California Market Predictions 2009

If we thought 2008 was a rough year, we haven’t seen anything yet in 2009.  This was the general theme of the economic forecast presented by Bruce Norris as he presented his latest California Real Estate Market Update, Category 5 on January 31, 2009.

In 1997, Bruce told the real estate industry a great boom in price would occur. In 2006, Bruce told us the boom was over and there would now be a crash. While some thought his predictions were ludicrous, most have turned out to be conservative.  In the Category 5 report, Bruce went into great detail why 2009 will be the most volatile year California has seen since the Great Depression. With that volatility, will come the opportunity to gain great, permanent wealth.

Bruce has drawn on many economists, has read countless data, and studied past market trends to reach the conclusions he presented.  He mixed this with his own real life experience from being a real estate investor since the 1980’s.

Here are some of the highlights:

·        California will continue to experience price decreases in most areas until 2010

·        Unemployment may reach 12-13%

·        We will experience low interest rates for the next 12-24 months, followed by increasing interest rates that will reach double digits.

·        We will experience all time affordability of homes

·        California will continue to experience negative migration until 2010

·        A very tough recession, but not a depression

·        An amazing opportunity for some to gain life changing wealth

 

We aren’t even close to correcting the foreclosure problem that has let to a record number of California foreclosures.  With the rest of the sub prime loans, option arms and adjustable rate mortgages resetting in 2009 most home owners find themselves in a negative equity position.  This will leave very few options for the homeowner and will lead to many more foreclosures.  With prices continuing to decline, many more home owners on the fence about relieving themselves of their heavy burden of debt will contribute to the foreclosure numbers.  Areas hardest hit by continuing foreclosures and price decreases will be the high dessert, Riverside County, and San Bernardino County.  Los Angeles County, Orange County, and San Diego County will not be immune from the price decreases.  Though the last three haven’t been hit as hard yet, they will experience quite a bit of pain in 2009.  According to krunching.com, in Palmdale 63% of properties were in a negative equity position.  There were 110 REO properties listed on the MLS in December 2008, but 893 trustee sales in the same time.  So that means 783 foreclosures haven’t hit the market yet.  Compared to Oceanside where 32% of properties were in a negative equity position, 37 active REO properties and 155 total trustee sales.  Glendora had 15% of property in negative equity position, only 9 listed REO’s and 25 trustee sales.

            As the volume of foreclosures continues to flood the market, the ratio of home sales to trustee sales continues to be staggering.  In Southern California in 2008 there was a 95.8% ratio of trustee’s deeds to existing home sales, which means there were 170,000 trustee’s deeds and 177,507 existing home sales.

In Los Angeles County there was a 75.9% ratio of trustee’s deeds to existing home sales.  In Riverside County there was a 124.1% ratio of trustee deeds to existing home sales.  San Bernardino, 202.3%, Orange County 56%, Ventura 45.5%, San Diego 75.9%, Santa Barbara 61%.

            Until the ratios return to around 1997 levels, (29.7% for Southern California) we won’t see any stabilizing in the market.  And as volatility continues to dominate the market, expect unemployment to be on the rise.  According to the United States labor Department December 2004 had 111,060 initial claimants for unemployment.  November 2008 had 224,079.  With unemployment soaring to around 9% don’t be surprised if this doesn’t get to 13% before everything is over.  This will lead to a negative migration trend away from California for a few years as people seek jobs and homes.  This migration trend will begin to reverse in 2011 as prices will be at record affordability and may begin to increase.

            As our government has historically turned on the printing press to combat deflation, expect 2009 to have some stagflation (high inflation mixed with low economic growth) before the government can begin to pump money into the system.   This will create inflation, and the raising of interest rates will be necessary to combat hyper-inflation.  Expect low interest rates to continue another 12-24 months, but expect them to increase well into double digits.  Interestingly enough, Bruce predicts our next boom cycle around 2014 to 2019 will happen with double digit interest rates.  So with record affordability, interests can continue to rise without affecting the next California Comeback.

            The Norris Group recently purchased a 3 bed 2 bath house in Moreno Valley for $50,000.  The lender was owed $340,000.  This property could easily rent for $1,300.  .  It was a light fixer that needed $15,000-$20,000 to rehab.  Assuming a PITI loan of $70,000 with a 20% down payment at 7.25% for 30 years the monthly payment would be around $480.  These deals are becoming very common.  California will reach unprecedented affordability in the next two years.  Since California Association of Realtors has been keeping data, 1977 had an affordability ratio of 45%.  2005 saw our lowest level at 16%.  We will pass 45% affordability by 2010.  This will create an amazing opportunity to pick up cash flow rental properties.  For the experienced investor there will also be many rehab and resale opportunities as well as wholesale opportunities.  Though things are going to get worse before they get better, the negative news of the current economic conditions will also present amazing possibilities.