Southern California Real
Estate Bubble Debate Continues
--->New - Los
Angeles real estate to depreciate 4.8% by 2008?
With the economy continuing on at its snail’s pace and with little job creation, the Southern California real estate market continues to spark
debate.
Is the Southern California real estate is a market ready to burst, much like the Internet
bubble, or not?
As some markets in Southern California begin to build a larger surplus of houses, such as
in Orange County, some expect a “day of reckoning”. For example, Edward E.
Leamer, an economist at UCLA states, “The question is how that reckoning is going to occur.”
Already, San Diego is
witnessing a considerable slow down, coupled with some
price depreciation. Is this just the beginning or the
end? Is there going to be a big drop in real estate
prices, or just minor depreciation?
Recently, a new study
by Kiplinger's Magazine, cited on CNBC, found that Los
Angeles was the third riskiest real estate market in the
West, just below San Francisco and Sacramento.
Surprisingly, San Diego was not on the list.
So, what does this
mean? It means expert after expert contradicts other
experts.
Still, even ex-Fed leader
Greenspan noted not long ago, "Its hard not to see
that their are a lot of local bubbles" showing
signs of "froth". This "unsustainable
underlying pattern" is cause for concern, according
to the Chairman.
Other surveys, such as
one by Moody's indicates that Los Angeles real estate
will depreciate by about 5% over the next year and a
half, bottoming in April of 2008. That's not much of a
crash.
Most promoting
the idea that the bubble is going to burst believe the
current market could simply stagnate before a big crash.
On the other hand, many argue that the real estate market might
temporarily slow, but it will definitely not burst.
An obvious advocate, David
Lereah, chief economist of the National Association of Realtors, believes that boom
isn't a boom, but just a strong, demand-backed real estate market.
In essence, population increases have created a shortage of
desirable land.
In the early 1980s, the last Southern California boom real estate market, a large number of new houses were
built. When the crash hit Southern California later in the early 90s, home prices tanked. Homes in Los
Angeles dropped as much as 20 – 30 percent almost over night.
Since that time, the population has swelled, and the
Southern California area is expecting significant future growth, yet not nearly as many houses are being
built as then. Consequently, one might make an argument that Southern California did nothing but make back its losses, as it positions itself for a ‘realized’ housing shortage.
Obviously interest
rates are going to play a hand in the future of the real
estate market. Currently, rates have dropped a bit, as
has interest in mortgages. It seems everyone is playing
the waiting game.
Additionally, much of the real estate market in Southern California isn’t reflective of rental prices. While Southern California rental property has skyrocketed, it has not kept pace with the price of home sales. Either rents will continue to rise sharply, even after housing slows, or the
real estate market might have to take a little tumble.
The average rent in Los
Angeles was expected to reach $1,500 per month in 2005,
yet an average monthly mortgage payment in Los Angeles
far exceeds $2000.00.
Ironically, the rent to own ratio
isn't as bad in Los Angeles as it is in San Francisco,
yet Southern California always dominates bubble talk.
Perhaps that's because Orange County and Ventura County
are considered part of the Los Angeles market. In those
areas, the rent-to-own ratio is even worse.
Still, the rub is that if the population continues to skyrocket, there won’t be enough housing to support the population; thereby, extending demand for
houses and apartments. Since the homebuilding industry isn’t raising significant amounts of capital, it is doubtful that a huge surplus could be created anytime
soon.
In Los Angeles a big
move is to residentialize downtown Los Angeles, a move
that could radically alter Southern California's largest
city.
Perhaps real estate
market fundamentals have really shifted.
Anyway, your gonna have
to pick your own side of the debate.
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