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June 15, 2006
Chico Home Prices Are Starting to Tumble
Remember, when we were discussing home prices and I warned about the MLS inventory climbing and said this could signal a retreat in home pricing? Well, today's lead story in our paper edition sure looks familiar, "A
national study concluded Chico homes are "extremely overvalued" ... analysis released Monday by National City Corp. and Global Insight found that homes in Chico are priced nearly 61 percent higher than they should be!" I was stunned...Chico is 61% overvalued??? My friends in real estate say this 61% number is rather suspect, yet they admit current home prices do seem just beyond affordability for many low to medium income folks. For still others it exceeds their "comfort zone" as buyers and they are in a wait and see mode.
Realtors are calling this a buyers market, but that won't help sales much, if Chico home prices remain so high that nobody wants to be a buyer!. Proof of that is found in the MLS inventory which is at about 500 homes, that is huge for Chico. In a good year, it should be less than half that, according to my sources.
In other areas of real estate, Wall Street says it's an almost a sure bet that interest rates are going higher, but how much higher and over what time, well, that is the big question. However, if homes aren't selling now, any increase won't be welcomed. My advice is, if you must sell now, better price it right into this market and not on the market 6 months ago, a lot has changed since then. You don't want your home price to chase the market as it heads down. This can get expensive! Case in point, is an out of state buyer picked up house about 9 months ago for close to $200k and he's flipping it out now for $179k for a quick sale before he sees even more loss. This is what happens when a red hot market turns cool.
Posted by Post Scripts at June 15, 2006 09:23 PM
Comments
That story entitled “Report: Chico homes overvalued�, well, when you look into the internals of this study is becomes glaringly apparent that their computer algorithms are absurdly incorrect in placing value on Chico homes. They say that the cost of a home is $270,000 and the real value [price] should be $108,000. The ground truth of their number is that it barely would cover the cost of land and development impact fees, throw in the house for free. The hard costs of building in Chico have made it impossible to produce a home in the $108k price range for more than ten years.
Their numbers are simply are not creditable. I did not see anywhere in the story that this report was actually saying homes in Chico should cost $108,000, so people could place their own worth on the value of a home mortgage bank’s study. Perhaps I might humbly suggest that National City Corp. and Global Insight are using unrealistic data to issue a broad based report that feeds into an already soft market in which they have an obvious regional conflict on interest.
Unless you believe that $108k is a creditable average price for homes in Chico that report is BUNK >
Posted by: pypr at June 16, 2006 11:09 AM
IMHO, a "fair price" for an older 2 bedroom 1 bath home of about 900 sf in Chapman town is more like $155-165,000 range, not $210,000 to $235,000 range, as sellers are now asking. These homes are way off..the price of anything is determined by what it sells for and these are not selling, therefore, they are overpriced. The next level is homes in better areas, say the 3bd/2ba of about 1200-1400 sf., are priced a bit better, but still too high.
This low end starter home in Chapman town is priced beyond the reach of our low to medium incomes, even if both husband and wife work!
Expecting low end wage earners to pay $1400-1500 a month for a small old 2 bed room house is simply beyond their reach unless wages go up dramatically. There is such a thing as an affordability index that must be reckoned with, like a law of economics. Local wages vs local home prices are at a terrible disparity right now.
Speculators that boosted home prices earlier are not going to buy the spec type homes anymore because rents won't justify the house payment. In most cases this would mean they would have a very negative cash flow. Appreciation is all but gone for awhile, because we have had too much appreciation in the past 3 years and now it must average out for awhile.
This is a tough market, real tough.
I'm pretty sure we can expect an overall downward price adjustments of 10 - 15% as interest rates go back to normal levels in the coming 12 months. I don't see 60% coming... wouldn't worry over that one.
Posted by: Jack Lee at June 16, 2006 01:29 PM
I do think that the older homes are over valued. But there is a market factor that plays in the value. It’s replacement cost. The value of a home is going to base line near that cost. That makes reports that claim a 60% overvaluation absurd. Costs such as development impact fees do add to the value of older homes even though they never paid them. The rise in property costs also adds to the value of homes even though when the house was purchased land costs were lower. Look at the price of land and the cost to build neither of which is going down. The average wage of Chico workers isn’t a factor in the base cost of homes, nor should it be.
I doubt that people will reduce their price below replacement cost no matter how cheep the bought their home.
Posted by: pypr at June 16, 2006 05:20 PM