With the recent run up in prices, the most common question I am getting from buyers right now is whether or not we are in a new housing bubble and if prices will come crashing down anytime soon. While personally I don't think we are in a bubble (depending on how you define bubble - and we'll get to that), I do not believe that what we have been seeing in Redondo Beach or Manhattan or Hermosa Beach for that matter is sustainable. What I am particularly referring to are the huge jumps I am seeing week to week in certain neighborhoods and property types and I'll get to that shortly as well.
Let's talk about "bubble" first. I was recently reading an article by Robert Shiller (of the the S&P Case-Shiller report) where he specifically addresses some of the components of bubbles such as investors chasing speculative short term asset profits with no particular understanding of what they are buying or selling, only that it has to potential to appreciate. Don't get me wrong, I'm all for profits. While my personal inclination may tend more towards the buy and hold approach I get it that there are many investors making short term bets to their advantage.
But that is not what is happening in the local realty market right now. Whether it is home buyers I am working with or the buyers for my real estate listings, what I am mostly seeing are people who need a place to live and who do not want to pay rent. That just doesn't feel like a bubble to me.
Can there potentially be a correction. Almost definitely there will be. That's the history of real estate in Southern California. The way this cycle most likely will play out is that the convergence of higher prices (the make me move buyer) will hit the freight train of higher interest rates and we'll get to a point where there will be enough and possibly more than enough inventory to satisfy demand. And guess what happens then? A seller who really has to sell lowers their price. And then another one, and then another and your correction happens. This is further driven by the buyers who have dropped out of the market fueling lower demand.
But it will level off. Here's why.
We have a record number of homeowners who a) either bought at the bottom with low interest rates or b) refinanced into lower rates and who c) aren't moving no matter what because it is less expensive to stay in their house then rent.
One of the neighborhoods I am seeing a runaway freight train of pricing is in Golden Hills. We rapidly went from Tall and Skinny SFRs selling in the mid to high $8's to prices for totally ordinary houses with minimum updates coming out in the high $9's and then we have some over $1M. Not sustainable in my opinion.
Even when there is a correction, my expectation is that it is nowhere as devastating as the last downturn and within 12 months has righted itself. But I'm not an economist, just a guy who sells a lot of houses. In Redondo Beach CA.