I've been looking 1 and 2 bedroom condos in Southern California, specifically north and south orange county for the last 3 months. In the Inland Empire prices have dropped incredibly low while Orange and Los Angeles Counties are stubbornly holding on to their price levels but still dropping nonetheless. Florida, Arizona and Nevada are dirt cheap as well with Vegas being the epicenter of the subprime fiasco. Today I'll be using data from Orange County, CA.
Rates today on a 30 year conventional are close to 4.5%. In 1997 the index rate was close to 7.5%, basically 300 basis points higher making the cost of money higher than it is today. 1997 is important because it was the year after that when interest rates began their 13 year decline.
Announcement Date Index Month Index Value
28-Jan-98 Dec-97 7.26
24-Dec-97 Nov-97 7.34
26-Nov-97 Oct-97 7.37
28-Oct-97 Sep-97 7.46
25-Sep-97 Aug-97 7.47
26-Aug-97 Jul-97 7.52
28-Jul-97 Jun-97 7.67
26-Jun-97 May-97 7.75
28-May-97 Apr-97 7.73
25-Apr-97 Mar-97 7.61
26-Mar-97 Feb-97 7.53
26-Feb-97 Jan-97 7.55
Subject home: 8636 East Sugarloaf Peak Road #M, Orange CA 92869
This 1 bedroom 1 bath 740 sq ft condo is currently selling for $160,000.00. which a buyer could probably get for 150k after a bit of negotiation. With a 10% down payment of 15k the note will be 135k at 4.5 percent rates. Monthly payment equals $684.03 with $150 property taxes and $50 insurance. Total monthly cost is $864 per month. This same condo will rent for $1200 per month therefore based on market rents this condo is a screaming buy as the owner will also get a interest mortgage tax deduction at the end of the year close to 6k, or $500 per month.
Now lets look at the price history of this little bugger:
04/26/2004 Sold view details $298,000 Public records Public records
06/30/2000 Sold view details $136,000 Public records Public records
09/15/1997 Sold view details $86,000 Public records Public records
From 86k in 1997 to a bubbly 300k in 2004 all the way back to 150k, possibly lower. A nice 50% drop in the middle of Orange County. However the 1997 price is still incredibly lower than it is today. A 76k loan in 1997 (10k down deposit) with 7.5 percent rates would cost $531.40, or $150 less than current prices. Property taxes would be $89 per month with a bit cheaper insurance. Again, a side by side comparison:
150,000 note with 4.5% rates = $684
property taxes $150 per month
76,000 note with 7.5% rates = $531
property taxes $90 per month
So prices are close to their 1997 levels in real terms with the above example showing that a 2011 condo with current rates is 34% more expensive than in 1997. Factor in 3% annual inflation (stated by the gov) and on a inflation adjusted basis the price is the same. A big factor to consider is all the millions of people that are getting foreclosed on their mid level homes that will be downshifting to these 1 or 2 bedroom places. Prices on 2 bedroom condos have fallen a similar amount as well.
So is there a bottom in low end housing? I would say that we are close with a possible 15% reduction in price with rates staying in the low fours. The strong evidence for a bottom in this area of housing is low apartment vacancy rates that are pushing rents higher. This same condo rents for at least $1200 per month. Just look at craigslist and see market comparisons.
With so many graduates coming out with student loan debt, their ability to purchase more expensive homes will be diminished. Thus, those that do decide to buy will be looking in the lower end market. In fact, many will not be able to afford at all and will be renters keeping the low end rental market flush will supply for years to come. Finally we have millions of boomers that will be selling their homes in the attempt to downsize and take what little equity they have left for retirement. All these headwinds point to a bottom in low end housing, plus or minus 10%. There is a possibility that rates go even lower if we follow the Japanese with their 1.7% 10 year rates. However, Japan has enjoyed a high trade surplus and an even higher savings rate with most of Japanese government debt held by Japanese while the US has $600 billion trade deficits and a lower savings rate with much of the debt held by foreigners.
On balance prices have fallen to below market rents with generational lows in interest rates. If your finances allow for it now may be a good time to get in the low end housing market.
Thoughts on this are welcome.