News came out today that median home prices in Santa Cruz have dropped again. The Santa Cruz Sentinel reported that median home prices declined from a jaw dropping $775,000 in 2007 to a median value of $510,000 in July 2010 (down 34%). Initially the report seems to be good news for home buyers and would increase home affordability in a very depressed economy. Unfortunately, just like a snake in the grass when you step on it, the news has the potential to rear back and bite. When home prices plummet and home buyers are still reluctant to buy what does that tell the market?
There are some commodities that consumers will pay any price for (gas, water, air) and personal economics have little effect on demand. Real estate markets have witnessed depressions before, but none have had the meteoric rise and fall as the one we are currently experiencing. The shear magnitude of foreclosures that will be entering the market in the months to come coupled with rising unemployment has driven home buyers into a state of skepticism. Why should anyone buy a home now with future home prices softening?
Median home price drops portray a deeper meaning into consumer confidence. Market price reflects what buyers are willing to pay for a commodity. A large part of consumer confidence is future employment. If the economy reflects soft employment saving cash takes top priority and the need to buy big ticket items go on the back burner. If the consumer believes buying a home is like buying other depreciating assets like a car, a refrigerator or washer dryer then buying a home will take on a lower priority. In tight economies consumers will seek alternatives (buying used instead of new) for less cash. Renting a home will be seen as a cheaper alternative until the economy picks up or prices begin to rise.
So who stands to gain the most when home ownership becomes less attractive? Not real estate agents, not homeowners, not mortgage brokers, appraisers, home inspectors and certainly not home buyers either. Real estate investors are winners on both ends of the this scenario. As home prices fall investor acquisition costs will fall. As fewer consumers buy and turn into renters the demand for rental units will increase. For owners of rental properties (especially multi-unit) value should remain strong, capitalization rates and vacancy rates should fall and rents will rise. Because a large portion of multi-residential values are based the above mentioned factors, values will rise accordingly. It will be a real estate investors that will laugh all the way to the bank gaining both appreciation and cash flow, a rare event in a down economy. Good to know there will be some winners to will keep the sector going.