My New Blog

What's next:

Well, there are some definite things happening and going to happen and you don't need a crystal ball to figure it out. But there are a couple over looked bits of info that might help you put the pieces together.

The first question I hear is "do you think home values will go up in the future?'. Often followed right on the heels by "how low will values go?" To get to an answer you have to know what factors impact prices and their direction.

To understand what will happen to your home we need to know the ingredient that go into making home values change. In the case of homes value going up, there are two prime factors...demand and income. Throughout much of the country the idea of demand has been the big pusher on increasing home values. Nothing wrong with that. But the other necessary ingredient is income. If your home price continues going up quickly, getting beyond the ability of income to manage, price at some point will stop going up (no income to support the increased outgo from mortgage payments) and start to drop off. That critical point was delayed under our recent run up because of the creative financing tools put into place to help folks get in to more expensive homes. Things like teaser rates and interest only payments and 40 year terms all benefited the consumer and delayed the reckoning that was on the horizon. We now see the horizon and it's as cold as an artic hug. You must have an increasing income base if you want an increasing home value.

The other question, how long will value  continue the downward spiral? It's then that another factor comes into play and that's rental income. Most people will pay more for a home over what they will pay to rent...particularly if they see the potential for an increase in value. But when the potential is limited or unsure most folks will not pay much more for a home than for a rental. There must be a balance between the two. So mortgage payments must come back inline with rental payments. Meaning values must come down on homes.

So what we're seeing now is values..and therefore mortgage payments, coming back in line with rents. Once that happens values will stabilize and have the potential to increase as incomes also go up. Our current problem is that the market factors got out of line and are now needing to adjust. That adjustment will be very hard on many people. And people will be affected differently depending on where they live. If you're in a strong growth area with a good income base you're going to be fine. If your in an out lying suburb or city, very distant from the main financial hub, you're probably in some trouble.

According to national estimates some areas will need to adjust as much as 30% to be in line with the rental market. One such area is the San Francisco Bay. Other areas include Sacramento, the central valley, and several inland areas in S. California.

With that said, is it a good time to be thinking of buying? Yes, if you're smart. One of the great sadness of this whole run up in values is the folks who bought at the top of the market just before the air was let out of the balloon. With real estate as with stocks you buy at the bottom of the market...that's where the values are. And that is now. And even with a potential for some drop off in the future, if you buy right and in the right area you can make a ton. A good agent and lender can make that happen.