The Last Los Angeles Real Estate Bust

Is the Southern California real estate market going to bust? That is the question.

The answer, unfortunately, isn't so easy.

Most real estate analysts claim that real estate is cyclical. There are up markets and down markets; however, historically real estate does outpace inflation by around a percentage point or two.

Thus, markets do bust, even if that bust is just temporary. Still, if a market does bust, it could take as long as a decade for home values to recover.

The Last Los Angeles Real Estate Bust

Los Angeles and Southern California has been a very hot market over the last five years, but 10 years ago, the Los Angeles real estate market was a very different story. In 1990, the average house price in Los Angeles was $222,200, but by 1996 that average home price dropped to $176,300 - a loss of more than 20 percent.

Yet, that isn't the whole story. "Furthermore, those are nominal prices, not real values. To calculate the loss more realistically you would have to figure in the cost of inflation: $222,200 in 1990 would have been worth $266,700 in 1996 dollars, which means the actual loss for homeowners buying in 1990 and selling in 1996 was closer to 34 percent." (MoneyCNN)

Of course, today, the average home value is above $450,000. So busts can be followed by booms.

The last bust was greatly affected by the massive loss of jobs from the aerospace industry and most experts think massive job loss is again the only thing that could cause such a huge bust in Los Angeles again. Of course that doesn't mean that a smaller bust isn't in order, or that homes just might not appreciate for another 10 years.

Nonetheless, the important point is that real estate markets, such as Southern California's market, have busted in the past and could again bust.

Los Angeles real estate hot in August

According to the LATimes, home prices in the Southland jumped 17 percent in August compared to last year, bringing the median home price in the area to $476,000.

In Los Angeles County, the median home price rose to $494,000, up almost 21.4 percent.

San Bernardino County jumped a whopping 32 percent to a median home price of $344,000.

Riverside County hit $388,000, up 16 percent.

Ventura County rose 15.2 percent to $592,000.

Orange County climbed 14 percent to $617,000.

San Diego County only rose 2 percent to $493,000. San Diego, once the Southland's leader in appreciation has been the coolest market in the area, and many think the rest of Southern California will follow in its footsteps. While most of Southern California has cooled over the last 6 months, a drop in mortgage rates seems to have spurred home buying interest, at least temporarily.

Overall, the market still appears strong. In the first and second quarters, foreclosures in California were down 15%. Still, most analysts feel the real estate market in Los Angeles and the Southern California area cannot sustain such gains in value.

When the real estate market finally calms down; however, seems impossible to predict.

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Katrina to extend real estate boom?

According to the Mortgage Bankers Association, applications for residential mortgages were up last week as falling interest rates hit a two month low. The average 30 year fixed mortgage rate now sits at 5.64 percent. This is even lower than the same time last year.

What happened to rising rates?

While interest rates have been showing some signs that they were going to go up, they have not gone up nearly as much, nor as quick as expected. In the wake of Katrina, many expect rates to either hold, or even go down.

So will low rates keep filling the real estate bubble?

One could speculate that they will. Nationally, the U.S. just lost massive housing to Katrina and the supply and demand of homes will be affected. While most of the demand will probably be centered around the Southeast, other states are sure to be affected.

In Los Angeles and the hot Southern California real estate market, dropping interest rates might push a number of home buyers off the fence, as this might be seen as a last opportunity for the lowest interest rates in a lifetime. Of course, with Southern California home buyers extended further and further, how many more home buyers can there be that can afford California real estate?

According to an article in the LA Times, Mortgages take a bigger bite, many borrowers are now using as much as half their monthly incomes to pay their mortgages. At some point, conventional wisdom would argue, there will be repercussions to this stretched financing.

Sure, there could be some unforeseen economic boom just around the corner bringing new jobs and higher paying jobs; however, if job losses start increasing, many recent homebuyers could find themselves in a very sour financial predicament.

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