The 2011 San Diego Local Real Estate Market Update – 2011 Predictions and Expectations and Beyond!
2011 will be a year of change, that’s for sure, but the market overall is looking much more stable and consistent than that of the last couple years. The nation as a whole has been knocked around by the great recession and we are seeing the after effects from the most severe economic downturn in decades. That being said, this year will be one of more stability whereas last year was a tumultuous rollercoaster, not only for real estate, but for the greater economy as a whole.
I would love to say that this year will be the break out recovery year that everyone is hoping for, but the fundamentals point to the contrary. Depending on how you measure, there are anywhere from 15-25 Million people that are unemployed. There are 7+ Million households in some form of financial trouble and facing the possibility of foreclosure. Depending on how you measure, we are running a 14-55 TRILLION dollar deficit and we are creating money like crazy and buying back our own debt to gloss things over until things get better – it’s crazy. Notwithstanding the societal, environmental, and geopolitical issues that are impossible to ignore, you could basically say that we are living in the most fluctuating, fast-paced and most exciting time to be alive in human history. I would argue that never before in the history of our species has a single generation had the ability to enact such immense change both presently and well into the future. It’s safe to say that there is a lot going on in our world, and so much so that you need to rely on your trusted advisors more than ever, so I am pleased to be able to provide you with the best information and best service possible for all of your real estate needs.
Of the several negative issues mentioned above, there are an equal amount of positive developments that are occurring as well when it comes to local real estate. The last couple years have been difficult, but we are all doing our best to make our way through these challenging times. The three biggest barriers preventing a full-blown economic recovery are high unemployment, excess inventory, and people’s negative perception of the real estate market, in general. Ill addresses each of these separately.
Unemployment: Everyone talks about unemployment and it is a big deal because when a work-worthy person cannot find employment, the loss of that utility value is small, but when multiplied several million times for all those who are unemployed throughout the nation, it takes its toll on everyone to a considerable degree. Its eats away from GDP because that would-be worker is not making the money that leads to consumption, it takes the USA down a notch on the world scale in overall productivity, it takes away from tax revenue that is so badly needed by our government, and it has a damaging effect on the family unit when the breadwinner of a family cannot find work. Until jobs are placed by this excess workforce, we will continue to have problems. Ben Bernanke, the Chairman of the FED, has recently stated it will take 5 or more years to get to 5% unemployment, which most economists consider the “natural” rate (of unemployment). It’s good to see that USA today on a recent front page is touting that jobs are being created and we are making progress, unfortunately it is slower than everyone wants or expects. From a real estate perspective, the more people that are unemployed or on limited work schedules (furloughs), the fewer people there are that can actually qualify for a home loan. Last year alone 93% of all home purchases were done so using some sort of mortgage financing, so although it may seem that there are a lot of all-cash buyers out there, it’s quite the contrary, and this lack of buyer capacity will cause a reduction in overall demand, which will have a dampening effect on home values. We have seen this effect take shape over the past 18-24 months specifically, but the good news is that the worst is behind us.
Excess Inventory: We are in the midst of a massive turnover of real estate. This turnover was one that was thought to be an onslaught of foreclosed homes, but it hasn’t turned out to be that way. Banks are smart and if there is a shadow inventory of homes that are being withheld from the public, it is being released in a very controlled manner. After all, why would the banks release the entire foreclosed inventory at once? All that housing supply would just eat away at their bottom line. The opportunity cost of holding these foreclosed properties is greater than just fire-selling them away to get them off the books. There are a lot of myths out there regarding all those foreclosed homes and their relationship with the banks that own them. Just know that this is an issue that is far from over; in other words, the banks do own a considerable amount of REO (Real Estate Owned) property, and that these homes will become available at a controlled level over time until all the excess property is absorbed. Essentially, this is the best way to go about getting rid of all the excess property anyway. It’s good for the banks because they make more money, but at the same time it is good for current homeowners because values will remain stable, as well as being good for the economy in general.
Furthermore, 2011 will be the year of the short sale. On average, the bank will make 10-15% more by doing a short sale as opposed to foreclosing on a home. A short sale makes sense for a bank because the seller in a short sale works with their agent to find a buyer and all the bank needs to do is “push the button” and approve the deal. With a foreclosure, there are mounting holding costs, property taxes, eviction costs, repair costs and lawyer’s fees that the bank is responsible for, and when compared side by side, the short sale is the win-win for the bank and borrower alike. 2010 was a record year for foreclosures where over 1 million homes were taken over by the banks. Many experts predict that 2011 will be the absolute peak for foreclosures, and estimates are as high as 1.3 Million homes being taken over the banks. That being said, these experts are not taking into account all of these would-be foreclosures that will inevitably be sold as a short sale because in most cases, doing a short sale is considerably better than a foreclosure in terms of the overall effect on the financial and credit health of the seller/borrower. The more people doing a short sale, the quicker we can absorb the excess distressed inventory in the market, and because the federal government has rolled out attractive programs that entice cooperation for the bank and sellers in a successful short sale, this will add momentum making the short sale the most popular and viable go-to option to absorb inventory and make substantial inroads on the way to economic recovery. As a result, expect to see a consistent and substantial supply of short sale inventory for at least the next 18-24 months. the continuum