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February 2, 2013

Yuba City Real Estate
Market Forecast

It appears to us that the real estate market turned the corner in 2012. Several years of very strong sales coupled with a declining number of foreclosures and short sales resulted in a dramatic reduction in the number of homes listed for sale. Home prices bottomed in May of 2012 and have been improving since then.

2013 Will not be without it's problems. There are likely to be continued salary and benefit reductions or layoffs and job attrition at the city and county level which will affect the local economy and the ability of people to purchase homes. Rising prices will also have a negative impact on affordability for homeowners and will reduce yields for investors.

Having said all of that, one central and inescapable truth is that the real estate market runs in cycles and it appears that we have entered the phase of the cycle of improving prices. At any point in the cycle, there are forces at work that drive both the pace and direction of the market. At this point in the cycle, buyer anticipation of improving prices, buyer fears of being priced out of the market, buyer fears of delays in purchasing causing them to settle for less home than they can now afford and more buyers entering the market will all be among the dominant forces driving the this year's market.

Improvements to the economy have not been limited to real estate home prices. New home construction, home remodeling, new car sales and restaurant sales have all been showing gains as well.

Based on these and the other factors (listed below) that we think are driving the market, we believe that homes prices will continue to improve throughout 2013.

Below is a more thorough list of the factors we believe are now having or are likely to have an impact on the real estate market.

Positive Factors

1. Scarce inventory: The number of homes listed for sale in Yuba City declined from 204 on December 1, 2011 to 90 on June 1, 2012. Since then, the number of homes has drifted lower and stood at 61 on February 1, 2013. The average number of months of inventory on hand has averaged less than 1.2 months over the last 11 months. The supply in the Yuba City is currently at 1 month. Sales seem to be constrained by a lack of inventory and reports of large numbers of multiple offers are commonplace.

2. Sales activity is strong. Yuba City has seen sales of 60 to 80 single family home sales per month since January of 2008 The housing recession of the 1990's saw only 30 to 40 sales per month.

3. Renters can purchase homes with a small down payment using 30 year, fixed rate financing and experience total housing costs less than or not much more than the cost of renting.

4. Investors can achieve neutral cash flow with a 20% to 25% down payment using 30 year, fixed rate financing. Alternatively, they can receive positive cash flow in the 5% range on all cash purchases.

5. Thirty year fixed interest rates have been at or below 5.0% since January of 2009. These are the lowest interest in at least 42 years. Today's rate for a 30 year fixed rate loan is about 3.35% and the one year adjustable rate is 2.6%. Large areas of the country have still not felt the housing recovery and prices are still declining in some markets. The Federal Reserve has indicated that they expect to keep interest rates low through at least the first quarter of 2015.

6. Very low bank CD rates are causing many investors to look at real estate as an alternative investment.

7. Historically, California's population has increased by about 500,000 people per year. This results in between 230,000 and 250,000 new households being formed each year in California. According to figures from the State of California, there were 27,000 new single family housing starts in 2012 and 28-29,000 new apartment units. California has not been building enough homes to meet the needs of our growing population since at least mid 2007.

8. Approximately 85% of college graduates were moving back home after graduation according to a CNNMoney.com article from November 15, 2010. This represents a significant source of pent up demand for housing as the economy improves and graduates find jobs.

9. The Mortgage Bankers Association reported on 4/7/2010 that "1.2 million households were lost from 2005 to 2008, despite the population increase of 3.4 million..." explaining, in part, the sluggishness of the rental and housing market as financially strapped families moved in with friends and relatives. This group represents another source of pent up housing demand when the economy recovers.

10. Nationwide, foreclosures began surging upwards in 2006 and 2007. FHA prohibits loans to people whose foreclosures are less than 3 years old. An ever increasing number of foreclosed homeowners are becoming eligible to purchase homes again.

11. Current home values have left large numbers of homeowners owing more than their home is worth. The Wall Street Journal reported in November of 2009 that 30% to 40% of California home owners with mortgages had negative equity. Many of these homeowners would like to purchase another home but are waiting until the sale will generate enough cash for a down payment on their new home. Rising prices will likely turn many of these homeowners into purchasers of mid to upper end homes.

12. California has an extremely cumbersome and expensive planning process. It takes about two to three years of studies and planning to get approval for a new subdivision. It won't be possible to create new building lots over night when the market starts to rebound.

13. Government fees remain high and will limit new home construction. These fees are being collected to pay for sewer and water connections, building permits, new parks, fire stations, police stations, schools, levee repairs and other community wide improvements. Builders are even being charged a fee that goes into a special fund for "affordable" housing. Forcing builders to pay high fees to cover a wide array of community wide improvements associated with a growing population discourages new home construction and puts further upward pressure on home prices.

14. The State of California seems to have largely solved it's short term budget problems. There also does not appear to be the political will to deal with the larger issue of unfunded pension liabilities in the CalPERS and CalSTRS retirement system. We don't anticipate additional major cuts in State employment or in education.

Negative Factors

1. Improving prices will likely change the fundamentals that have driven the market since January of 2008. That is, rising prices will reduce the number of buyers for whom purchasing is cheaper than renting. It will also lower yields for investors.

2. We have not seen a dramatic reduction in unemployment and are certainly not seeing anything approaching a "robust" economy. Rising prices absent improved wages and lower unemployment will reduce affordability.

3. The rental market continues to be sluggish and there doesn't seem to have been any significant increase in rents.

4. Current home values have left large numbers of homeowners owing more than their home is worth. Many of these homeowners would like to sell but are waiting for prices to improve creating what is being referred to as "closet inventory." This supply of homes will help to moderate price improvement, especially in the lower ranges, as these homeowners begin selling when prices improve.

5. Massive Federal government deficit spending (borrowing about 35% of every dollar it spends) is likely to lead to some really negative consequences.

6. The Federal Reserve can easily raise mortgage interest rates if they sense that home prices are appreciating too rapidly.

7. Lending and appraisal standards have tightened dramatically in the last few years. These tightening credit standards are keeping some prospective buyers out of the market.

8. Budget problems are likely to persist at the city and county level. This may result in either further wage and benefit concessions or in more layoffs and attrition.

9. Foreclosures: We think this is a non-issue but address it here because we have heard for at least two years about an impending wave of new foreclosures. That new wave of foreclosures has never materialized. It also now appears extremely unlikely that we will see anything like it. Given our extremely low inventory numbers, it would seem that any slight increase in the number of foreclosure homes hitting the market will be quickly absorbed.

Realtor MLS Equal Housing


Lloyd Leighton Realtors
1212 Highland Ave.
Yuba City, CA 95991

Phone: (530) 671-6152
Fax: (530) 671-3904

Calif. Dept. of Real Estate License # 00951505
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