Proof in four charts
The headlines scream: “Housing Prices Unaffordable in Los
Angeles” or “When Will the Bubble Burst in LA Real Estate.” A quick survey of
major national economic journal articles about housing in the US, and
especially in the popular urban centers, will reveal a consistent tone of fear.
The argument is something like this. Prices are almost back
to 2006/7 levels that were unsustainable and resulted in a crash. Interest
rates are likely to be continuing up under pro-growth Trump economy, and
combined with super high prices, residential real estate is bound to head
straight down.
But, there are serious problems with this logic. The
following four charts should be all you need to debunk the fear mongers.
1.
The
real (inflation adjusted) price of homes is not near the top in 2006/7. The chart below shows the average prices for
the US and Los Angeles over the last 30 years.
2.
The
affordability issue is answered by this chart. Here you have a comparison of
price to income. Substantially lower than 2016/7.
3.
Finally,
we have the buy vs rent chart. If you can afford the rent, you can afford the
house. Moreover, the rental value compared to the cost of the underlying
property value drives investors to buy. As can be seen in this chart, there is
a very long way to go to 2006/7 levels.
4.
This one
is a bit more complicated; however, all of the pricing issues above are based
on current interest rates. Thus, if
interest rates go up, affordability goes down. What is shown in the next chart
is that the last bubble had interest rates (30 year fixed) of around 6%. Therefore the purchases during the bubble
were at those levels, not current levels of around 4%. While affordability will
be a factor as prices go up and interest rates go up, both can go up and still
not create the kind of bubble we saw in 2006/7 any time soon.
While there is no realistic way to incorporate all of this
information into some real number that would represent a certain top in the
market, it is pretty clear that prices can increase more than 20% even if
interest rates increase to 6% without hitting the unsustainable levels of
2006/7.
Final note – Prices and wages are expected to go up 3% per
year in the next couple of years. So housing prices can go up 3% per year from
these levels in addition to the 20%
slack identified above.
Caveat – Housing prices may go down next month or next year
due to known reasons or reasons that will only be visible in the rear view
mirror. This article only intends to demonstrate that the home buying public is
not yet stretched to the extent that they were in 2006/7.
If you are in the market to purchase a home, need to sell an
existing residential property, or both, please call Whit Prouty to discuss
current market conditions in the area of your interest. The consultation costs
you nothing. Call Whit at 310-962-6942
