Where’s The Bottom? The Prophet Speaks.
As prices in greater Sacramento (you know, the whole USA) continue to fall, naturally everyone wants to know where the bottom is.
I’ve been saying for some time now that we’ll reach the bottom of the real estate market on May 20th, 2009 at 10:20 AM. Actually, I’m not exactly sure. It might be 10:15 if all goes well.
I am the eyes of Johnstradamus, and all your ways are known to me.
No, but seriously, we’re all curious. Purva Brown posted a very interesting article to The Sacramento Real Estate Gal recently discussing Alan Greenspan’s recent prediction that the real estate market will begin to rebound in 2009. (Hey look, Alan agrees with me!) In discussing the article, Purva made the point that anecdotally we’re seeing some increases in demand.
I would go one step further to say that depending on the area, the pent up demand is not anecdotal at all, it’s quite real and measurable. The unit volume numbers tell the story. Elk Grove unit volume is up about 100% in April. In East Florin, 95828 and 95829, unit volume is up 172% from last year. Even in Roseville, where the price declines have been less precipitous, volume is up some 40% from April to April.
I believe we’ll continue to see increased demand as time goes on, as long as interest remains reasonably low. In one respect this is a simple manifestation of the demand curve in action. As price goes down, demand goes up. Another way to look at the potential for real estate prices to reach equilibrium was one that Sean O’Toole recently reminded us of in his excellent post Death Spiral? How to Find the Bottom in Your Market. Sean’s point is one that I’ve believed for many months, that as more and more properties begin to offer positive cash flow, we’ll reach an equilibrium point. This will be true even if Option ARMs continue to reset and cause additional foreclosures, and and there’s no shortage of articles on the bear side are predicting that they will. See for example this article in Slate and this evaluation of the ARM Reset Problem. Of course as Sean points out, you still have to predict what cap rate is reasonable for a given area to reach equilibrium. With this in mind, those of you who may want to argue for a different recovery date than Johnstradamus predicts may easily be able to prove it using no more than a keyboard and a slide rule.
Don’t get your fingers caught.
I admit I was pretty shaken when I first saw the ARM resets and Option ARM recasts lasting into 2011, but one thing that’s different about these resets will be that this “second wave” is not composed primarily of sub-prime borrowers, as I understand it. So although it’s cause for concern, let’s remember that sub-prime borrowers by definition should have a higher default rate. I wouldn’t be surprised to see more foreclosures in El Dorado and Placer County relative to Sacramento County as this unfolds, but that’s strictly a hunch.
What’s really encouraging to me is to see such an increase in demand in Sacramento County already, even though the numbers for rentals in areas like 95828 and 95829 still didn’t impress me as all that wonderful. I suspect that most of these buyers are not investors, but first time buyers who are feeling like a home is now within their grasp. Beyond that, however, I believe that if we ever get to the point where you can routinely get $200 per month on a single family with reasonable assumptions about expenses and vacancies, we’re going to get to a point where it won’t matter how many foreclosures get dumped on the market — enough investors will scoop them up that prices will reach an equilibrium.
