Mark Boud sees new real estate cycle around the corner

Mark Boud – A Believer in Real Estate Cycles

As founder and principal of Real Estate Economics, Boud has worked through, logged and analyzed real estate cycles during the past 25 years. In April, Boud told a group of public and private home builders that for those who understand the cycle, there is an opportunity brewing in Southwest Riverside County.
Boud defined our market cycles as periods that typically register “double-digit appreciation” in homes for at least two years before a period of correction. He talked about the cycles in the late 1970s and 1980s, the anomalies associated with the past cycle, and the horrific cycle crash we’ve just experienced.
He said that typical cycles are when house appreciation registers at 10 to 14 percent annually for two to three years, then goes through a correction period. In the most recent cycle, the extended ‘bubble’ caused by loose lending, and the resultant financial crash, has caused an over correction such that we’ve never experienced before, spelling a short window of opportunity that we may never see again in terms of home purchase and land acquisition.
He noted that the market should have corrected itself in the early 2000s, but that loose lending that helped homebuyers and derivative bankers, inflated the market.
“After 2002 we experienced a non-traditional market where instead of housing appreciating at eleven or twelve percent a year for a couple of years, they were going up 20%+ for four consecutive years,” said Boud. “In 2008 home prices dropped by 38 percent and more in some areas, which is the price paid for allowing such artificiality into the cycle.”
In the bad news, Boud noted that the Inland Empire lost in the neighborhood of 180,000 jobs during the recession. He also said that the market was “very oversupplied” at the time and the combination of tightened lending, distressed properties and oversupply of new homes was like a perfect storm for collapsing the value of homes.
In better news, the market has already formed a floor, according to Boud. Houses in the Inland Empire are more affordable than they’ve been in decades and, in fact, are currently more than $100,000 undervalued, on average. Also, the economy and job market are beginning to improve. In December, the Inland Empire reported the first year-over-year job growth since 2008. In addition, distressed housing inventory is being whittled down, although still about 57 percent of home sales are distress-related. “In the next five years a lot of jobs will be created in Orange and San Diego counties as well as here in the Inland Empire. Jobs are directly related to new home sales, “said Boud. “For those who understand the cycle, there is an opportunity now to purchase at dramatically under valued levels.” Boud said that “very little land is being improved and very little housing is being built,” and these factors will combine with economic growth to build upward pricing pressure during the new cycle.
“I’m a believer in the cycle and I anticipate the next cycle is beginning and we will see this cycle build a foundation in 2012 through2014 for another double-digit run-up in price thereafter,” said Boud. This cycle will be driven by new job creation in high-tech, bio-tech, green-tech, medical and others.”

Mark Boud Presentation – At a Glance

· The Inland Empire economy is now gaining jobs, with year-over-year job growth beginning 1st Qtr 2011

· Housing Construction is at an all-time low – small builders can’t get financing to build homes

· Housing Affordability is an all-time high – a severe over correction is already well established

· Despite an anticipated rise in foreclosures during 4th quarter, distressed housing inventory is still trending downward

· Marginal price appreciation has begun, but a prices will recede mildly during the next six months

· Transactions remain high, but may fall during the next few months

· Current market improvements are being driven by under valuation as opposed to economic growth

· Mature market demand will become a driving force in the next cycle

Bob Johnson – The Next Generation of New Homes and New Home Buyers

Jobs are the key to improving the current economic climate in Riverside County, according to Bob Johnson, Assistant City Manager for The City of Temecula. Johnson told the group of Merchant Builders that Riverside County went from having the nation’s second fastest growing economy in 2005 to an economy with almost no growth for past couple of years.

“It’s absolutely shocking to see the housing market as it is today,” said Johnson in his opening remarks. He pointed to all the usual suspects: high unemployment, uncertainty, workers making less money, foreclosures, etc.

On a brighter note, he said that the inventory of existing foreclosures is diminishing, and that the next cycle of new home buyers will be a “creative class” of knowledge workers. He advised the homebuilders to create walkable, transit-oriented communities, to attract the next class of new home buyer.

Marion Ashley – Riverside County Gearing Up

Marion Ashley, 5th District Supervisor, touched on job creation and infrastructure speaking at the Merchant Builders Symposium.  Ashley noted that since the recession started services from Riverside County Staff have been reduced by 25 percent to 50 percent in some areas.

He also noted that even though services have been reduced, the County is going forward with several infrastructure projects such as the widening of the I-215, rail improvements to Perris, and beatification programs in several areas.

He told the audience he looks to developing areas such as March Global Port and the planned new freight facility in Cabazon as good signs for the job market.

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The Rancon Group will be at the Pacific Coast Builders Conference June 22nd improving our market knowledge and continuing to foster new relationships while enhancing existing ones.