Monday, April 6, 2009
Has California Housing Hit Bottom Yet?
A friend of mine pointed me to this article suggesting that California real estate may have reached a bottom and is in the middle of a recovery. The article sites busy real estate agent, dwindling housing supplies and the return of the investor. So do I think we are close to a housing bottom?
In a word, no. The article does not argue that housing prices are not still falling. In fact, it clearly says that housing prices are still declining. So what is going on here? There is a simple explanation of this. No asset goes straight down. When prices decline, rational buyers who were sitting on the sideline will move in. There are lots of people in the world that have no patience. We are a society full of people who need to have what they want immediately. Just like we had a stock rally in December, and then a precipitous drop in February and March, housing will in all likelihood have a rebound before it goes lower. Nothing ever rises or falls in a straight line.
But this rebound, if you can call it a rebound, does not mean we are near a bottom. We will spend years, and I'm not exaggerating, at a very low level for housing. Keep in mind, if you threw out the 70's and the early part of this decade, housing prices have barely beat inflation in the last 100 years. So even if there is a "rebound" around the corner, we are, at best, going to be at a very low price level for a very long time. I make much more than the average person. When you combine my fiancée’s income, which is also above average, I get pretty close to being in the top few percent of wage earning families in America. However, 3x or 4x of that would still only by me an average house in my neighborhood. How absurd is that? A household that makes about three or four times what an average household makes can only afford the average house? We still have a ways to go.
I want to buy a house. I am the perfect buyer that everyone is waiting to come into this market, and I am staying out. I have a friend in San Francisco who is exactly like me. Wants to buy, has the money, but has the patience to wait it out. These are the people who need to come into the market. That will require at least another 20% down from here, and more likely another 30%. So no, California has not reached a bottom.