Why have the prices of San Clemente real estate dropped substantially over the past year and since the top of the market in 2006?
Due to the anomally during the market boom when prices appreciated nearly 100%, prices are now adjusting for the inconsistent and nonsustainable growth of the first six years of the decade and towards a healthier market of stability where various income ranges can actually afford homes in the market through conventional financing. Rather than the majority of buyers being financed through exotic mortgages that were high risk, required little due diligence on the part of the lender for approval, and that the average consumer did not understand or could even afford, we are now on the opposite end of the risk spectrum and moving back towards normal markets. As a rule of thumb, the median income in a housing market should be able to at least afford to purchase an average condo, otherwise you have too few buyers and too many sellers that results in downward pressure on prices. This is fundamental economics of supply and demand that determine prices!
How do I determine the direction of prices in my market?
While there are no solid rules, months of supply is a solid indicator. 5-6 months of supply indicates a stable market, 7-8 months of supply indicates single digit depreciation, and 9-10 months indicates double digit depreciation. On the other hand, 3-4 months indicates single digit appreciation and 1-2 months means double digit appreciation as buyers are fighting over a smaller supply of homes, and therefore, pushing home values up. For April 2009, the inventory of San Clemente real estate cotinues to move back towards a stable market as current homes under contract are up 109% and new listings are down nearly 25%. A year ago, inventory was above 12 months.
Why should I buy now?
An investment no matter what, follows a typical nine stage cycle. Lets start in the middle of the cycle with optimism that turns into excitement and eventually becomes euphoria with all the hype. Euphoria (i.e. irrational excuberance) we have seen in the dot-com era of the late 90's and then in the real estate era of the early 2000's. We should all know by now that euphoria eventually results in a market downturn causing denial, then fear, panic, and ultimately despondency and depression (where we are in today's market). Nevertheless, this cycle returns back to optimism in the end and we begin the market cycle all over again. As a comparison to the real estate market and to illustrate our example of market cycles, lets look at Bank of America stock. Earlier this year with all the negative news about the market and in particular bank stocks, this stock hit a 52 week low of nearly $2.50 per share. While Bank of America represents one of the most solid banks in our country (after taking into account the subprime mess), there was complete panic about what was going on with the banking sector and the fundamentals of what makes a solid company or solid investment were forgotten by investors. Today, the same stock after some positive news in the market, is trading near $9 per share or up over 300% from its low (its 52 week high is in the $40 range). While you may be thinking I should have invested (this is not a stock recommendation), the point we are making is that the point of greatest opportunity to capitalize on investments is in the despondency and depression stage (i.e. today's market). Since this is today's market, the buyers who understand where we are in the cycle know now is the best time to invest in real estate. These buyers know if they retain a long-term investment focus they will realize great returns in the end, especially given the long-term outlook for California real estate of projected statewide population growth of nearly 12 million or 30% by 2030 with little coastal real estate left to develop. In the end this means a growth in demand for real estate and less supply that ultimately drives values up. Again, this is basic fundamental economics!
Is homeownership really a good way to build wealth?
Real estate on average has appreciated 8-9 percent per year in California or 4-5 nationally. While this is a decent return, the better way to evaluate your real estate investment is based on the amount of cash you put into your home and the return on this, also known as a return on equity or return on investment. For example, a buyer that puts $50,000 into a $500,000 home that appreciates conservatively 5% per year in California will see their home being valued at $525,000 over one year or an increase of $25,000 on their $50,000 invested. This represents a 50% return on equity in just one year. Stocks and bonds as a comparative on average generate returns of 7-12%, and therefore, this is why real estate is a great investment as it can be leveraged (i.e. financed). While transaction costs can be much higher for real estate and it is not as liquid (i.e. cannot be sold as quickly as stocks and bonds), a long-term focus on real estate investing will ultimately provide a well balanced portfolio with other investments in order to hedge your risks. In addition, owning real estate is one of the greatest tax savings that one can realize each and every year.
For more information on San Clemente real estate, please contact us for a free consultation.
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