Up to Date Real Estate News from the Experts in Urban Living

Up to Date Real Estate News from the Experts in Urban Living March, 2013

Mistaking rebound for bubble

Source: OC Register

Yes, we now hear pundits claiming the recent advances in home prices should be viewed with steep skepticism, as in the minds of these purported experts these price increases may already be overdone. I’m all for a healthy debate. But some of these comments feel more like sour grapes from a bunch of market observers who not too long ago thought prices had further to fall.

Is there a chance that home prices may have gotten ahead of themselves in a few markets? Perhaps. Could prices plummet if the nation’s economy turns south, or if interest rates were to spike? Well, that’s not a reasonable bet – but it makes for fodder for the professional worrier. Housing got overdone in the middle of the last decade and got fair economic punishment. Deep discounting, just as the economic gods ordered, now creates the demand that’s got housing percolating once again. Still, today’s conditions – especially the lending tactics – are far more subdued than the crazy days of the past. But I wanted to back up my gut with some numbers, so it was time for my trusty spreadsheet – using Orange County as a proxy for this bubble debate, since we’ve had a few real estate bubbles here.

First, a history lesson, using our previous real estate debacle as an economic road map. If you forgot – and perhaps your mind is blocking out the memory – the 1990s were pretty stinky around these parts for real estate. Using Data-Quick’s all-residence median selling price, the Orange County housing market peaked in July 1991 at $220,000. If you recall, a mild national economic downturn was stewing at the time, and many areas like Orange County were starting to deal with defense cuts as the Cold War waned. It translated to a housing disaster.

It took 56 months for local home-selling prices to hit their cyclical bottom in this tailspin, at $184,000 in March 1996. That was a drop of 16.4 percent from the peak. From this trough, it took 26 more months for the local median selling price to better the old market pinnacle. All told, Orange County’s housing market took 82 months to go from one peak to another. Yes, almost seven years with home prices – on net – unchanged!

Now, let’s look at our current real estate cycle. Based on Data-Quick’s median, the Orange County median selling price peaked in June 2007 at $645,000. (Note that from the previous cycle’s 1996 bottom to the latest bit of euphoria, local home prices appreciated for slightly more than a decade at an eye-catching compounded annualized rate of 11.6 percent.) A near-collapse of the world’s financial markets – a drop fueled, in part, by real estate excesses around the globe and risky loan products pioneered in Orange County – helped push Orange County home prices down to their most recent cyclical bottom of $370,000 in January 2009.

That was a 43 percent drop in 19 months. A breathtaking dip, by any measurement. In the four years since the bottom, Orange County prices have risen 24 percent to January’s median selling price of $460,000. That’s only an annualized rate of recovery of 5.6 percent.

Remember: In the 1990s, it took almost seven years to regain the losses – at least, as measured by Data-Quick’s median – from that era’s housing mess.

Our latest wild ride will turn 6 years old in June, dating back to the 2007 pricing peak. So far, in 66 months, only one-third of the price drop – as measured by Data-Quick – has been restored. We’re running quite behind the rebound pace from the previous real estate darkness of the 1990s. That makes it hard to see recent gains as signs of any bubble-like patterns – especially in the broader picture of a modestly improving broader economy.

I’m not saying that future gains are by any means guaranteed or that the local housing market isn’t vulnerable to shocks, especially large economic ones. But in the broadest sense, Orange County’s housing market is still in the early recovery stage. Bubble? Hardly!

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Financial Update by Maurice

Mortgage rates increased a touch this week as MBS (Mortgage Backed Securities) are selling at higher yields to attract buyers. As the stock market increases, investors leave the bond market which forces sellers to push rates higher to attract buyers. This pushes mortgage rates higher as well.

Let’s look again at the difference in payments for a 1/2% move in rate.

$400,000 Loan Amount
30 Year Fixed
3.5% Rate (3.62 APR)
$1796 Payment

$400,000 Loan Amount
30 Year Fixed
4% Rate (4.13 APR)
$1909 Payment

The savings is $113 per month for the same loan amount. This in itself is a great reason for buyers to get into a home before rates rise (which they surely will).

Meanwhile, rates are super low so take advantage of the great opportunities that are upon us.

I like the quote by Steven Woodhull who said “You’ve got a lot of choices. If getting out of bed in the morning is a chore and you’re not smiling on a regular basis, try another choice.”

Based in Orange County, California, The Soussé Group is ranked number one in total sales in Irvine, California, 92612. Topped $140 million in sales in 2012, 2011, 2010, 2009, 2008, 2007 alone with 438 completed transactions and have successfully risen to the top 50 along the 25,000 agents in Orange County.
Kerry and Maurice Soussé
Realtor / Broker
The Soussé Group
HÔM Real Estate Group
1200 Newport Center Drive, Suite 100
Newport Beach, CA 92660
Direct Line: (714) 412-9014
Direct Line: (714) 412-8512
Direct Fax : (949) 640-7606
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