More predictions for a double dip in the California real estate market.

I was reading an article based on an LA Times article that reports that certain areas of CA real estate market are recovering.

As I've mentioned before, housing near the ocean, and in other specialty locations will rise. The article confirms this by saying San Diego, Los Angeles and San Francisco have had the highest recovery rates, and have increased for 5 months running. All of these cities have ports and beaches. All of the locations are pretty much built up, so there's nowhere to build. In SF's case, there are laws preventing construction. There are certain areas of SD county that can be built, but new building codes put in place after the fires of 2005.

Low density areas are still having problems. When prices in the big city start to drop, people (especially commuters)  in the outlying areas migrate inwards, leaving a high vacancy rate in places like the Inland Empire and farming communities like El Centro.

The downward trend in these markets certainly hampers the ability of these local governments to garner a money from property taxes as the foreclosed properties sell for less money and must be assessed on a lower valuation. This leaves these areas on a downward spiral until investors start returning.

Some investors can buy cheaply and charge lower rents, bringing rental values down further. For rental properties, valuation is based on rent rolls, so if landlords and property managers lower their rates to compete with new owners, then they can apply for lower assessments from the county. This can lead to even less services, and perhaps result in blighted areas, barring some sort of intervention/assistance from higher levels of government.

My experience as an investor and as a building inspector has shown me one thing about government intervention in the housing market. It is tied up in low-income projects. While the goal of assisting low income people may seem on the surface noble, the unintended consequences are dire, generally resulting in generational economic suffering. One of the principals of success is "How do you learn to be successful (or insert whatever adjective you like) people if you aren't surrounding yourself with successful people?" People in public housing learn to be people in public housing. (For a good start in mimetic theory, check out this link)I've also heard anecdotal evidence of prejudice against poor white people by administrators of color in low-income communities, but that's another story.

As long as there is a shortage of rentals, property prices will stabilize. So we are seeing prices stabilizing and rising (though probably temporarily) in the coastal areas. And we are seeing prices stabilize in other areas, but if you see lots of "move-in specials" in the local papers and online classifieds, be prepared to see prices drop in those areas, especially after the federal subsidies (tax credits) expire.

In fact, the $8000 tax credit was causing all sorts of pressure to buy at the end of last year. The new $6500 tax credit has put some wind in the sails of the CA housing market, and will allow people in outlying areas to move closer to the big cities, or upsize their dwelling in the suburbs. After it expires, if there is a commercial downturn, and people lose their income, we are going to see more foreclosures in the residential sector.

Then prices will come down again, unless there is further intervention by the federal government, but with all the red ink they are bleeding, that may not happen, though inflation may cause the property values to rise in any case. That raises the question, how do we cope with rising prices if the economy is stagnating or in a recession/depression? Keep in mind, all the federal stimulus of FDR extended the Depression into the Great Depression. (Read this article for a thorough treatment)

Obviously, we have to pay the piper at some point. The government will have to either raise taxes (further punishing owners and producers) or cut services or some combination of the two. I have yet to see any government program save money, so I don't buy into any statements of that nature, as no government program has come in under budget in anyone's memory that I know. The politicians have a vested interest in providing services in exchange for votes, so I'm not optimistic that we will see any action on that part.

Just some of my thoughts about what's coming down the road.