You want to buy now?!?!
Here's the problem. I live in Modesto, where the average household income is about $50,000 a year and the median home price is $400,000 or so. Any economist, heck, any high school kid, could tell you that this ratio is unsustainable. So why are housing prices to high? People from the Bay Area (where the median income is $80k-$100k) buy here because it's comparatively cheap and drive the housing prices up.
Here is why this affects you: People who work in Modesto can no longer afford to buy here, so they buy down the freeway in Merced and commute into Modesto every day. This drives the value of homes in Merced way up, since Modestans have much higher incomes than Merced(ites? ians? ers?). People from Merced and the surrounding areas are priced out of their own local markets as a result, so they look for somewhere else in commuting range. A LOT of the real estate sales further south in Central California are indirectly driven by people who are economically displaced thanks to market pressures originating in the Bay Area.
Now, with interest rates rising, the housing markets in Tracy, Patterson, Modesto, Stockton, and other outer rings of the "Extended Bay Area" become less attractive to home buyers. I'm constantly amazed that people will commute 4-5 hours a day to save $500-$800 a month on their mortgages, but they do just that. When rising interest rates narrow that gap to the $100-300 a month range, far fewer people will see it as worthwhile. When that market pressure evaporates, prices in this area will drop. They already are in high end homes where prices are already down 10% in many neighborhoods. We also have new developments that, for the first time in nearly a decade, have lots sitting unsold for weeks and MONTHS.
When the market in this part of the valley drops, less people will commute from the south, lowering market values there. This will set off a ripple effect that will lower values from Sacramento to Bakersfield.
If you must buy, just keep in mind that housing dips only affect those who plan on selling. Make sure that you plan on staying in whatever you buy for a decade or so, and you'll be fine. Market drops only hurt if you're refinancing or selling.
Tell me about it.
In July I helped my son and his girlfriend buy a starter home in the San Jose/Cupertino area. A 40 year old 1850 sq ft 2 story which needs all the bathrooms kitchen and floors replaced. It was listed in the high $700's and my son felt "lucky" to get it for just under $850K. A property which wouldn't fetch $300K in the Toronto area. And he'll need to put at least another $100K into it to get it to todays specs....
I don't get it. He and his girlfriend make good salaries, but they could loose those at a moments notice..
The good news was that someone bought his girlfriends 2 bdrm condo (which was also in the area) for just under $500K (she'd paid LT $300 for it about 5 years ago), so at least they were able to put a few buck down on their house..
But still, it's getting a little wacky out there..
Mercederists.