Portfolio Management And Financial Investor And Private Equity Opportunities In So. California

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It has been difficult to predict the Southern California housing market and its pending rebound. After peaking in early 2006, new home sales have generally found a "bumpy" bottom in the past several months. Sales rates are now below those experienced at any time during the ´91-´95 recessionary years, yet Southern California ´s population has grown substantially since that time and the local economy is not experiencing the same catastrophic job losses.

Foreclosures, speculation, tighter credit, inflation, and poor consumer confidence are all good explanations for the current market conditions. However, we believe that lack of affordability and decline in the number home buyers as being the fundamental causes. Coincidentally, both of these factors will lead us out of this chaos.

With rampant housing speculation since the advent of exotic mortgages, the Southern California housing market blew past any sense of affordability. Affordability far below 20% was becoming the norm and prices soared with artificial demand. However, under the radar, the number of first time and move up home buyers was declining, thus widening the "reality" gap between price and actual demand. In fact, the number of people reaching typical first time home buying age (early 30´s) was in serious decline since 1992, and bottomed around 2006. The slightly smaller move-up buyer segment (typically later 30´s) has been in steady decline since just before 2000. The use of subprime lending essentially outpaced the typical demand to create the dramatic drop in sales volumes and prices when the bubble burst.

The Forecast

Recently, builders like KB homes have indicated that they offering much smaller and affordable homes in the Inland Empire to attract buyers; moves like this will prove beneficial in the coming years. Census data shows that the Eco-boomers (or Gen-Ys) start their steady ascent into their home buying years here in 2008 which will last at least until 2024. New smaller homes will be required to meet this new wave of buyers as much of the current inventory is priced well over their buying capabilities; especially the Inland Empire.

Local economist John Husing noted in his July report that home prices in the Inland Empire are now in line with typical demand in a normalized market and are at historic lows when compared to Orange and LA County prices. We believe that prices might have to drop a little bit further to match demand for the new, lower priced home. A recently published report from the UCLA Anderson Forecast noted that residential construction will bring the California economy out of the ´doldrums´ in 18-24 months. We feel this better correlates with the timing of production for the more affordable home product. Plus it provides an adequate window for credit markets to unwind, allowing more builders to build. The Inland Empire, with its strength in affordability, will lead the charge. Husing also stated that nearly 25,000 homes per year will be required to meet the population growth projected in the Inland Empire from now until 2020, which is more than the average during 1997-2006.

Other Positive Signs

Baby Boomers: This group is reaching their final home buying years and will have an equal impact (as the Eco-Boomers) on Southern California real estate. Census data shows that between 2007 and 2020 the number of baby boomers reaching final home buying age (early 60´s) will increase nationally by 47% (from 3,300,000 to 4,850,000); half of that total will reach this age by 2011. This will place an enormous demand for senior housing in the more affordable areas like Riverside and San Bernardino Counties when these elders migrate from the coastal areas.

Professional Services: The increase in Baby Boomers will also place a strain on available hospitals, medical office, and neighborhood retail drug stores; these are all currently undersupplied in the Inland Empire according to experts. While this will drive demand for more office and neighborhood retail, it will add to the surge in demand for housing of the professional staff.

Stronger Economy: After losing ½ million jobs from ´91-´95, the Southern California economy has diversified and become more dominant. Even with the credit crunch and the Inland Empire seeing weakness, the job losses in Southern California do not appear to be as significant a factor as in previous downturns.

New home inventory: Even with all the foreclosures, Builders did a much better job with new home inventory. At just below 4 months supply, there is far less to burn though as compared to the 10-12 month levels experienced from ´91-´95.

Conclusion

Now is the time to take advantage of the numerous real estate buying opportunities; especially those that will allow for a smaller unit type. The growing demand for affordable housing will be something that Southern California has not seen in at least over 20 years or more. With sale rates, building permits, and housing starts matching the lows of the ´91-´95 period, Southern California is poised for a strong rebound sometime in 2010 (possibly earlier in more affordable areas) due to stronger market fundamentals.

UNITED DEVELOPMENT SERVICES is a portfolio management company for direct investors of real estate developments. Clients needing stronger Due Diligence; better Client Representation; enhanced development strategies will benefit from UNITED market insights, experienced staff, and comprehensive knowledge of local agency processes. UNITED has handled nearly 100 projects, in various stages of the development process, covering four Southern California Counties. UNITED also provides full service Engineering and Land Planning for their clients. For more information contact us at info@uniteddev.com or visit our web site at www.uniteddev.com