First Half of 2009
The debate boils on about slump, green shoots, recession and recovery. If this is a generational event, then we are facing generational challenges and generational opportunities. Every market move makes someone happy. While happiness may seem to be elusive in North County Real Estate, it sure beats being in Michigan. This is what’s happening in North County Real Estate Today.
Residential single family real estate has been criticized in the state run media over the past few years. Today’s low interest rates and low prices are attracting multiple offers on many properties priced at or below 300K. The headwinds in this category are appraisers and lenders. Appraisal values are all over the map and lenders are skittish. Federal rules and regulations are slowing down the sales process. Deals are routinely closing late. Half of the sales are distressed properties. Shortage of inventory is already an issue, and prices appear to be stabilizing.
More residential single family homes sold in the first half of 2009 as compared to the first half of 2008. This increase in sales was fueled by....... an average sales price of $290,000. Interestingly this average price reflected a 1% increase over the first quarter average price. Most of the buying activity is at or below $300,000. Inventory is thin across the price spectrum. New construction is at a standstill. We believe foreclosure properties will continue in our market into the first part of 2010. These foreclosures are the primary source of new inventory. Government mandates tend to interrupt the foreclosure process for periods of time. These mandates have only prolonged the foreclosure situation. Most buyers are well aware of how competitive this environment is for purchasing a home. This is a stable market with great upside in the next decade.
Price discovery is an important concept in real estate markets. When real estate markets seize up and falter, as NorthCounty did in 2006/08, current market values become clouded. Sellers take years to adjust their expectations while buyers sit on the sidelines waiting. Transactional velocity slows and pricing becomes a mystery. In NorthCounty the foreclosures came into our market, over the last couple of years, and defined the values in residential single family. There is a deep population of residential sales in NorthCounty so buyers and sellers have value clarity. More importantly lenders and appraisers have price clarity. Closed sales create price discovery which fuels confidence and clarity in the market place.
High end home sales have started the process of price discovery in NorthCounty. Big home sales on 1 to 5 acres have doubled over last year’s comparable period. With velocity and price discovery we are establishing a market bottom in this category. Demand is selective at the upper end and many of these homes are functionally challenged. The difficulty in obtaining jumbo loans also slows down this market. The healing process in the upper end will be longer then residential single family and more painful. The recovery process is underway in the market for these estate homes. It’s still all about price.
Raw acreage is just starting to show early signs of price discovery. In down cycles dirt tends to fall much lower, on a percentage bases, than improved properties. The primary reason for this discrepancy is that an improved property sells for below replacement cost so there is no appetite for buying and building. Years of acreage supply have been building up. There are some stirrings and some sellers are moving to get ahead of the curve. We are not there yet. We can see it coming.
Commercial real estate is overbuilt and oversupplied in most categories. The combination of a weak economy and many vacancies is not good for values. This market is years behind residential single family. There is no velocity or price discovery in commercial real estate today. Rents are falling and will fall further. It’s going to take a growing economy to get commercial real estate on track again. The weakest segment of commercial real estate is vacant land.
Our wine industry is surviving and actually doing fairly well with all things considered. Tasting room sales have been decent in 2009 but the summer started out slow. Wine grapes have firmed in price and Westside fruit will command strong dollars. Big wineries, that are major buyers of fruit in NorthCounty, are tentative. The real question hanging over the industry today is wine sales. The global wineries are very cautious. Our local fruit is getting good prices but fruit buyers are very conservative. Fruit supply appears to be in balance which would bode well if wine sales improve over the next few years.
Inflation seems to be viewed as an inevitable outcome of the government monies being pumped into our economy. Real Estate has always been viewed as a strong hedge against inflation. Today most Real Estate has been beaten down in price. If you can join historic low debt cost with low real estate values the hedge position and upside for return would seem to be generous. Inflation is a sinister and covert agent of monetary erosion. Real Estate will provide a competitive edge for those folks looking to survive and prosper in an inflationary environment.
Residential single family homes have found a bottom in NorthCounty. Higher end homes are close behind with dirt and commercial real estate bringing up a distant rear. This is what bottoms feel like. Bumpy and uncomfortable. Fortunes have been lost and new fortunes will be made. We are living in an economy dominated by fear. It’s a very selective market but the longer term prospects remain bright for NorthCounty.