Tuesday, January 16, 2007

Expectations for 2007

There has been a plethora of predictions about what to expect during the New Year. Soothsaying is in vogue. It seems like everyone has an opinion about the future. A year from now if your fortune telling is correct, you have earned the right to point it out and say… “I told you so” and if you’re predictions about the future are wrong…well it’s best not to remind people, most will have long forgotten anyway. Besides, a good forecaster should also have a number of rationalizations as to why something did or did not happen as they predicted. So, while looking at what the future holds for the real estate market this year, I thought I would also review my 2006 market predictions and evaluate my findings.

In my “Expectations for 2006” column published a year ago in the Mountain Democrat, my first predictions that mortgage interest rates would increase to 6.75 percent was only briefly correct. Interest rates did increase during the first part of 2006, hitting a high of 6.75 percent in June but since have steadily declined and are currently in the 6 percent range. This year I predict long-term mortgage interest rates will remain in the 6.25 to 6.50 percent range. Inflation is pretty much under control as the economy cools slightly from the housing market correction. Interest rates on home equity and other adjustable loans will be less volatile than they have been.

My second prediction last year was that investors, flippers and profiteers would exit the market, causing an unusually high increase in the number of listings. That one was correct along with my other one of fewer Bay Area Buyers (BAB) migrating east to the foothills. It will be another two or three years before BABs significantly influence our local market that at one time made up 20 percent of all purchases in El Dorado Hills. It will take even longer for investors and flippers to revisit the foothills. El Dorado Hills will continue to suffer the most from their absence.

Another old prediction for 2006 was that the “urgency factor” that influenced many buyers into making hasty home buying decisions would be replaced by a “wait and see” attitude. Actually, this last years real estate market can be entirely summarized by “wait and see.” This year the wait will be over for many. Our housing market recession has been unlike past market corrections. It was not the result of job losses, high interest rates, or economic malaise. It was the result of too many high priced homes. As home prices continue their adjustment, many who have been postponing making a buying commitment, will decide it’s time. A year ago I predicted first time homebuyers, who had accounted for 20 percent of all home purchases in 2005, would go on strike in 2006. They did but I expect them to be back this year.

In January of 2006 I predicted that the then record high median selling price of $500,000 for El Dorado County would hold through 2006. I was collectively correct, individually wrong and my assumptions were incomplete. I assumed that our property values would not be impacted since we had not experienced the same over-building and speculative buying as had Placer and Sacramento Counties. For the most part of the year our collective median selling price did remain above $500,000 but individual property values declined by as much as 20 percent off their high point in 2005. Our county’s collective median selling prices have only been sustained by an unusually large number of high priced home sales. Lesson learned: A receding tide lowers all ships. This year, I expect fewer million dollar home sales and no increase in property appreciation.

Last years low number of county home sales has been our nemesis. Sales have been consistently 33 percent lower than 2005. No one expected county sales to continue at their 2005 level but neither did anyone, including yours truly, expect such a significant decline. This year will be better albeit, coming during the second half. Home buyers will begin to rediscover El Dorado County this spring.

So for this year: Continued low interest rates, no price increases and a welcomed increase in the number of home sales. The worst of our housing correction is behind us. A year or two of market stability will follow as we catch our breath before the next housing boom in 2009. If my predictions are right, I will remind you next year and if they are wrong, hopefully you will have forgotten.


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