anyone who does not have a down payment of 10% or more and an ownership time horizon of seven to 10 years to avoid California real estate. There will be a great buying opportunity at substantially lower prices in the not-too-distant future.
Doug Fabian and Josh Lewis
(Fabian, of Huntington Beach, is editor of Successful Investing. Lewis is first vice president of Stearns Lending, Santa Ana.)
Mad(e) in USA
The U.S. is no longer the leader in many fields where we once reigned supreme. Electronics? Fuggetaboutit! Steel? No way! Manufacturing? Are you kidding?
The Chevrolet Silverado and GMC Sierra had the lowest ratings in crash tests for 2005 pickup trucks. In rollover tests, the Ford Ranger fared worst among pickups with four-wheel drive.
I recently drove a GM rental car in Hawaii and couldn’t believe what junk I was hauling my family around in! Didn’t they just shake up their management, again?
On TV the other night there was a major hoopla over the interior of the super new Airbus due out for passenger service next year. It’s gorgeous! Boeing just continues to roll out trouble.
What are we good at? Hiring illegal aliens at cut rates and making inferior products. Germany pays the highest factory wages in the world and still is able to compete just fine. The euro is skyrocketing against the dollar.
Schools in California, run by union-supported morons, try to convince us it’s the governor’s fault that Johnny (and his teacher) can’t read.
It also seems clear,U.S. companies can’t compete with onerous government restraints. To make matters worse, our business managers add salt to the wound, “cheating” in any way they can.
I’m fine. I turn 60 this year. But what about my 7-year-old boy (yeah, that’s right, he’s 7)? What kind of a country is he going to inherit? And what are we going to do about it?
Barry M. Gold
Irvine
