Interesting article in the U-T this week about certain neighborhoods holding up better than others in terms of price erosion.
Specifically, the article cited Solana Beach and coastal communities which saw an increase in median price last year, and questioned if they would be immune to the housing crisis.
While there’s no “certain” answer as to how well specific areas will hold up over time, there are clues.
First, high-end communities west of I-5 like Solana Beach and Del Mar have a sizable number of vacation or rental homes – and financing on these types of properties almost always required higher down payments, even before the credit crisis. People with a larger equity stake have more to lose in a downturn, and thus they are more inclined to hold out for a market recovery.
Second, it’s undeniable that price erosion has been driven by foreclosures. The more foreclosures, the more price erosion, the more foreclosures. It’s a vicious cycle. The higher-end communities have mostly avoided this spiral. Again, this is large part to the equity stake it took to initially get into these communities.
According to the US Census Bureau, between 1965 and 1995, the home ownership rate in America grew just two percent - from 62% to 64%. Between 1995 and 2005, however, the home ownership rate in America spiked from 64% to 69%, an annual rate of growth that was more than seven times the average of the preceding 30 years. There was only one way this could happen – the systematic loosening and removal of traditional underwriting guidelines.
What you see today is the fallout from that loosening of credit. Nationally, we are headed back toward that 62 - 64% benchmark that stood for so many years. But because the growth in home ownership was mostly at the lower end of the market, that’s where the greatest losses in value are taking place.
This entire conversation directs us back to the title of this posting – and that is that “All Real Estate is Local”. Understanding what’s happening in your neighborhood is vitally important, because discussing the “Southern California Real Estate Market” can mean 10 different things in 10 different neighborhoods.
But understanding the fundamental breakdown that caused our foreclosure crisis is critical to being able to make better decisions today. And knowing what factors are influencing activity in your neighborhood will give you a much better measuring stick of what is likely to happen in the future.
Specifically, the article cited Solana Beach and coastal communities which saw an increase in median price last year, and questioned if they would be immune to the housing crisis.
While there’s no “certain” answer as to how well specific areas will hold up over time, there are clues.
First, high-end communities west of I-5 like Solana Beach and Del Mar have a sizable number of vacation or rental homes – and financing on these types of properties almost always required higher down payments, even before the credit crisis. People with a larger equity stake have more to lose in a downturn, and thus they are more inclined to hold out for a market recovery.
Second, it’s undeniable that price erosion has been driven by foreclosures. The more foreclosures, the more price erosion, the more foreclosures. It’s a vicious cycle. The higher-end communities have mostly avoided this spiral. Again, this is large part to the equity stake it took to initially get into these communities.
According to the US Census Bureau, between 1965 and 1995, the home ownership rate in America grew just two percent - from 62% to 64%. Between 1995 and 2005, however, the home ownership rate in America spiked from 64% to 69%, an annual rate of growth that was more than seven times the average of the preceding 30 years. There was only one way this could happen – the systematic loosening and removal of traditional underwriting guidelines.
What you see today is the fallout from that loosening of credit. Nationally, we are headed back toward that 62 - 64% benchmark that stood for so many years. But because the growth in home ownership was mostly at the lower end of the market, that’s where the greatest losses in value are taking place.
This entire conversation directs us back to the title of this posting – and that is that “All Real Estate is Local”. Understanding what’s happening in your neighborhood is vitally important, because discussing the “Southern California Real Estate Market” can mean 10 different things in 10 different neighborhoods.
But understanding the fundamental breakdown that caused our foreclosure crisis is critical to being able to make better decisions today. And knowing what factors are influencing activity in your neighborhood will give you a much better measuring stick of what is likely to happen in the future.
