The overriding consideration in the big California markets this year is how long you plan to be invested. If you’re a home builder or rehabber who will finish your project soon, if you’re a speculator who will flip an acquisition, if you plan to split a property into several rental units or condos, if – in other words – you have an investment horizon of only a couple of years, now is a great time to invest in California property.
On the other hand, if you’re a builder with a multi-year project, if you plan to buy and hold rental property, if you’re investing with the intention of selling out after five years or so, be very wary of getting into LA or San Diego or the Bay area right now.
And if you already hold property and are looking for a good time to sell, you should start the process.
It’s not so much that home prices are in danger of falling anytime soon – at Local Market Monitorwe’re forecasting that prices in all California markets will rise over the next three years – but that the risk of prices peaking and then falling will increase sharply every year. You never know what will trigger the end of a boom – or exactly when – and that’s what many California markets are in right now.
The table of stats shows that much of the LA and Bay areas are already above the 15 percent threshold for over-pricing when you compare the current average home price with the ‘income’ price. Over-pricing gets serious above 30 percent and into the danger zone above 40 percent. With prices rising at 7 to 10 percent a year, that danger zone is only a couple of years away for Anaheim, Riverside-San Bernardino, and San Francisco.
It seems only yesterday that California home prices were falling and foreclosures rising, but the tech boom and the continuing attraction of California as a migration and immigration destination quickly ran up against the reality that very little home building has been accomplished in the state for more than a decade.
With average home prices sky-high in many markets – in San Francisco now more than $1 million – investments in rental property will continue to be needed but this is where investors must be very careful not to overpay. Rents are far less volatile than home prices but if you plan a five year investment you could easily be looking at a very poor market when it comes time to sell. Don’t include expected appreciation in calculating the purchase price you’re willing to live with, and walk away if the asking price isn’t right; bad investments never look bad in the first couple of years.
Within the larger markets, Sacramento looks like the best bet right now – population and job growth are good, home prices aren’t yet too high, and the price/rent ratio at 21 is still reasonable. Vallejo-Fairfield looks most attractive in the Bay area, although we don’t yet know what effect the recent fires may have.
There are certainly more opportunities among the smaller markets like Modesto and Fresno that have price/rent ratios under 20, but the economic situation in these markets tends to be less stable. The north California markets like Redding, Chico and Yuba City have a different kind of economy but with their lower home prices are likely to have better growth in the future and are less competitive for prime investment properties.
So remember – many California markets are again in a boom, the boom won’t bust for several years, but be careful you aren’t caught when it happens.
Ingo Winzer is the President of Local Market Monitor, Inc., a North Carolina based residential real estate forecast company that provides MSA, county and zip code analysis nationwide to investors.