The basic homebuyer has changed during the last 4 years, and that is our problem.

I have been doing real estate business since 1984.  Before that I appraised houses and did the measuring of houses for loan brokers back in 1973 and 1974.   I have watched the ups and downs of the market and the one true thing is that it always ends up going back up.

I have been watching our market now and one thing occurred to me that is scary and market constricting.  From 1984 until 2008 I would say that 75-85%  of all buyers were self employed.  The people that have their own businesses and that work for themselves always had the money to buy houses.  They had the down payment to move on expensive homes and make those huge house payments.  It was almost never the salaried worker.  The teacher, police, fireman, government worker were pushed out of the market by the self employed.  Now there are new rules (Dodd-Frank) that we must all live by when qualifying a client for a home loan.  These rules get more and more restrictive as time passes and will eliminate most self employed buyers.  The last time our market was held back like this was pre-1988.  That was the year that World Savings came up with the “Easy Qualify” loan and self employed people became the engine that drove up house prices for the next 20 years.  Granted it got out of hand, from the CDO’s, the pension plans, the insurers, the lenders, the banks, the realtors, and the borrowers, everyone went way to wild.  That put us into this world wide recession/depression(Europe).   However the stated income loan was what drove up our market and sustained the growth and economy that we all enjoyed.   Now we have over reacted and made it virtually impossible for self employed people to buy houses unless they use all cash.  We all know that there are not enough cash buyers to create a true market.

Large money managers have gotten into buying homes to try and generate some semblance of Return On Investment for their clients.  This will end poorly.  Believe me when I say that money managers are not ready for property management and evictions, repairs, fires, plumbing problems, brokers, insurance claims…….. I see money managers getting out of the rental business in the next few years and washing their hands of property management.  Real Estate ownership is not tracking bonds and T-bills that have guaranteed returns with little or no unseen fluctuation in returns.

What we have now is salaried people buying homes at the lowest rates in 90 years and they will be unable to move up or down once interest rates have moved back to their  unprotected market rates. The area you live in will dictate the prices of the homes.  San Fernando Valley has a general top value of $500,000.  West Side goes up to $800,000.  These prices are determined by the prevalent income of the majority of residents.  Valley families make around $125,000-150,000 and west side families closer to $200,000.  There will always be prime area’s like Manhattan Beach, Palisades, Hancock Park, and Calabasas that will attract the highest income and  wealthiest families that will drive up their values.  However these areas will see the highest percentage of cash buyers.

In the past our market ran up for 4-8 years depending on the outside environment such as loans, underwriting, and construction.  With the Dodd-Frank rules in place we will not be able to get the price increases that we saw in the past years due to qualifying requirements.  Everyone is excited about the huge price increase that surprised everyone, including myself.  What we have to understand is that I believe we are done with this run up.  The run mostly happened in the lower priced homes that people qualify for, not the multimillion dollar houses.  Remember that the average salaried income of the area is what gives us our price point for houses.  None of the self employed people are even in the market this time around and won’t get into the market until something is done to get them loanable.  It will have to be a non-bank entity that wants a higher return but is not government regulated.  Maybe some of these money managers that are going to wish they weren’t in the Rental business will move their investments to a lending base that offers self employed people access to home loans based on their down payment and good credit.  With Dodd-Frank around the banks are only going to get harder to deal with.

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