The recent drop in foreclosure rates to 2007 lows, combined with climbing home sales and prices (as seen in Santa Barbara real estate!), are a reflection that the real estate market is continuing to gain ground. Threats remain, however. What are they?
1. Developers. The scarcity of raw land for developers is a concern for the long term as the struggle to find and start new projects is lagging, causing the supply of new homes to slow. A key reason in the market segment is the reluctance of banks to take write-downs on land value. Having foreclosed on the land initially — which was then valued at a higher book value — the banks’ balance sheets are becoming a determining factor in the supply of development parcels for home builders moving forward.
2. Inflated Prices. The recent influx of foreign buyers into the American real estate market at all levels is causing an inflated price basis in many urban areas, thereby squeezing American buyers out of the market. With the recent fall in the U.S. dollar against many currencies, record low interest rates and falling inventory levels, a new housing bubble could be in the making — especially if interest rates reverse course. The flip side of this argument is that foreign buyers are reflecting a strong faith in the U.S. market by investing in areas such as Los Angeles. New York and Miami are benefiting from this trend as well.
3. Not All Markets Are Equal. While there are definitely markets such as Montecito and other areas of Santa Barbara seeing multiple offers on property, and in many cases there is property selling for above the listing price, there are by the same token just as many, if not more, markets still seeing slow sales growth and a large property inventory in spite of this overall housing recovery.
4. Flippers. As mentioned in some of my previous blogs, the record low interest rates that we have been experiencing over the past several years have created a situation where in many instances owning a home is cheaper than renting; meaning housing affordability is high. The market has tapped into this sentiment and house flipping is once again becoming a noticeable market segment, with many investors and cash buyers stepping in and bidding on properties in the hope of making a quick dollar. The obvious downside to this is banks are very cautious about loaning to the next buyer who may be paying substantially more for the same house just a few months or year later despite any improvements that may have been made.