The sharp decline in housing prices that precipitated the United States housing bubble as early as 2005 has created attractive opportunities for home buyers looking for the cheapest homes in California. While some real estate analysts and economists maintain that housing prices have not yet hit bottom, there is some evidence to the contrary.
Current market conditions in California show that median home prices rose by 14.3% in March 2010 compared to the previous year. According to the California Association of Realtors, median home prices in California peaked in 2007 at $558,100.00 and fell to $346,750.00, indicating a 38.1% decrease. Certain markets in Southern California peaked earlier than 2007. In San Diego, for example, residential property prices peaked in the summer of 2006.
Home buying patterns in California have changed considerably over the last few years. At the height of the real estate bubble, buyers were not necessarily looking for the most affordable homes. After all, home prices were on the rise, credit was abundant, underwriting guidelines were relaxed, and subprime mortgage lending was in style. The practice of house flipping became so widespread that cable television networks such as A&E, Bravo, and TLC produced reality shows devoted to flipping. Instead of affordability, many home buyers were focused on quick profits. Other home buyers who stretched their finances to the max believed that even it they experienced a sudden loss of income, the red-hot real estate market would allow them to quickly sell their house and pay off their expensive mortgages.
Now that the bubble has burst, affordability is returning to the California real estate market. The Housing Affordability Index published by the National Association of Realtors measures the financial ability of a typical American family to purchase a median-priced home and qualify for a mortgage loan. When the index reads 100, it means that a family earning the median income as determined by the US Census Bureau has just enough financial resources to afford a median home in their neighborhood. Values greater than 100 indicate greater affordability. For the month of June 2010, the Housing Affordability Index in California was 135.
For real estate analysts who study market cycles, a peak in home prices occurs at the end of a growth period. When the cycle is in decline, a trough indicates that prices have hit bottom. This usually indicates the start of a new growth period. During a period of housing correction, trough prices are used to measure price increases. Following the peaks and troughs in California is a good method to find the cheapest homes.
The latest “Trough versus Current Price” report from the California Association of Realtors shows that the statewide trough price of $245,230 was reached in February 2009. Since then, home prices in California have recovered by 27.2% according to the June 2010 report. The three regions in California with the sharpest increases are:
Buyers looking for the cheapest homes in California are not likely to find them in the regions listed above. Even if price increases suddenly stop for these regions, it may take a while for their median home prices to adjust to the statewide average.
Northern California reached its trough in May 2010, more than a year later than the rest of the state. Home pricing in this region has always been more stable. The June 2010 median home price in Northern California was $243,550, up just 1.8% from its trough price of $243,200 a little over 12 months ago. This stability does not necessarily translate into the lowest median home prices in California. Median home prices in the High Desert region between northeastern Los Angeles County and northwestern San Bernardino County are the lowest in the state: $125,620 reported in June 2010, up 18.3% from its May 2009 trough price of $106,210.
Incidentally, the “Peak versus Current Price” report for June 2010 also shows the High Desert as the region that experienced the most precipitous change: down 62.5% from its peak price of $334,860 in April 2006. The Riverside/San Bernardino region currently has the second most affordable median home prices in the state: $191,900 reported in June 2010, down from $415,160 in January 2007 (a 53.8% decrease). The situation is similar for Sacramento and Palm Springs. Median prices in those regions have fallen 50.3% and 49.5% respectively when compared to their peaks during the summer of 2005.
The volume of existing home sales is a benchmark statistic that is usually calculated from data samples extracted from Multiple Listing Services. It focuses on single-family homes instead of new constructions. Data from existing home sales is generally accepted as an important macroeconomic indicator since it shows demand and market pricing of homes.
A significant figure gleaned from the existing home sales report is the inventory of unsold homes. As this number increases, a decline in home prices can be expected. Low demand in the housing sector usually leads to a higher number of cheap homes on the market. Home sellers may find themselves in an unfavorable market position when inventories rise for an extended time period. Unsold inventories in California are currently at their highest levels for high-end housing. It may take an entire year and several price cuts for a million dollar home in La Jolla to sell. In contrast, the cheapest homes in California sit in the unsold inventory for only a couple of months.
Recent sales volumes in California have enjoyed small increases after stagnating for several months. The recent spike in real estate activity can be attributed to bargain hunters looking for foreclosed and repossessed homes. The staggering number of foreclosure filings in California over the last few years has opened the door to may first-time home buyers and real estate investors looking for fire-sale deals.
The foreclosure process begins when a homeowner misses a certain number of payments on a mortgage. The bank initiates the process by serving a judicial notice to the homeowner about the default and the intention to repossess the property. As the foreclosure process may last a few months, a bank may consider placing the property in short sale as a way to mitigate loss.
A short sale consists of selling a mortgaged home for a price that is far less than the amount owed on the mortgage. A short sale is a reasonable economic solution to the more complex foreclosure and repossession process.
If a short sale is not successful and the foreclosure becomes final, the property is ordered into auction by the judge presiding over the proceeding. Foreclosure research firms have observed that the typical opening bids at courthouse auctions in California start at an average of 30% less than the amount owed on the mortgage. Since most of the foreclosed homes that end up in auction go unsold, lenders will often assign a local real estate agent to place the property in the open market. At this point the bank may end up selling the home for an amount lower than the price set at the auction. These homes form part of the REO (Real Estate Owned) portfolio of a bank held as non-performing assets.
It is estimated that foreclosed homes have recently made up almost half of all real estate sales transactions in California. Bargain hunters scour the real estate listings, check the county courthouse records for new foreclosure filings, and conduct Internet research in order to find the best deals.
In order to find the cheapest homes in California, a home buyer must establish a comparison across three different reported pricing sources: listings, sales, and median prices. Sales prices are usually the most realistic since they show the final price that both buyers and sellers have agreed to. These prices are indicative of the market.
Home sales statistics can be easily researched online. The websites of local realtor associations are usually good sources of information for median and sales prices. Listing prices can be obtained from local real estate brokerages and even the classified ads of local newspapers.
Let´s take a look at the average listing prices in some of the California metros for the month of July 2010:
Now take a look at the average final sales prices:
The average listing price for homes in California in July 2010 was $350,000. The average sales price, however, was $318,800. These figures are good news for bargain hunters since they indicate that sellers are still willing to offer sizeable price reductions in order to close the deal.
Not surprisingly, the cheapest homes in California are not found in the big coastal cities close to the Pacific Ocean. They are hidden below sea level in the Imperial Valley, located near the border with Mexico and not far from the major cities of Los Angeles, San Diego, and Phoenix. Home prices in the El Centro metro area have fallen from a high of around $245,000 in 2006 to today´s record lows of about $110,000.
Imperial County is just east of San Diego County. The El Centro Metropolitan area is described as the smallest but most economically diverse area in California. Life in Imperial County is a lot more relaxed than in neighboring San Diego. The landscape of the region consists of low-lying desert, mountains, and quiet farmlands.
El Centro is home to the cheapest residential real estate in California. How cheap? A nice 2027 square foot two-story home with 4 bedrooms, 3 bathrooms, large backyard, nice garden, 2 car garage, and driveway was recently listed for $166,900. Given the current market conditions, a smart home buyer has a great opportunity to pay even less.