Sunday, May 27, 2012

Housing Prices: No Where to Go but Up...Unless They Go Down

Are you wondering what will happen with mortgage rates Los Angeles? Housing prices and rents are subject to the same laws of supply and demand in finance as any other product.  The roots of the demand are demographic ebbs and flows which are modified by the self-descriptive statistic, “household formation.”  If you have more households forming due to increases in population in a region plus a diminishing desire of people to share living space, you see increase in demand for houses.  Currently, high unemployment and uncertain incomes push demand down for new homes, so currently we are experiencing low household formation.

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.

The supply side is affected by vacancies – as measured by the number of months of supply of homes on the market as well as how many apartment units and homes are being constructed.  Right now apartment vacancies are around 5%.  Historically this is as low as has been seen and it puts upward pressure on rents.  New apartment units are not yet being constructed in numbers large enough to meet the demand.

New home construction is at historic lows, but the high number 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 calculation 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.

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