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Tuesday, April 24, 2012

Don't be fooled! Home prices are not cheap and are not at a bottom!

Today's Case-Shiller 20 City Home Price Index release showed prices for houses dropped to the lowest level in almost a decade, dropping 0.8% from January, and 3.5% from February of 2011 to February of 2012.  Even more telling, of the 20 cities in the index, 16 were down and only 3 were up (1 was flat).  Keep in mind that prices continue to drop despite the lowest interest rate environment ever!  The 30-year fixed-rate mortgage is at an incredible 4.28% right now!

I looked back at the data for median home prices for California overall and for Santa Barbara County to compare where we were at the bottom of the last real estate implosion (1993 - 1996) and where we are today.  I also looked at comparisons with the peak of the current bubble, in 2007.  Here are the results:

For California overall:

Low (Feb. 1997):     $167,790     30-year FRM:     7.84%
Peak (May 2007):    $594,530     30-year FRM:     6.39%
Current (Mar 2012): $291,080     30-year FRM:     4.28%

For Santa Barbara County:

Low (Dec. 1994):     $169,939     30-year FRM:     9.35%
Peak (July 2007):      $878,124     30-year FRM:     6.85%
Current (Mar 2012): $405,380     30-year FRM:     4.28%

For California overall:

Median home prices are up 73.5% from the low of the last cycle (from February of 1997), and are down 51% from the recent peak (may 2007).

For Santa Barbara County:

Median home prices are up 138.5% from the low of the last cycle (from December of 1994), and are down 54% from the recent peak (July 2007).

What's my point?

The point is that, despite the massive declines we have already witnessed, real estate prices are still artificially high due to the historically low interest rate environment.  More to the point, because rates cannot stay this low forever (or for very much longer), we still have a lot of risk to the downside for real estate prices from current levels, despite the declines we have already seen.

While I do not expect interest rates to rise dramatically in a short period of time (that would crush the economy), I do expect them to rise over time, back to 7.5% to 8% area for the 30-year fixed-rate mortgage.  If this occurs over the coming 3-year period, (which is what I expect), the rising rate environment will put continuous pressure on real estate prices that will, at a minimum, prevent prices from increasing by any sizable amount.  That is the best case scenario!  It is much more likely to push prices down even further; substantially further for markets like Santa Barbara.

Here is what I expect to see:

For Santa Barbara, I see prices declining by at least another 30% from current levels, which would place us in the $280,000 area for the county, for median home prices (my target median home prices for Santa Barbara County is $250,000).  Keep in mind that the median home price bounces around quite a bit for Santa Barbara County, because we are relatively small, so sometimes we don't get that many sales.  A good example of this is the change from February to March - $345,000 in February, and $405,380 in March (I assure you that prices didn't jump by 17.5% from February to March).

Keep in mind that Santa Barbara County has the north county, which tends to have lower-priced properties, and the south county, which includes Santa Barbara (city) and Montecito.

One can argue about statistics and what they really mean "'til the cows come home," but at the end of the day, the trends are clearly showing declining prices.  Further, one cannot argue that rising interest rates are not going to have a negative impact on housing prices.  The only valid point of contention will be the degree to which rising rates impact prices.

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