The near 20% slide in Valley median home prices in the last year – as of January, down $113,000 year-over-year to $500,000 - makes buying a home increasingly tempting to renters who would love to own their piece of the American dream. (The Los Angeles Daily News reports on the latest statistics.)
But the price decline is a double-edged sword. That which giveth can also taketh away – just ask any of the estimated 10% of Americans who bought into the dream since 2005 or so who believed prices were a one-way stairway to heaven. Now they are dismayed to find their homes are “underwater” - worth less than they paid for them (estimate by Economy.com according to Reuters).
As attractive as prices can now be (compared with the recent boom years, which seem like a distant dream), they are likely to fall even further. The question buyers have to ask themselves is: how much further? If I put 10% down on a $300,000 condo so that I have $30,000 equity, and prices slump another 10% over the next year or so, where is my equity? Well, gone….vanished.
What’s a buyer to do? First, think long and hard before writing an offer on any property without doing plenty of due diligence. Know the comps - the prices of comparable homes that have sold in the recent past - backwards and forwards; make sure those sales are from the last 90 days because market conditions are subject to change too quickly these days to place much confidence in older sales statistics. Several comps for each property can be found at the end of most Redfin listings under the “Nearby Similar Sales” banner; and Redfin’s median price statistics can be filtered to include only the last three months’ sales.
Second, focus on “distressed” properties, those whose sellers are under pressure to sell at reduced, often below-market prices. The sellers may be owners who are underwater (also known as upside-down), or who can no longer afford to pay a mortgage that has “reset” to a much higher rate. Usually, they’re both. These desperate folks are called “short sellers” and need the permission of their lender (bank or other lending institution) to accept an offer that is less than what they owe.
Short sales can be a buying opportunity, but are also known to be difficult and frustrating. Many would-be short sellers and buyers fail to complete a transaction that could save the property from foreclosure, often because lenders are behind the curve on local property values and don’t recognize an acceptable offer when they see it. So, the lender forecloses and ends up owning the property. It shows up on their ledger as “Real Estate, Owned.” And that is the last thing lenders want or need.
Now the lender has a portfolio of REO (Real Estate, Owned) homes and has to get them off their books. Typically, they market REO’s at discounts from 10% to 20% off market price . This can represent a real buying opportunity, if the deteriorating market doesn’t, over time, eat away the value of the property as much or more than the discount. When housing markets undergo major corrections, prices tend to fall over a period of years, not months. Redfin identifies both short sale and REO opportunities whenever that knowledge is available.
So, be careful. Many economists and housing experts who don’t have a financial stake in the market (unlike Realtors and Realtor associations) expect continued sharp falls in home prices, as much as 15 to 30% over coming years. As the old saw goes, “Be careful what you wish for [falling prices]….because you just may get it” – with a vengeance.