From 2008 to 2013 the residents of every city in Riverside County witnessed a “Foreclosure Armageddon.” Riverside was being dubbed the foreclosure capital of the world with San Bernardino right behind. There was a feeding frenzy of real estate gurus, house flippers, and reality TV shows showing people how to buy foreclosures and “flip that house”. There were bus tours for domestic and Chinese foreign investors driving through distressed neighborhoods in Riverside every day of the week to buy and flip real estate. Cash buyers were so dominant in the Riverside market that first time homebuyers were forced to stand on the sidelines and watch everything get bought up while home prices soared to new heights.
So now what? If over the long run house prices increase at a faster rate than the median household income or rents, it is very likely market correction in house prices will take place. The other option would be an increase in income or rents, which is highly unlikely to happen in our current national and local economic state. Many things have improved in the local and national economy but there is not enough economic activity and wage growth to support what has happened to real estate values in Riverside County and the rest of the state. Inventory is up and will continue to rise because many sellers are opportunistic, never listen to their real estate agents and are always late to the party. They should have listed their property a year ago. Now they will sell at the buyer’s price or not sell at all, and that is what is happening currently in Riverside.
The good news is that prices are still affordable for many people and if you are in the market to buy a home – a place to live and raise a family, then buy now – right now. What you may lose in value in a market correction you will gain in lower mortgage payments. You have to pay rent or a mortgage to live anywhere, so why not pay an affordable mortgage payment. But if you are speculating then you are asking for trouble — especially if you are new to investing.
The experience and successful speculators are essentially gone and you have less competition today to buy. In 2015, cash buyers will not dominate the market like they have in the past because there is still a lot of uncertainty in the real estate market and economy. Most buyers are looking for steals not deals.
The California Association of Realtors (CAR) is predicting that California real estate will increase 5.2% in 2015. Is CAR right? Real estate is going to get more expensive but the real question remains where in California will prices rise?
Remember real estate is a local phenomenon. What happens in Los Angeles or Orange Countydoes not necessarily translate to what is going to happen in Riverside. Also it depends on what a normal market looks like. Will we achieve equilibrium (equal sellers and buyers) and see prices stabilize? It’s possible but I think unlikely. First remember that current property values are not sustainable based on median income in Riverside County. This is why properties are staying on the market longer and we are seeing price adjustments happen more frequently. Everyone is waiting for the next big thing to happen to put us in another tailspin, i.e. congress behaving badly, rapidly rising interest rates, more changes in monetary policy, the congressional budget, the deficit or a terrorist attack on US soil or war. Investors like certainty.
Based on current home prices compared to the median household income in Riverside, we have already achieved unsustainable home price levels and a market correction is inevitable. How paradoxical was that time when prices were falling and values and interest rates were at an all time low and no one could buy because of impaired credit and no cash — especially for African Americans and Latinos. Now two to four years later when home prices and interest rates are higher, the very people who were priced out during the boom are shut out in the bust because they still do not have the cash, income, or the credit. It’s a macro economic problem.
In addition, when inventory hits it highest level in the future, all of the properties once purchased by hedge funds will return to the market. That has been the behavior of most Wall Street firms. They hold on to stocks, bonds and real estate trying to squeeze out the very last bit of profit, because of greed and get caught holding too much and react by dumping it all and putting the market in a panicked freefall.
Over the last 12 months ending October 2014, 28,529 foreclosures were completed according to CoreLogic’s State Foreclosure Data October report. California ranked number three behind Texas and Michigan with Michigan being number one with 45,356 completed foreclosures. California is tied for 5th place with Arizona as far as seriously delinquent mortgages at a rate of 2.1%. Alaska leads the pack at 1.6%. The serious delinquency rate gives us a glimpse into the future that foreclosures will continue to decline and ultimately become a rare event. Banks have learned the hard way that it is better to negotiate with the seller and approve a short sale than to beat down the seller with the legal action of a foreclosure proceeding.
Riverside only had 5,643 completed foreclosures over the same period of time which is nowhere near where it was during the crisis and comparatively speaking we are in the middle of the pack compared to other metropolitan areas.
Where are investors now? The smart ones are sitting on the sidelines waiting to see what happens next and buying performing and non-performing notes and commercial property. There are many not so smart investors still running the streets looking for great deals and you can see an occasional bus tour on the highway, but the banks have caught on and as a result there arelegalservicesno steals. A few good deals but their margins are thin and the risk is much higher. Many investors are buying houses at market price because they are great rentals and long term investment is at 8% to 12% ROI.
Property values, especially in Riverside are extremely affordable and profitable for cash investors because of high rents and high demand. This is not good news for first time homebuyers. The percentage of first time buyers in October remained at 29% for the fourth consecutive month and represents less than 30% of buyers in 18 of the past 19 months according to Yun Lawrence, Chief Economist for NAR. This is the lowest level for first time homebuyers in almost 30 years.
How is this possible with an improving job market and low interest rates? How is it possible in Riverside which in the minds of many is the last stop to affordability — being one hour from just about anything else you need in life that you can’t find in Riverside?
It is possible because we are still in recovery. So what is coming down the road for Riverside? Not much. There is new construction but not enough, and new home construction will not pick up if builders have to compete with too many resale’s coming on the market and increase foreclosure activity which is a possibility. There is enough stock right now to get into a resale or new sale and interest rates are still low.
What are buyers waiting for? Another Foreclosure Armageddon? I hope not. The power to buy is now.