Calblog

Well, if you want some good news, the long term trend in So Cal housing prices is fairly steady. The increase we're seeing now is just making up for slow growth in the early and mid 90s.

I don't really buy this, but it's a data point suggesting the market isn't as bad as it looks.

I can't speak about the national market - but there is definitely no "bubble" in Southern California.

Prices may go down slightly in the fututre (who knows?), but that won't be proof of an artificial bubble.

You simply need to look at the fundamentals in this instance. People are still streaming into Southern California, while not enough new hosuing is being built - hence, continuing price increases.

There might be a correction though when interest rates rise.

I'm not nearly at a place in life yet to be purchasing property, but I'm increasingly leaning toward it simply to ensure that I get a mortgage with the ultra-low interest rates.

I'm sure many other first time buyers have similar considerations going on.

It could happen. I'm not sure rates are going to rise by all that much, but you never know. Another possibility is that they will rise at a modest rate, in tandem with a general upsurge in the economy. In that case, expect prices to flatten somewhat, but not necessarily "correct" themselves.

XLRQ is right.

Any drop or flattening of prices is neither a "correction" or proof of a previous "bubble" which implies that prices are artificially high right now. A drop in prices usually just means a standard market drop in demand in relation to the given supply.

Southern California is currently experiencing a near-record housing shortage in terms of supply while the population has continued to increase. Nobody is building new hosuing in any significant numbers, and there is no sign that it will change any time soon.

So prices will remain high here regardless of what interest rates do.

I attended a housing conference recently and the rep from the CA Board of Realtors said that in order for the bubble to burst there needs to be about a 20 month supply of housing. Right now there is about a 1.7 months supply. Interesting, but I’m only a planner. So what do I know?

I have been waiting for the housing bubble to burst for the past five years, so don't take real estate investment advice from me.

If only we knew the answer ! I'm remembering back to the early 90's So Cal housing bust, and there were some bad things happening then that aren't happening now:

--The collapse of the aerospace industry in about 1990, eliminated tens of thousands of good jobs in
the LA area. Many aerospace workers had their homes foreclosed, especially in the Antelope Valley area.

--Thousands more LA area jobs were lost to major cutbacks at TV networks and other mass media companies.

--The 1994 earthquake put many damaged and foreclosed homes on the market dragging prices down further.

I don't think there will bust, though the rate of price increase may slow.

So what happens when the locals can no longer afford to buy houses? Currently the median house prices in SoCal is over 500K. Using the banks' 28% rule, you'd have to make about $140K per year to afford such a home. Something tells me that there has to be an adjustment, else no will be able to live where they work.

I agree with Jeff. Let's take a look at the house price increasement rate these years, it's double-digits outrageous increasement, especially in Southern California. At the other side, the inflation rate is very slow (that's why FED keeps low interest rate to stimulate the economy); the employee wage increasement is very limit; California State is in financial crisis,... How can people afford if the price continue to climb up.
I do not think supply - demand is the main factor that heat up the price. Baby boomer was claimed as the primary reason that made the real estate market so hot before 90s, it was still cool down.
The primary reason is the low interest rate. Banks want to put more money into the market, so anyone is easier to borrow a loan. In addition, people only care about the monthly payment, they do not care about the primary balance - the actual amount that they own and have to stick with the bank for years.
It is fine if they bought a house in a good area, live there long enough and still able to pay for the mortgage when the house price drops.

In my opinion, housing in So. Cal. exploded for three reasons. 1) The crash of the equity market, forcing delayed retirement. 2) The historical low interest rates allowing for appreciation, PMT=IPMT+PPMT. Low rates dropped IPMT, assuming PMT remains constant, PPMT will go up. 3) The relatively attractive job market in So. Cal. attracted an influx of population seeking job opportunities. I agree with most of you, the current housing cost is due to demand; the retirees are not relocating, and others are moving in for job oppertunities. While this may not qualify the current conditions as a bubble. It is obvious to me that we will soon see housing price drop. As the economy recovers, job opportunities else where will encourage job seekers to relocate. A recovery will also signal the Fed. to raise interest rated, to balance the equation, the principle portion will have to drop. Some of you stated that when prices are low, sellers will not sell therefore softening the blow, but is that realistic? When equality of a home becomes negative, what is to prevent owners to just walk away? Financial institutions will react prior to that by foreclosures, resale the property and recover the loan. The Fed is expected to raise rated in June or August. I believe that will be the beginning of the housing price correction. If the job markets improve across the nations, the correction will continue for three to four years, the time I estimate for the delayed retirees to be forced to retire.

I agree with you tc. The house prices are definately going to decrease in about 2-3 years, and will not appreciate for another 5 years.