Real Estate Bubble Report Part 1

With prices hitting all time highs in most parts of LA County and specifically in the Beach Cities, one of the questions I'm getting from both Buyers and Sellers is "are we in a bubble"?

For Buyers the concern is obvious. No one wants to put down 20% or more to purchase a home and then see prices plummet 10%. Or more.

For Sellers, particularly those sitting on the fence about listing, they want to know if we are at the top of the market because if so, get that yard sign out 5 minutes ago. 

Personally I don't think we are in a bubble per se although I do believe that the current pace of price appreciation is not sustainable. How that all plays out remains to be seen. My prediction, if I have to make one, is that we may hit a malaise where prices stagnate and it takes longer than it currently does to sell your home.

Let's look at some facts and external pressures, pro and con.
  • Over 80% of home owners have greater than 20% equity in their home. That's a powerful reason to stay put and not "walk away".
  • Many home owners are paying less for their mortgage than comparable rent would cost.
  • Changes in the tax laws may remove some Buyers from the market or in extreme cases cause some owners to become Sellers.
  • Inventory is likely to remain low supporting current prices, but....
  • Interest rates will certainly continue to rise during 2018-2019.
I've started a bubble report video series. You can watch it below then read some other comments about a potential bubble I've collected from here and there.

Chris Farrell, a Marketplace economics correspondent says "you're just not seeing the kind of rampant speculation that you saw back in 2005. And you know, lenders are still reasonably conservative. And yes, prices are too high in parts of the country. And, there are a number of headwinds. For 2018, we got the tax cuts. The deductions for state and local government taxes are going to hurt the high-end part of the market. And then, there's Jerome Powell: he's been confirmed by the Senate to be the head of the Federal Reserve. And he's clearly in the, "Let's raise interest rates" camp. And I think housing prices in most parts of the country have gotten ahead of incomes."

From a recent article in the LA Times 

"Many economists think today's upswing is more sustainable, driven not by risky lending but by an improving economy, historically low mortgage rates and a shortage of homes for sale.

And if a borrower can scrape together a down payment and qualify for a loan, mortgage payments are still cheaper than during the go-go-days of the mid-2000s. That's in part because the average interest rate for a 30-year fixed mortgage has been hovering in the high 3%-range.

Are we in a bubble today? No. In a bubble you are either overbuilding or overborrowing and neither condition is in place."

The flip side is rising costs are putting homes out of reach for many.

And then there's Bitcoin

If you want to talk about bubbles, maybe the discussion should be Bitcoin and the other cryptocurrencies, But here's something that has gotten a lot of attention: Buyers using Bitcoin to buy houses. Yes, that's a thing and truthfully it brings up lots of other contract related questions beyond the scope of this post.

But here's why I include it here. Buying real estate with Bitcoin would have to be the ultimate example of using something intangible to buy something very tangible. Opposite ends of the spectrum. In fact, it reminds me of when the new media companies started to acquire "old media" companies before the dot com bubble burst (the first time). And we all know, or should know, how that turned out!

If you like the Bubble Report video I will be posting updates every month on my YouTube Channel and on my various websites. And if you are interested in Buying or Selling a home in Redondo Beach CA, call/text me at 310 975 5139.