In the depths of the recession in 2010 it was accepted knowledge that it would take decades for home prices to rebound back to their 2006 high levels.
With all the funny money that was available for every Tom, Dick and Harry to buy a home in 2006, prices went through the roof, and according to all the experts, were artificially inflated to a level that was unrealistic.
As 2015 came to an end, it's interesting to note that in the coastal regions of Southern California, once again our experts were wrong.
Home prices in West Los Angeles, South Bay and South Central area in 2006 averaged $621,411 and today they average $1,225,256, a staggering 97% more than 2006.
Home prices in the greater San Diego area in 2006 averaged $524,679, and today they average $844,396, 61% more than in 2006.
Home prices in the greater Orange County area in 2006 averaged $794,027, and today they average $1,052,880, 33% more than in 2006.
What is very interesting to note is that home prices in Southwest Riverside County in 2006 averaged $482,429 and today they average $401,704, 18% less than in 2006.
What does this data tell us?
Are coastal home prices once again overinflated or are the prices of homes in Southwest Riverside County still depressed? Who are the buyers in the coastal region? With these high prices they certainly aren't first time buyers.
The affordability of the homes in Southwest Riverside County compared to the coastal region is the greatest it has been in three decades. Why? Could it be the lack of first time buyers? If so, where did they go?
What happened to our first time buyers?
It is our opinion that home prices in the coastal region are overinflated and in Southwest Riverside County, home prices are still depressed. Our middle aged, our seniors, and foreign investors who can afford an expensive home, have been aggressively purchasing homes in the coastal regions because there is so little available land to develop. This increased demand for homes with limited supply has caused home prices to rise very rapidly in coastal markets. In addition, the tight credit has made it very difficult for the average American to buy a home. Consequently, most homes are being purchased by the affluent, either for cash or those who have a large down payment. This eliminates almost all of the first-time buyers.
On the other hand, Southwest Riverside County, which normally appeals to the first-time buyer and the younger family, has been sitting on the sidelines for a variety of reasons: Lack of a down payment; the FHA has lowered its lending limits; and their inability to get a loan to purchase a home because of tightening credit regulations are all contributing factors. Virtually all of those defined as the “millennium generation” of buyers have been living at home or living in apartments. They are not getting married and are busy paying off their student loans. As a result, they have not been buying homes as generations have in the past. When will this millennium generation become buyers is anyone's guess but when it happens "Katy bar the door!" because these buyers represent a significant amount of pent up demand.
Ever since we made the commitment to specialize in Southwest Riverside County, we have said the engine that drives this economy is affordable housing. That has never been more true than it is today. Historically speaking, the home prices in the coastal regions have been about 132% higher than home prices in the Inland Empire. It's been that difference that has made home purchasing affordable to the first time buyers and to those buyers that want to downsize. That gap has gone from 132% ($492,429 compared to $647,700) to 250% ($401,704 compared to approximately $1,040,000). You can draw your own conclusions from these facts.
We, at Rancon, remain very optimistic that with very little change in banks’ lending policies and the family formation that has continued to take place and is accelerating among millennials, home sales will explode and prices will rapidly increase a minimum of 18% to get us to at least the high water mark of 2006.
Together with our investors, Rancon has made great investments over the past decade. Of course, we would have preferred to see them all come to fruition sooner. We have patience and confidence, two important things to have in this business.
- Dan Stephenson