It would appear from all major market indicators that our real estate market has entered into a slight market correction. This is in no way bad news at all.
What we need to realize is that real estate values actually peaked in most major markets in California around August 2006. We then witnessed a real estate value decline of approximately 20 percent by January 2008 and real estate values in most markets continued to decline and reached a low point in February 2011 which was a total loss of approximately 50 percent from the peak of the market. The government then stepped in and provided a tax credit incentive that helped boost the purchase market and also helped increase values slightly but the heavily loaded distressed inventory (REO – bank owned and short sales) caused that increase to diminish and the market stalled once again. By February 2012 the decline in home values adjusted to its lowest point bringing the total loss of equity in most major real estate markets to just a little less than 55 percent from its peak in August 2006.
The good news is that the decline in home values is over. What began to happen toward the end of 2012 is that, investors, first time buyers, move up buyers, and those who re-entered the market after losing their homes, started creating a home buying bonanza. With the rules of supply and demand being the guide, home values increased rather quickly by conservative estimates of 25 to 30 percent. This means we still have 20 to 25 percent of the overall loss to make up before we reach the peak values of mid-2006. We are all keenly aware that the job market is moving slower than we would like and the economy remains fragile but home values remain stable and poised for future growth.
The rules of supply and demand continue to rule the day and with a shortage of new construction, it won’t take the consumer long to figure out that prices are not dropping and the wheels are not falling off the bus as they were in 2008. In addition, normal buying patterns (job transfers, school year influence, and seasonal shifts) are allowing for a normal real estate cycle of buying and selling to occur. Sellers must face the facts that what a willing buyer will pay based on comparable sales prices are (in most cases) what will dictate or determine the value of their home as we move forward. Buyers on the other hand should not sit back and be idle as interest rates are probably not going to go down anytime soon and more potential homeowners are entering the market at a pretty quick pace.
One additional item to remember is that new home construction is on the rise in California and this means more jobs which in turn will drive up the need for more infrastructure and even more housing. All of this is good for the overall economy and good news for current homeowners and future homebuyers. There are always other factors (i.e. increased taxes, regulations and inflation) that can damper any economic and or housing recovery but the housing engine remains strong and even with this market correction it remains healthy and vibrant. From my perspective, this housing market correction is simply allowing for a balance in home values as it relates to the overall economic cycle and we are simply returning to a normal real estate market.
Mike Southwick is managing broker at Century 21 Select – El Dorado County.