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Local Market Conditions and Outlook

p>As the year eases into the long holiday season, the housing market enters its traditional deep freeze period with sales volumes dropping 20-40%.  After a disappointing late summer of sales, non-distressed sellers are pulling their properties off the market.  So, while the amount of inventory on market is still quite heavy and needs over 6 months to clear, the number of quality properties in strong neighborhoods is declining rapidly. 

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Buyers and sellers are still locked in a nervous dance as neither wants to blink on the price.  Both have plenty to fear about the next 6-12 months with uncertainties coming from recent monetary stimulus policies and the resulting price gap has remained stubbornly wide.  The properties currently clearing the market are usually those in the lower price tiers where financing is less of an issue and price-risk premium is far lower. 

Looking forward into the winter months, distressed sales appear poised to rebound sharply as a percentage of total sales with banks holding more REOs from failed short sale attempts earlier in the year.  Since non-distressed buyers are unwilling to accept steep price discounts and the banks have a very real incentive to move the money-losing properties off their balance sheets, the most likely deals to close will come from distressed sales.  Alongside the banks, Fannie Mae and Freddie Mac are also experimenting with incentive programs such as HomePath to move foreclosed properties off their books. 

As most financial professionals are anticipating inflationary pressures from capital coming out of US Treasuries chasing higher returns, this has created a rare opportunity for qualified buyers.  Property prices have corrected to sustainable long-term trends; investor capital is flowing again; and interest rates remain at historical lows.  Those buyers with a solid income or capital sources are able to capture this opportunity to secure performing assets at fixed costs while dollar-denominated debt like mortgages continues to depreciate. 

As the Federal Reserve has suggested a new corrective target of over 4% inflation to stimulate our economy past the current deflationary period and a potential dip back into recession, higher inflation is nearly inevitable as a necessary

condition for recovery.  Even if the Federal Reserve manages to hold impending inflation expectations at just their target rate of 4%, the rate of inflation will surpass the mortgage cost of capital, which has been between 3-4% for 30 years of fixed rates.  This means those who own property will effectively be paid to own, while those who rent will be mercilessly punished by the dilutive effects of inflation.  This is the ideal time to buy real estate, whether as a primary residence or a rental.  Just make sure your finances are properly matched to the right target property.

Michael Cheng

Michael Cheng