For Corona Del Mar
1988 to 2008

The return to fundamentals for property evaluation has begun. The fundamentals of replacement cost analysis of a property’s price will likely have greater influence during this recession than the fundamentals of a present worth analysis of a property’s rental income, be the rent actual (tenant occupant) or implied (homeowner occupant); or comparable sales. Buyers and lenders collectively are in control of the demand for homes. But for FHA-insured lending shifting the risk of loss to the government, sales transactions will require buyers to have at least a 20% downpayment and stellar credit strength.

Replacement cost is comprised of the price for a lot (or teardown) and the cost of labor and material for constructing improvements on the lot. The combined costs to reproduce a home within a fixed socio-economic region, say Corona del Mar in Orange County, can be reduced to a dollar amount of cost for each square foot of the improvement on a lot — a rule of thumb for price setting

Corona del Mar — Past, present, and probable future average square foot costs of homes

The average cost per square foot for a home in Corona del Mar has dropped around 25% during the past two years (2006 & 2007) from roughly $2,350 to $1,700 per square foot based on prices paid for homes.

The average square foot price of a Corona del Mar house was flat in 1999 and 2000 at $700 to $800 per square foot of homes sold just prior to the onset of the recent real estate bubble. During the last recession’s recovery period (1995-1996), roughly $450 per square foot was paid on average.

Prices based on square footage will probably bottom in 2011 and remain there for a couple of years, most likely at 1999-2000 per square foot costs which probably will be below actual replacement costs of new construction. Square footage prices will begin rising for the first time in 2013 and beyond, timing which took place in the 90s recession and recovery period.

Time is needed for agents to mentally adjust to large amounts of property deflation as the dollar buys more square footage, or put another way, fewer dollars buy the same square footage than they did just a few years ago.

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