Sunday, April 29, 2012

California Housing Prices More Likely to Go Up Than Down!

Housing prices and rents are subject to all of the same laws of finance as any other product.  Supply, demand, and cost of goods. At the root of the demand is demographic ebbs and flows.  You can net this out with a statistic called household formation.  If you have more households forming due to increases in population for a given region and changes in willingness to share space, you see an increase in demand.  We currently have low household formation rates due to high unemployment.

As employment increases, young adults will tend to move out of their parents home, those who are sharing living spaces will look to live alone or with fewer individuals sharing.  This will put increased demand on residential prices.  Therefore, in our current environment, household formation is much more likely to increase than to decrease.

As to the supply side, the issue is how many vacancies in apartments, how many months of supply on the market, and how many apartment units and homes are being constructed.  Right now apartment vacancies are around 5%, which is historically about as low as it can go.  This is putting upward pressure on rents.  New apartment units are not yet being constructed in numbers large enough to meet this demand.

New home construction is at historic lows, but the overhang of homes for sale is starting to drop from the record highs to more normal levels.  In other words, the supply of both apartments and homes is drying up, and there is no way to increase that supply quickly if household formations increase as expected.  This will put upward pressure on rental rates and home prices.

Costs of materials, labor, and regulation are all going higher for construction of new homes and apartments.  This means that the possibilities of the price of both can't fall much below current levels, as the replacement value would be more than the current pricing.

As rents go up the calculus for purchasing versus renting changes, and more renters become buyers.  Once again this puts upward pressure on housing costs, although it may temporarily dampen rents.

If you are ready to do something about an investment in California real estate and need a Los Angeles Mortgage Loan Specialist to help out, call Bill Rayman at 310-295-2900 ext 113.

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