September 26, 2020 Breaking News, Latest News, and Videos

California Focus: Why State’s Home Prices Stay Up:

There’s a housing price “bubble” and it could burst at any time, some so-called financial experts have been saying for the last two years. But home and condominium prices keep climbing in California.

When interest rates rise, housing prices will drop because buyers will no longer be able to afford the monthly payments, states a longstanding financial “law.” But the Federal Reserve Board has virtually tripled interest rates in the last year and real estate prices stay up.

Why is housing — especially in California, where median prices are higher than anywhere else — defying the experts and their supposed laws?

Essentially, it’s because of another law: the law of supply and demand. Population in California has increased by more than 700,000 per year so far in this decade, despite a significant exodus of profit-takers who sell off their homes and take the money to other states. But fewer than 200,000 housing units per year — including single-family houses, apartments and condominiums — have been built each year in this state.

So demand stays high, pushed in large part by legal immigrants who have been the single most important force driving the population increases of the last ten years.

At the same time, investors dissatisfied with the stock market’s relatively flat performance of the last four years see real estate as a safe haven where corrupt corporate executives and inflated profit reports can’t victimize them, as happened to investors in companies like Adelphia Cable, Enron, Worldcom and Krispy Kreme doughnuts.

Nearly one in five of the homes sold during 2004 in cities like Redding, Merced, Madera, Visalia, Chico, Fresno and Bakersfield were bought as investments rather than primary residences. Many buyers in these inland areas where prevailing prices are much lower than in coastal regions are stock market refugees. Others are profit-takers from coastal counties who suddenly find themselves sitting atop a pile of cash after selling homes they have owned through years of massive price appreciation. Some buy two homes with their new wealth, one as a residence and another as an investment they hope will be safer and more lucrative than stocks and bonds.

When a large segment of the market can pay cash, mortgage rates suddenly become irrelevant and past “laws” of the housing market fly out the window. For those with cash from selling previous homes often drive the bidding and other prospective homeowners must match their offers or forget about home ownership.

Which means that the twin forces of fear and greed are the reasons prices here continue to climb in the face of factors that might ordinarily push them down.

Buyers with cash to invest want to make even more money, while buyers looking for a first home or wanting to move into a bigger and better one fear they must act quickly. Many have watched as coastal county prices zoomed high enough to force them into 150-mile commutes from inland areas they can still afford to coastal regions where they work.

This commuter phenomenon is one reason for the record building boom now underway in Central Valley counties like Madera, Merced and Modesto and the desert portions of San Bernardino and Riverside counties, where major highways make commuting to the Silicon Valley, Irvine and other high-priced areas possible.

At the same time, long drives and train rides eventually motivate many commuters to make whatever sacrifice it takes to live closer to their work. They then become bidders on real estate in the choice portions of Los Angeles, Orange, Santa Clara, Ventura, San Diego, Monterey, Marin, Alameda, Contra Costa and San Mateo counties, all of which have seen prices rise more than 20 percent over the last 18 months, despite rising interest rates.

What’s more, even buyers who stretch themselves to the limit for their next move are unlikely ever to default on the new higher payments. For one thing, down payments are often so high that buyers feel there is no way they can walk away from their houses, no matter how onerous the interest, tax and insurance bills may become.

This is reflected in new figures from the national Mortgage Bankers Association., which show delinquency rates in California at just 2.04 percent over the last five years of massive price increases, one-third the level in relatively low-priced Texas, where 6.8 percent of borrowers were behind on their payments.

All of which probably means that even if California’s coastal real estate price increases slow as the year goes on, chances are there will be no bursting bubbles. And inland prices likely will keep rising indefinitely, so long as the concurrent forces of immigration, greed and the fear of being left behind remain powerful.(For more information, go to the website of the California Association of Realtors, www.car.org)

in Uncategorized
Related Posts