Where does the heated Southern California real estate market go from here?

August 3, 2017

Image result for hot housing marketFor 62 straight months, Southern California home prices have gone in one direction. Up.

In the South Bay, the median price of a single-family home topped $1.1 million in May, according to the South Bay Association of Realtors. That’s a 15 percent increase from one year ago, when the average hit $1 million for the first time since the association began tracking such records, and a 25.6 percent increase from May 2015.

The average price of a town house or condominium in the South Bay went up 10 percent to $733,224 this May compared with last, according to the association.

Five years ago, you could snatch up a median-priced condo in Orange and Los Angeles counties for about $280,000, 76 percent less than today’s prices. A median-priced house cost $323,000 in L.A. County five years ago, about $260,000 less than today’s prices.

That was then.

What should a buyer do now? Will prices keep rising? Are prices close to the top?

We asked a half-dozen economists and industry analysts what the future holds for home prices in the region. Among their answers:

Southern California home prices aren’t about to drop. In fact, they believe prices will keep rising for two more years, at least, and possibly longer.

The market isn’t in a bubble — yet — although bubble talk is starting to “raise its ugly head” at cocktail parties, one economist said. Some analysts are saying Southern California home prices are showing signs of being overvalued.

If you’re thinking about buying a home, now just might be the time to act — provided you don’t overextend yourself and you plan to live there awhile.

Here are five key questions about where Southern California home prices are heading in the future.

ARE WE AT THE PEAK?

Not one of the economists we interviewed thinks we are, at least not for entry-level homes.

Luxury homes, priced at $2 million and up, may have reached a price peak and are facing an oversupply of listings, analysts said.

Nominal home prices have surpassed prerecession highs in Orange and Los Angeles counties. Riverside and San Bernardino counties are about 18 percent below their price peaks. But none of those counties has reached prerecession peaks in inflation-adjusted dollars.

Another fact to consider: During the last market run-up, Southern California home prices increased year over year for 126 consecutive months, or 10½ years. That’s twice as long as the current streak in home price gains.

Lastly, analysts say home prices aren’t rising that much. Price increases averaged 6.3 percent in Southern California in the past year.

HOW MUCH LONGER WILL HOME PRICES GO UP?

Two years at least, most economists interviewed said. Possibly longer.

How much longer prices rise depends on what happens to the overall economy.

“At some point, there’s going to be a correction, but I don’t see it on the horizon,” said Pat Veling, president of Brea-based Real Data Strategies. “Sellers want more than sellers got six months ago.”

Projections by the California Association of Realtors show a gradual decrease in home price appreciation over the next few years, said Oscar Wei, a senior economist for the group. For example, CAR projects prices will go up 5 percent statewide in 2017, 4 percent in 2018, and 2.5 percent in 2019.

Assuming the gross domestic product continues to grow at 2.5 percent and mortgage interest rates stay below 4.5 percent, Southern California home prices could be going up at 6 percent a year for the next six to seven years, said Christopher Thornberg, a founding partner of Beacon Economics and a former UCLA economics professor.

At 6 percent a year, the median home price could reach $800,000 in Los Angeles County by 2023.

“Given the supply shortage and the strength of the California economy, (that’s) perfectly reasonable,” Thornberg said. He added: “Reasonable here means it’s not a bubble and they won’t collapse.”

ARE WE IN A BUBBLE NOW?

No.

“To me, there’s nothing like these numbers that smells (like a bubble), that walks like a bubble. … We don’t have nearly enough housing to meet the demand,” Thornberg said. “The reason that (2005) was such a huge nasty bubble is because a lot of people were borrowing money they couldn’t afford to pay back. … Now, credit is hard to get. Credit is locked down.”

Statistics show vast differences between the prerecession housing bubble and today’s market, Wei added.

Consider: Los Angeles had an 11½-month supply of homes for sale in the spring of 2007 compared with under four months available this year. In California as a whole, 43 percent of borrowers had second mortgages in 2006, vs. 4.8 percent last year.

California’s median down payment was 11.8 percent of the purchase price in 2006 vs. 18.6 percent last year.

“We don’t have as many people over-leveraging (their homes),” Wei said.

But some analysts are questioning whether the Southern California housing market is overvalued.

“It doesn’t mean there is a bubble. The problem with this talk is it could affect expectations,” said G.U. Krueger, president of Krueger Economics. “People will start to question whether to pay the prices the housing market is asking for. There could be more negotiation going on. … But I don’t think it will result in home price declines.”

CoreLogic data suggest Los Angeles County is modestly overvalued, said Sam Khater, the firm’s deputy chief economist.

U.S. home prices and rents are high relative to incomes, and are back to 2003, pre-bubble levels, he said. Down payments also are higher today nationally and most likely in California than at the peak of the last housing boom in 2004-06.

“More importantly, prices continue to rapidly increase in the lower end of the price distribution, where borrowers are most stretched,” Khater said.

WHEN IS THE NEXT RECESSION?

Not for at least two years, economists say.

“Over the next two years, the recession probability is very low,” said UCLA economics professor William Yu, a member of the team producing the UCLA Anderson Forecast. “But beyond two years, that is very difficult to say.”

A recent report by Newport Beach-based investment firm Pimco determined the probability of a recession in the next year is less than 10 percent. But the probability is much higher for a recession in the next five years, said the company’s annual “secular outlook.”

“If history is any guide, we believe the probability of a recession sometime in the next five years is around 70 percent,” the outlook said.

A major global calamity — like a new Korean War, a messy breakup of the euro, or a surge in oil prices — could trigger a recession, but forecasting exactly when is an extremely murky business, said Joachim Fels, a Pimco managing director and global economic adviser.

“Everybody knows that it is impossible to forecast the ups and downs of the business cycle several years ahead,” Fels wrote in 2016.

IS IT TOO LATE TO BUY A HOME?

Veling, the Brea industry analyst and consultant, has advised renters for the past four years to get into the housing market while interest rates and prices still are low.

“All those who did not act are in a world of hurt,” Veling said. But, he added, it’s not too late.

“Anybody who buys houses today will probably be fine,” provided they treat it as an asset, he said. “It still boils down to buy what you can afford.”

While it’s definitely more expensive to buy a home today than it was a few years back, the cost of buying will be even greater down the road, added Wei, the CAR economist.

“If you wait, home prices probably will go up about 8 percent or so in the next couple of years. Plus you’re probably going to see some increase in mortgage rates,” he said.

“If you see something you are interested in and you can afford it — maybe not a single-family home, but a condo or a town home — (buy it) and start building equity,” Wei said. “I wouldn’t wait.”


Sources Cited:

jeffcollins@scng.com, Jeff Collins. “Where Does the Heated Southern California Real Estate 

        Market Go from Here?” The Daily Breeze, The Daily Breeze, 14 July 2017.


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