Housing Price Bubble? How big is it?
On a scale of 0 bubbles to 5 bubbles, five being the most severe danger of a burst bubble, one Southland writer sees this as a difficult time for the California housing market. Adding all of the numbers, the current real estate bubble is at least a 3 out of 5. Inflation is the key ingredient mitigating this bubble.
Market watchers caution that the lack of affordability is worrisome for California’s housing market. The state is consistently 20% to 30% less affordable than elsewhere in the United States. Here in Los Angeles, the Loft Market is locked in a price and demand deadlock. As a result, sellers are reluctant to reduce prices while demand remains strong.
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Yes, this past summer produced a slight narrowing of this California-vs.-U.S. homebuying affordability gap from earlier in the year. That’s when this spread was at its widest since the end of 2007 a decade ago. However, it sharply lowered the chance a typical Californian can become an owner even with historically cheap money. As a result, banks and Investors are cannibalizing the market buying up homes and, in turn, pushing up prices.
… today’s overheated pricing is all about “simple supply and demand.” Well, demand means having buyers who can afford to buy.
This shrinking affordability is even more troubling when mortgage rates have nowhere to go but up. One big reason is that inflation — an essential factor in setting interest rates — is heating up. The safer, newer, cleaner suburban single-family neighborhoods have shot up the most over the last 18 months. Much inner-city and urban real estate has held steady or dropped in price during the virus hysteria. Affordability is historically quite good in high-crime, high-homeless areas of inner cities, such as Little Tokyo Lofts in Downtown Los Angeles.
According to the Consumer Price Index since 2000, U.S. inflation has averaged 2.2%, while rates on 30-year mortgages averaged 5%, according to Freddie Mac. So historically speaking, loans are usually priced 2.8 percentage points above these cost-of-living increases. Yet this fall, inflation was around 6% while this benchmark for mortgage rates — kept artificially low with Federal Reserve help — averaged 3.1%. That’s 3.1 points BELOW the inflation rate.
Unfortunately, real inflation is higher than that. In fact, Thanksgiving dinner costs 14% more this year. Because the Federal Reserve and federal government have indicated that there’s no limit to radical monetary policy and government spending, and there’s no serious capitulation about inflation by the current administration, we can assume that inflation shall continue to grow. Real inflation with insufficient real growth, or stagflation, is likely to mitigate and obfuscate real estate bubbles for years. #realestate #bubble #marketupdate #entarispowerful
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Industry cheerleaders will shout that today’s overheated pricing is all about “simple supply and demand.” Well, demand means having buyers who can actually afford to buy.
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Copyright © This free information provided courtesy L.A. Loft Blog with the information provided by Corey Chambers, Realty Source Inc, DRE 01889449; MPR Funding Inc NMLS 2000513. We are not associated with the seller, homeowner’s association, or developer. For more information, contact 213-880-9910 or visit LALoftBlog.com, Licensed in California. All information provided is deemed reliable but is not guaranteed and should be independently verified. Properties are subject to prior sale or rental. This is not a solicitation if the buyer or seller is already under contract with another broker.
