Is Another Bubble Forming in Southern California?

Last year we witnessed the market make incredible leaps and bounds towards recovery, but more recently there has been a period of cooling as high prices and increasing interest rates have pushed buyers out the of the market. While many experts believe this is just a normal part of the recovery, the lack of affordability has been resurrecting some old habits – many of which haven’t been seen since the bubble days only a few years ago – and the return of these practices has sounded the alarm for some RE professionals. Now some experts are asking, “Is this the beginning of another bubble?”
Zillow recently announced that today in Los Angeles, only 43% of the homes on the market are considered affordable by historical standards. This means that a typical family could buy the house and spend 35% or less of their income on mortgage payments – 35% being the average from 1985 through 2000.

Unfortunately, spending 35% of household income on mortgage payments is no longer enough for the typical family to afford the typically priced home. Today, the typical family in LA must spend 39% of their household income on mortgage payments – up 9% from the end of 2012 and the highest rate anywhere in the nation. It gets worse though – if interest rates on a 30-year fixed mortgage continue to rise to 5% by next year, the typical family in LA will then have to pay 47% of their income to afford the same home – an alarming number considering that nationwide, payments on a median-priced home are 15.1% of the median household income.

In an effort to counteract these increasing homeownership costs, many homebuyers are resorting to tactics which haven’t been seen in years – putting less money down, relying on non-traditional financing and moving further out as a means to find a house which remains affordable – all of which seem eerily similar to the practices used in the days leading up to the last bubble.

Stan Humphries, Zillow’s chief economist, commented on the matter saying, “As affordability worsens, we’re already beginning to see more of the kinds of worrisome trends we saw en masse during the years leading up to the housing crash. We’re not in a bubble yet, but we’re beginning to see the early signs of one in some areas.”

Only time will tell whether or not a new bubble is truly forming, but until then it’s vital that agents and brokers watch out for the signs of another market collapse.

Has the lack of affordability impacted your buyers? Do you think we’re facing another potential bubble? What are your thoughts?

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