Bubble, Bubble, Toil and Trouble: Is an LA Housing Bubble Brewing?

It’s been apparent for a while that home prices are rising in Los Angeles, but is an LA housing bubble brewing to burst? The area’s affordability has been eroded – how can agents sell to buyers in a market where 25 counties have housing stock priced out of the reach for families earning a median income?

Although the news points to the ridiculously high-priced listings in the LA area, data suggests that the market is not on the brink of collapse. Based on the house price index from the Federal Housing Finance Agency, historically, the LA housing price cycle tends to last 12 years on average, of which seven years are spent in the bull market of increasing prices with at least 65% real price appreciation and five years in the bear market of decreasing prices. This trend can help to predict the future – because we are three years into the housing recovery that started in 2012 with 27% appreciation so far, there will be four more years or 38% more price growth before we reach a turning point.

Another way to track the housing cycle is building permit numbers. If developers are investing in new properties, that’s a sign that demand and prices are rising or keeping steady. If developers are holding back, then demand and prices will soon fall. Over the last three years, LA housing permits increased from 11,200 units in 2012 to 18,200 units in 2014. With the 2015 number likely to be higher than 2014’s, it can be predicted that the next home price peak is at least two years away.

More so, the simple price-to-rent ratio, calculated by taking the median home price over the annual median rent in LA, is also is a measure of housing value. If the ratio is high, that points to a bubble, but a high ratio for LA is not alarming due to the city’s “superstar” status. LA’s size, amenities, weather and geography make its properties an investment target for the international elite. High profile individuals buy homes not to live in them, but to diversify their financial portfolios.

Although all these factors indicate that LA is not in a housing bubble, it is still one of the least affordable cities in the US. The California Association of Realtors recently found that only seven counties have housing that a family earning the median income can afford to buy. Plus, the inventory of housing stock within the reach of first-time buyers is dwindling. Association Vice President and chief economist Leslie Appleton-Young said “I think that the big risk is with millennials in California. Where are they going to live? There are some that have parents that can help them with the down payment. They are the lucky ones. But the others are on their own.”

Has your business been affected by the affordability issue? Are you trying to appeal to the millennial buyer who may not actually be able to afford a home?

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