Looking at the data, we can see the average home in Costa Mesa’s 92626 zip code went from around $350,000 in 2002 to over $700,000 in 2006. Newport Beach’s 92660 went from an average of about $500,000 to more than $1 million during the same period. More than a 100% increase in four years.
To get homes selling again, we need to understand how we got here in the first place. The increase in sales prices can be put at the foot of lenders who loaned people money to buy homes with no down payment and no verification of income.
To put it bluntly, if you could fog a mirror, you could get a loan. Welcome to Wall Street’s invention: the sub-prime loan.
In a market like Orange County, with very little supply, it does not take much increase in demand to rocket home prices up. With these sub-prime loans in hand, buyers bid up all available houses.
People will always bet with other people’s money if they have nothing to lose. Prices go up, I win; prices go down, the lenders lose.
If a buyer actually had to come up with a $20,000 or $30,000 down payment, they might not bid up home prices to where they could afford only the house with a temporary teaser rate that lasted long enough to move in. Prices were being forced up by people that had no skin in the game.
So now that sub-prime lending is over and buyers will actually have to pay for a house, prices will have to move down to what people can really afford.
This already happened in the new home market where builders have to sell homes for what people can actually pay in this post sub-prime market.
Take a look: New homebuilders are selling homes at 2005 prices. It’s a great time to buy a new home.
What about buying a resale home, which makes up most of our market? Do not waste your time trying to buy a home unless a seller is really motivated to sell.
