I used to be a big time BLOGGER on AR in 2006 and 2007. In both years, I made 2 blogs. (I was really dedicated to this blogging thing back then). This afternoon, I thought it would be interesting to look back and see what 2 stupid things did I post in 2006...... I guess I was not as stupid as I thought I was.......
(Few replied and the replies were not in agreement to my thoughts). It is kinda fun and a bit freaky to read this a few years later. I may not have been dead on......but I was pretty darn close.
Is the California market ready for a major correction? Yes, based on the market data that I am tracking. If the trend continues, 2007 will be the year that California and Arizona moves from a slow down in the real estate economy to a panic sell period that may last at least through mid 2008. If this does occur as anticipated, Austin's real estate economy will thrive as the movement is very strong from those relocating or vacating the bubble cities. This is a sad time for the bubble cities and an exciting time for the real estate economy of Austin, Texas.
I have mentioned for the last couple of years that the market in the major cities in California of San Diego, LA, San Francisco and San Jose will see a gradual decrease in demand followed by a very strong downturn. As typical in most downturns, the first year to year and a half a market sees the market slow down at a reasonable 5-10% in value. This is followed by a false flattening in the market. We have seen this flattening occur the latter part of '06 to the early part of '07 in California. The biggest mistake people make is to think that the correction is over, where, in reality, the second pricing drop is eminent.
The next stage is usually a sharp turn downwards followed by an aggressive downturn created by seller's who have either lost jobs or their homes are upside down with their mortgage. Here we should see an additional 10-20 decline in values, for an estimated downturn of 30% since the peak of the market in late '05. With many California buyers securing 100% financing or negative amortization financing, the down turn has the potential to be worse than many have projected.
Only time will tell, but my best estimate is that 2008 will the major downturn not seen since '91 to '93. This is merely a normal correction in a market that has exceeded the normal differential in values from other cities in the US over the last several decades. In reality, when you look at the past 10 years going into the down turn through '08, the California market will still show a very healthy increase. Those that have bought in the past 4 years will be affected greatly.
Having been a Californian, I visit California 2-3 times each year, and my latest trip in July was quite eye opening. Builders are now starting major incentive programs not seen in over a decade. Prices are dropping as anticipated, but not at the anticipated downturn predicted for next year. Many buyers and their agents are ignoring the trend and are still asking for prices grotesquely above the current market. This is typical of buyers that are substantially upside down with their mortgage or purchase price within the past few years. The prediction of a soft landing in California is not likely.
Soft landings are typical in the Midwest and northern US, but hard landing are more typical in the East and West coasts. On the other hand the East and West coasts tend to experience massive increases in values during the boom cycle. The landing is currently somewhat soft to moderate, but will turn to a fairly harsh landing in the coming year. The investors have fled the market 2 years ago and I do not anticipate their return until '09.
In comparison to Austin over the last several decades, California has ranged from around 1.5 to 2 times the median market value of Austin. For the last 5 years this number has been running from 3 to 3.5 times the Austin median market value. There will be a combination of an increase in the Austin market with a decrease in the California market. The long term normal differential should even out between '08 and '09. Mortgage program reconstruction, rising interest rates, and rising gas prices should cause the change to happen earlier than anticipated. Austin saw the panic sales in '01 to '03 while California was experience incredible growth in values. Naturally, the cycles of real estate come around; and, that is what we are all seeing.
Austin will continue to gain substantially from the continued downfall from the west coast markets until the equilibrium is reached once again, and a stabilization in the Austin market will be reached at that time. Sometime in '08 to '09 we will once again see investors flocking back to California to buy "deals" that will be created as a result of the California correction.
In the long run, both California and Austin will be incredible investment arenas in real estate as the world will not walk away from either location. Mind you I love California with all my heart and have just put an offer on a $2mm condominium in Coronado and am in final negotiations for less than half the so called market price. I completely believe that this will be back to a $3mm condo by 2010 or 2011, as condos just like it sold 2 years ago in excess of $3mm.
This is not negative news to California, but merely a reality of what the any cycle sees decade after decade. I was there to watch the fall of the summer of '90, and the panic of '91 and '92, watching my home drop 25% in one year. Hopefully we will not see any grand earthquakes over the next few years, as that will fuel the downfall. Many people are concerned of the negative news of the effects of global warming reducing the coastline causing further downfalls in pricing. I think that this is overly pessimistic thinking at this time. It is a serious concern, but I do not see the public creating a panic for at least one or two decades.
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