The overriding consideration in the big California markets this year is how long you plan to be invested. If you’re a home builder or rehabber who will finish your project soon, if you’re a speculator who will flip an acquisition, if you plan to split a property into several rental units or condos, if - in other words - you have an investment horizon of only a couple of years, now is a great time to invest in California property.
On the other hand, if you’re a builder with a multi-year project, if you plan to buy and hold rental property, if you’re investing with the intention of selling out after five years or so, be very wary of getting into LA or San Diego or the Bay area right now.
And if you already hold property and are looking for a good time to sell, you should start the process.
It’s not so much that home prices are in danger of falling anytime soon - at Local Market Monitor we’re forecasting that prices in all California markets will rise over the next three years - but that the risk of prices peaking and then falling will increase sharply every year. You never know what will trigger the end of a boom - or exactly when - and that’s what many California markets are in right now.
The table of stats shows that much of the LA and Bay areas are already above the 15 percent threshold for over-pricing when you compare the current average home price with the ‘income’ price. Over-pricing gets serious above 30 percent and into the danger zone above 40 percent. With prices rising at 7 to 10 percent a year, that danger zone is only a couple of years away for Anaheim, Riverside-San Bernardino, and San Francisco.
Within the larger markets, Sacramento looks like the best bet right now - population and job growth are good, home prices aren’t yet too high, and the price/rent ratio at 21 is still reasonable. Vallejo-Fairfield looks most attractive in the Bay area, although we don’t yet know what effect the recent fires may have.
I will not dispute a short term correction in stock market or real estate. Saw two applications single 29 applied for $1M mortgage at WFC and a couple for $2M. They assume they can work for next 30 years with no income loss. When one loses a job that is the beginning of a domino effect. AOL, JDSU, InforSeek. memories linger.
Market price is based on general employment statistics. An individual may lose job and maybe forced to sell the house sometimes, but as long as there are good buyers, it won’t affect the market much.
When everyone has a million dollar mortgage, salary would increase so that future buyers can afford a 1.5M mortgage.
The San Diego market, and I suspect the rest of the state is not on fire like the bay area. Sure it may be up 8% but there are not many overbids. In fact many of the properties go for a little bit lower that list.
I hope you are not reading too much into market price. I think the market is overheated right now and we are due for a correction, probably in the next year or two.
