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Replacement costs next upward driver of housing prices

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POSTED August 17, 2012 12:57 a.m.

San Jose existing home resale prices at the close of escrow were up 7.3 percent in April, May, and June compared to the same quarter in 2011.

The closing price in escrow was up 1.3 percent for the same time period.

Why does this matter if you are in Manteca, Ripon, Tracy, Lathrop, or other Northern San Joaquin Valley communities?

The answer is simple. Until Manteca - or any other South County city - reaches the point that they are a surplus job generator, Bay Area housing prices will have an impact on what a home sells for and even rents for on this side of the Altamont Pass.

Back in the late 1980s, San Jose’s job boom sent a housing price ripple up the Interstate 680 corridor and into the Livermore Valley with some lapping over the Altamont Pass into the Northern San Joaquin Valley.

Then in the 1990sn when Pleasanton emerged as a major job hub as the Silicon Valley expanded, the impact on Manteca housing prices was even more pronounced as the economy picked up steam.

Pockets in the Bay Area since the start of 2012 have helped make California the leading state in terms of generating new jobs. That is fueling, in part, the demand for housing in the Bay Area.

The recovery, though, is not shaping up as a three-peat mainly because there are significantly fewer manufacturing jobs this time around whether it is in the high-tech sector or in traditional heavy goods such as vehicles.

Economists expect migration to the Northern San Joaquin Valley in search of affordable housing for those with Bay Area jobs will continue. The outlook, though, calls for it to be at a more subdued pace than before the housing bust.

And there is an expectation that just like the housing and job recovery in the Bay Area it won’t be even across the board in the Northern San Joaquin Valley.

That means more desirable communities will benefit proportionately better from inward migration from the Bay Area than those considered less desirable. Prior to 2006, price was the big driver of where people with Bay Area jobs who were in the hunt for housing looked at when they crossed into the Northern San Joaquin Valley.

Manteca is seeing some signs of the improving job market, luring Bay Area buyers who will join the commute westward once they move here. But that slight spike is almost exclusively in new home sales and they are for the most part going to older families where wage earners are moving closer to retirement.

The next upward movement in resale home prices will be dictated more by replacement cost than anything else for the foreseeable future.

Previously-owned homes are still selling today for as much as 30 percent less that their replacement cost.

That means as inventory tightens up and new home building picks up a little steam, there will be healthy jumps in the median prices. Those jumps won’t recover all of the lost value from the 2006 peak by a long shot. But a good chunk of it will come back and do so relatively quickly until resale values at least match replacement costs.

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