back to the future – 2003

Well in just a couple short months we have gone from 2004 prices back to 2003 prices. Homes are consistently selling in the mid to high 300s in Eastvale with a few on the very low end going for the low 300s. This my friends is 2003 pricing when the Providence Ranch section of the neighbourhood was filling in and the Home Depot was opening signalling the arrival of Eastvale Gateway and all the amenities that this area sorely lacked prior to that. It is also coincidentally when I purchased my house so I am now on the precipice of real house value decline. It feels crappy! Just a couple years ago when things were slowing down and the hot market was losing its steam I bought in to the talk about how it would just sort of level off or maybe go down 10%. Well reality sucks! I’ve read that a good rough measure of a home’s affordability compared to local rents is the following. Take the rent you’d pay per year (monthly rent x 12) and then times it by 15. That is a nice rough estimate of what the same house should be somewhat reasonably purchased for. Rents seem to be stable in the 2000-3000 range in Eastvale depending on the size of the house. Let’s run the numbers for rents of 2000, 2500 and 3000.

$2000/mo rent x 12 x 15 = $360,000

$2500/mo rent x 12 x 15 = $450,000

$3000/mo rent x 12 x 15 = $540,000

Since most homes are being sold closer to 360,000 but many rents are above $2000 it looks like what I expected in terms of an overcorrection is occuring in earnest. Here are the possible reasons:

1) Lack of availability jumbo financing (>$417,000 loan amount) as well as much higher rates when you can find it (approx. a full percentage point higher)
2) Out of control gas prices making far flung exurbs like Eastvale without much local employment base less desirable places to live and thus not as valuable  (by the way the Valero on 6th and Hamner in norco is consistenly the cheapest in the area but BRING CASH to get the better price. Ralphs and Vons have a monopoly on gas up in Eastvale proper so they are always about 5-10cents more per gallon). To check current prices go to Gas Buddy. Oil prices may bounce up and down but the days of cheap gas are LONG GONE. Peak oil is finally making the headlines on mainstream media after years of people trying to raise the alarm.
3) Weakening employment picture (California is currently at 6.9% and more than a full percentage point above the national average due to the collapse of construction and related jobs)
4) An accelerating decline in home values in the OC may be leading some to keep renting and wait it out until the OC is “affordable”.
5) Lack of smaller more energy efficient homes in Eastvale. They built ’em big out here to attract buyers but in many ways that strategy may be backfiring in these frugal times….
6) People are just generally tapped out on debt and are unable to take on a house as they realize it is just not a great investment like everyone pumps it up to be not to mention the fact that we’re still in a declining market with no real clear end in sight and people don’t want to be knife-catchers. You might get a better ROI right now buying Indymac stock or day trading Fannie and Freddie!! In fact, the Inland Empire is the #1 riskiest real estate market in the entire US of A right now…

In the last downturn the IE registered 22 quarters of price declines between 1991-1996 and oh by the way the downturn in the early nineties was not anywhere near what we’re seeing now and we’re only 10 quarters into it.

What do you think is happening?
Are you sitting on the sidelines waiting for prices to fall further?
Is something else holding you back from purchasing a home right now?
What is your personal price point when you’ll jump in?


~ by razor on July 22, 2008.

4 Responses to “back to the future – 2003”

  1. I also bought in 2003 and am probably at break even right now.

    But if rents do hold then another 10% drop will definitely bring out the investors as renting will now be cash positive. So that should help stabilize prices. But the key is rents remaining at what they are. I know there was a recent report that unemployment in the IE is at 8% now so that may soon affect rents.

    President Bush also announced today that he will not veto the housing bill so there will be $3.9 billion used to purchase distressed properties, opportunity to refinance at a lower principal with an FHA loan for troubled homeowners, and a first time home buyer tax credit. So this bill should take some properties off the market, eliminate some future foreclosures and bring out more first time buyers sitting on the fence.

  2. As for rents I believe they will hold unless we see a really large spike in unemployment or prices get to a point where a bunch of the renters jump into homeownership. The reality is that all those people that got foreclosed on need to live somewhere and most of them are just renting now…

    As for the housing bill I am skeptical. Giving local governments $4bn to buy up distressed properties may or may not be a good thing. Few things to consider:

    1) local governments don’t have much experience in this area so how effectively will they do this?
    2) Will they pay the market price for properties or lowball and drive prices down even further? I didn’t see anything in the legislation that had guidelines for what they NEED or even SHOULD do.
    3) Most of the properties that are decent and are worth buying at the current discounted prices are being snapped up by investors and fence-sitters. Will the local governments be stuck with all the properties that nobody else wants? What the heck will they do with them? Again, local governments don’t usually rehab properties as part of their normal operations so I am skeptical as to their ability to pull this off. Also, who will do the rehabbing? This is a huge invitation for fraud/corruption at the local level as politicians and bureaucrats channel money to their buddies to do the work. Who is going to measure the quality of their work if at all? Without accountability and guidelines in the legislation, this is just going to be a massive waste of tax payer dollars which of course is no surprise. 🙂

  3. As for governments buying properties and then leasing them out, they can easily hire property management firms that do this. And finding a reputable property management company shouldn’t be too difficult. The government already runs public housing projects, although those aren’t necessarily a shining example of government programs. However, I too don’t feel comfortable with the government getting into the real estate business. Like you said, another opportunity for fraud.

  4. the fraud is one worry yes but just plain good old government mismanagement is even a bigger one!

    I hear ya on the property management front. There are lots of good companies out there. The problems are not absent though. I’ve seen property management use “their guys” to fix issues with the house and not get competitive bids and thus cost the landlord (the local govt in this case) more….

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