Los Angeles Housing Market Heading Into 2019 – More of the Same

Tight inventories, increasing demand, prices up, seller’s market

Don’t believe the scaremongering headlines you’ve seen in the real estate press lately. If you spend five minutes reading the articles that underlie a headline like “Southern California home sales crash, a warning sign to the nation,” you’ll soon see that the writers can’t support their hyperbole.

Did a little deeper and you’ll find that respected sources say that the LA market is 500,000 housing units short of what is needed, and that this is concentrated in so called “affordable” homes and apartments for rent or purchase. Of course, nobody has figured out how to create more land to build these sorely needed units. The available land is in the Inland Empire, and that is where affordable housing is being built. As fast as it is built, LA and OC residents are moving out to buy it.

Within LA County, the only way to add units is to tear down and increase density. This only happens at a snail’s pace due to limited properties being offered for sale, and layer upon layer of city, county, regional, and state hurdles to jump through after the property is acquired.

Will the exodus of residents heading to the IE and beyond (Las Vegas, Phoenix, Dallas) ever actually impact the housing prices in LA? Possibly, but so far, the lure of weather, entertainment, sports teams, and high paying jobs is keeping folks in LA. You can move to Riverside and get a lot of house for the money, but the IE is becoming the distribution capital of the US, and warehouses don’t use much labor or pay much for the labor they do use. 

Meanwhile, LA has become a huge draw for the wealthy and well paid. The entertainment, high tech, health care, and finance sectors are drawing folks from Northern California, Seattle, Hong Kong, China, Korea, India, and Europe. They are arriving with cash and are competing for available properties.

Here is one caveat. The number of new arrivals from China has dropped off. This may be due to a slightly softer Chinese economy, the tariff situation, or other issues. But word on the street says there is reduced competition in some LA markets that seems to be related to fewer mainland Chinese vying for scarce inventory. 

Are Prices Going Down in LA County?

What about the other headlines declaring that prices are easing, homes are staying on the market longer, not as many offers, more sellers cutting prices. Once again you need to dig. All four of these markers have been so high for so long that they had to come down. The amounts they are coming down is a percent or two. People are cutting the asking prices from the ridiculous to something just less ridiculous.

Where are we in the bubble? We are just now hitting prices from the 2006 highs in the “affordable” neighborhoods These are actual, not inflation adjusted prices. Some are still slightly below. Based on historical patterns we could have 40% upside left before a bubble could be declared. But if prices only continued to track inflation for the next several years, it is likely we would see 3% average increases year after year. 

What About a Recession?

What about a recession? Everyone agrees that there will be a recession at some point. In order for the housing market in LA to go lower, you need more inventory. It will not come from new units. It can only come from people moving away from the county, people doubling up, or boomers finally moving to retirement villas. If we endure a normal two quarter recession, it seems unlikely that there will be any impact on LA real estate.

What about mortgage interest rates? As long as we stay under 6% or so, there is likely to be enough elasticity in the market to absorb the hit. If we have several factors impacting all at once, then we could see a drop in prices.

For instance, imagine that the World has a year-long recession, drying up money from Asia. Maybe the US has a six-month recession, driving up the unemployment numbers to 6%. The final leg in the stool could be interest rates at 7%. In this case, you are likely to see the historical 30% drop in home prices for a year, followed by seven more years of prices going up. 

 When Should I Sell?  When Should I Buy?

When is the perfect time to sell your home? When is the perfect market to buy a new or upgraded home? It is not a good idea to try and time the market. The best thing you can do is make your decisions based on your needs. Do you need to sell your home? Call Whit Prouty and discuss current market prices. Do you need to buy a different place to handle a growing household, or just because you’d like a nicer home or a better neighborhood? Call Whit today and lay out your hopes and dreams. No better time to start looking than right now.

Call Whit Prouty at  310-777-6302

 

 

Los Angeles Housing Bubble Is Nonsense – Even When You Include Climbing Interest Rates

 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