Mortgage Rates Are Part of the Equation, but Housing Prices Are Still under Levels in 2004
How does a sane person know that there is a bubble in any investment category? You look at historical prices, inventories, dollar valuation, demand vs supply, barriers to purchase or sell, demographics of buyers, involvement of professional investors, potential of future increases in supply, and throw in "The great unknown and unknowable."
Clearly we could review all of those data points in detail, reach a very sober conclusion, and have any one of a number of unknown and unknowable things happen. What effect would a bond implosion have on the stock market? What effect would a breakthrough in natural gas storage have on oil prices.
So, we take the knowable items, and we do our best. What do we know about housing? We know that Los Angeles prices topped out at very high levels in 2007. They then fell, depending on the neighborhood, anywhere from 30% to 50% off of those highs. The prices began moving back up in early 2012 and have advanced about 20%, which would mean they are still off 15% to 40%.
We know that inventories are very low, and depending on the area, there is little likelihood of a quick ability to increase those inventories dramatically. This is especially true for single family dwellings in LA proper. We know that demand is fairly stable, with no great increase in population on the horizon.
The big deal is that mortgage interest rates are artificially low and mortgages are hard to get compared to the '90's and first decade of 2000's.
What does all of that mean. According to Corelogic, as reported by CNBC, there is no bubble:
"... said Mark Fleming, chief economist at CoreLogic.The interest rate panic of July 2013 has subsided now that Ben Bernanke has promised not to mess things up . . . yet. At what price level might the Los Angeles prices start to seem more bubble like. While this blog is not in the presuming-to-predict business, the logical extension of the known factors would say that the market should be able to move another 20 - 30% higher without too much excess. Housing prices in LA will always test old limits, and affordability goes out the window even in the early stages of a bubble.
Even in the fastest growing markets, where prices are up around 20 percent from a year ago, Fleming pointed to still near-record affordability. For housing price affordability to return to the average level that we saw in the years between 2000 and 2004, he said, either home prices would have to rise an additional 47 percent or interest rates rise to 6.75 percent. Only Washington, D.C., and Hawaii are "technically unaffordable," according to CoreLogic."
If the economy ever gets back to 5.5% unemployment or less, and assuming some of that gain is in management positions, which tends to be the case as the economy expands, then it is entirely possible that we could test the 2007 highs.
The short answer. No bubble yet.
To check into whether you might be able to afford the home of your dreams. Call Bill Rayman for a complimentary analysis of your plan.
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