Monday, October 22, 2007

The Real State of Real Estate

I read this article by Gary Watts, a real estate broker and economist in Southern California. It is a really long article, so I just have the first few paragraphs can read the entire article by clicking the link at the bottom...while he specifically relates this data to the market in Orange County, I am happy to provide specific info to anyone who wants it specific to Sacramento.


Brief History of Real Estate Downturns

The housing analysts tell us we are in the 25th month of the current housing downturn. Historically, housing downturns average 27 months so we may be near the end. Although there has been a significant decline in sales volume, home prices have continued to show small amounts of appreciation. With the Fed cutting interest rates, Congress passing bills to aid housing, and more money available for home lending, the financial markets will begin calming down. This down cycle will come to an end, just as they have done since 1970, and an excellent buying opportunity may lie ahead.


With a protracted war in Southeast Asia and OPEC doubling the price of a barrel of oil, real estate sales and prices came under great pressure. However, by the late 70s inflation caused prices to rise and, as the decade came to an end, home prices in Orange County had risen 15.04% on an annual basis.

“The median price of a home today is approaching $50,000 . . . housing experts
predict price rises in the future won’t be that great.” – National Business - 1977


With inflation hitting 21.5% and home loans reaching 18%, the Federal Reserve began to tighten credit to reduce inflation. This caused home sales to decline, but home prices continued to appreciate. That decade, the worst year was 1984. Orange County recorded price appreciation of only 0.90%.

“The golden-age of risk free run-ups in home prices is gone.” – Money Magazine – 1985

By the late ‘80s, defense contracts began to pour into southern California and once again, the housing boom was on. Home prices in Orange County rose that decade at an annual rate of 9.43%.


On Nov.11, 1989 the Berlin Wall came down and, by January of 1990, Congress cut the defense budget. In a short period of time, a lot of highly-paid workers in defense and manufacturing had lost their jobs. Orange County home prices declined from 1991 to 1996 by 3.22% annually, for a total of 19.33%.

“A home is where the bad investment is.” San Francisco Examiner – 1996

In the last 3 years of the decade, Orange County home prices rose 27.42%, wiping out all the losses of the early ‘90s and ending the decade with a net gain of 0.90% annually. In OC, the 36 year annual average for home appreciation has been 9.76%!


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