California Real Estate Market – Defying Gravity & Reality?

I was in California this past week taking some time off.  I’m originally from the Irvine area so I like to drive through to see how things have changed and check out the value of real estate in the area.  It’s through this that I try to get a feel for the California real estate market generally and the Irvine real estate market, specifically.

It was through this drive that I noticed a few things and my mind began to wonder.

• First, I was surprised by the lack of “For Sale” signs or posts across the neighborhoods.  There simply was not a lot of homes for sale at all.  In fact, there were so few, it felt unnatural.  I talked with a Realtor there and they are experiencing something similar to what we have going in our market – increased buyer demand taking all of the foreclosures out of the market.
• Second, I could tell the prices were down from my last visit the year before.  No surprise there. 
• Third, after reviewing homes for sale versus homes for rent and what someone could pay to rent a property versus own it, I saw something we saw previously in our market – a big gap that potentially favored a renter. 

In effect, I could find a home to rent for around $2,700 a month in Irvine or I could pay around $700,000 to $750,000 to own that home, or a mortgage of roughly $4,000 to $4,300.  Of course, that doesn’t include property taxes which likely will add on another $7,000 per year across 12 months.  So, estimate that my mortgage will run closer to $4,700 to $5,000 per month.  Oh, and I didn’t add in mortgage insurance!

So, the rents in this case, could run rough around half of what you would pay for the mortgage.  Of course, you won’t get any tax shield from paying rent in this case.  However, I imagine that you simply can’t make up for the savings through any potential tax shield that likely throttles down through the Alternative Minimum Tax.

Coming back to the aspect of rents, there is no doubt that some renters who have owned the properties for much longer and have smaller loans can price lower when charging rents.  So, we could simply be seeing how one rental property owner competes with another.  However, I wonder about another aspect that we saw in our market that has since changed here.

Is the gap between some rents and home prices simply too great?  Fundamentally, rents shouldn’t be so low compared to what the purchase value in terms of the monthly payment would be.  The market has long been legislated that owning a home yields more benefits than renting one.  So, what could this mean?

Driving around, I simply see a situation that makes me wonder if home prices in areas in California (let’s just talk Irvine and surrounding Orange County) aren’t still too high and out of balance.  My instinct tells me that homes in the Irvine area there are at least $100,000 to $150,000 inflated on average.

I also wonder if the Phoenix real estate market is simply ahead of the curve in how the foreclosure hyper-market develops in general as compared to California.  We have seen prices decline here to levels that seem very attractive from all standpoints.  Can parts of California say the same?

I also wonder who can afford these homes?  Where do the buyers come from?  California simply has become prohibitively expensive for anyone but local residents who already own homes or potential residents coming from similarly expensive markets.  In effect, I believe California has priced itself out of numerous markets for potential residents. 

So, from a long-distance disengaged view, I simply expect to see home prices in the areas I mentioned fall much further.  I don’t believe prices there can defy gravity and reality much longer.  Though many won’t like to hear it, this will be a healthy development of the market there in my opinion.

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Tagged as: california real estate market, irvine real estate