The numbers are in: California housing prices slipped during the first quarter of 2019, removing the doubts that the price curve is adjusting and we’re now in buyer’s market.
After flattening out last July, the house prices began to slowly slide in the fall. Some areas fared better than others since then, with a few gaining a bit in home values and home prices, while many more have seen a downward price adjustment of up to 20%, and it’s not done adjusting yet! The experts expect this downward price slide to last up to five years, so, according to that prediction, we have roughly another 4.5 years to go before the prices move up again.
So, what does this mean to us, though, if we are trying to buy, sell, or invest? Here is how it will affect you, depending on your side of the transaction.
You can look forward to more possibilities in negotiations and fewer bidding wars. With lower housing prices, there are more opportunities for home ownership. The present low mortgage rates make obtaining larger loans easier, which in turn opens up more property choices to new buyers and those looking to use the opportunity to relocate. More choices = less competition.
While ideally, everyone would love to buy “at the bottom of the curve,” which seems like where the most buyer-friendly prices can be obtained, that is not always possible or even preferable. Allow me to explain.
While we know that the home prices move up-and-down through the years, no one can predict for sure when the “absolute bottom” of housing market has been reached. The current trend is expected to last about 5 years before it adjusts up again, but this is an “educated guess,” as no industry expert can give us a guarantee that after any specific date the prices will being to move upward again.
By the time prices have “hit the bottom,” flattened out, and maybe even began to move up, most other buyers will know that as well, which very likely will convince them to move on the purchase they were postponing while waiting for the very best deal. The result of that, usually, is a bidding war, where several buyers will try to outbid each other, competing over the same property and pushing its price higher and higher.
If you prefer to skip the pressure of competition, buying before the market rebounds might be a better bet for you. You will have to catch your breathe and remember that yes, on paper, your home price may drop in the coming months, but the good news is that it will likely return to the previous level eventually. Historically, California homes have increased in value overall, even with the ups and downs our market has gone through.
When the market adjusts down as you list your home, your pricing strategy needs to take the downward curve into account. What this means is that, for example, if the comparable sales (“comps”) in your area suggest you price your home at $550,000 today, you need to remember that as the prices go further down within the next month or two, that number will look more and more inflated compared to future local averages. In a seller’s market we had a year or two ago, we could price a property “ahead” of the price curve (higher than today’s average), and, because most homes take about a month or more to sell, the market would catch up. Right now, in order to not lose the opportunity to sell at the best level, we have to look at the comps, and price a little below what today’s average would suggest, so when the market catches up in a few weeks, the home still looks affordable to the buyers in our price range and we have not priced ourselves out of a deal.
First of all, all bets are not off for house flippers just because the home prices are falling. However, with the downward-trending market, choosing properties that will provide enough appreciation after being repaired and brought up to local standards, as well as completing the work quickly and being able to put the property back on the market to capture the newly-created equity are key points to surviving and thriving. Alternatively, if you can afford to wait, buy and repair investment properties now, but do not sell them yet. Instead, consider renting them out temporarily, until the seller’s market returns and the prices trend upward once again.
This may be a great time for new investors to join the fun, especially if you are not ready to move lightning-fast on repairs, and might have to actually use the “rehab” property you are looking to flip as your primary residence while you work on it. The market may test your nerve a bit, as you will likely see the continued downward pricing trend for the next few years. However, if your goal is to move in, take your time with repairs, and list your fixer-upper in a few years after you’re done working on it, this way you could avoid feeling pressured to move faster than you’re ready, and you can sell when the seller’s market is back and can offer you higher returns on your investment.
Remember, each deal is unique, and you have to “run the numbers” on it to be sure the home will provide the kind of returns you are looking for, no matter what type of market we’re in. Preparing a “worst case scenario” seller’s net sheet calculation with your real estate professional can give you a quick idea on where you can expect to be financially “should the worst” happen, and if the deal will “run your account into red” or make you money.
Of course, if you are buying with the idea to rent the place out, you do not have to be too concerned with what the buying and selling market is doing. Your returns are tied to another dynamic, which has to do more with attractiveness of your property’s location, and how it compares to other available local rentals. Fix it well, price it competitively, and you should see good results. Using a professional property management service could take the headache out of paperwork, keep you up-to-date with the state and local area requirements, and help with figuring out what liability issues to be concerned about and how to manage the associated risks.
All in all, as I often tell my clients, “You don’t need a ‘better’ market; what you need is a winning strategy.”
Looking forward to helping you make 2019 your best year yet!
Marina Alkasas | Realtor® | Cal DRE License # 02070557 | Century 21 CARE
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