Another 20% Downward Correction In Store for OC Housing Prices

Many factors go into what moves a potential homebuyer to buy. At the top of the list is the right price. A recent article by Jonathan Lansner provides some insight into what the “right price” is for a home in Orange County (“He wasn’t wrong in ’02, just early”).

For some decades now, the median price for one Orange County house could pay for multiple homes in other parts of the country. As Lansner states, this ratio of Orange 2purple-red-arrow.jpgCounty home prices to the national home prices has on average been 1 to 2.4. In other words, the price of one Orange County home could pay for 2.4 homes priced at the national value. During the multiple years of our recent soaring housing prices, this number shot up to a ratio of 1:over 3 (the price of one Orange County home could pay for over three homes at the national home price).

Now zoom forward to today: The February Realtors numbers show that for one Orange County home you could still buy 3 homes at the national price. By these numbers it is clear that Orange County home prices are still in line for more downward adjustment.

Numbers from our recent past housing depressions reinforces the likelihood of more price declines in Orange County housing. In the Orange County housing depressions of the mid-1980s and mid-1990s, the point at which buyers came back into the market in significant numbers was when one Orange County house cost less than two homes priced at the national price. (For another perspective on the lag associated with recovery, see the April 28, 2008, report titled “The housing market and credit crisis led the economy into recession. They will need to lead it out of recession.” This Wells Fargo Financial Market Strategies report states “… that housing values have overcorrected to the downside doesn’t mean that the market won’t go down even further on negative sentiment and credit tightness.”)

The upshot is something that homeowners are most likely not happy to hear. Using the calculations in Lansner’s article, “local homes are still 20 percent overpriced vs. average prices.” (Many experts agree with this number. But this is a post for another time.) Even though this is not what some may want to hear, recognizing the situation for what it is will put homesellers in the best position to make the most favorable choices for themselves. It will also give homebuyer insight into what is the best use of their money.