Another real estate bubble for Los Angeles?
Is Los Angeles in the midst of another real estate bubble? The answer to that troubling question depends largely in who you ask, or what you read.
It’s a fact that home prices continue to climb across Los Angeles, which is well-established as one of the least affordable cities in the U.S. Prices are up roughly 8 percent in Los Angeles (10 percent on the Westside) from last year while the median listing price in the city is now $580,000 as of August 2015.
From a longer-term perspective, home prices are up 27 percent over the last 11 quarters and an incredible 126 percent since 2000.
But does that create a housing bubble that is ready to burst?
Historical market data tells a different story according to William Yu, an economist at the UCLA Anderson School of Management. In a recent LA Times Op-Ed, Yu suggests that all of the factors indicate Los Angeles is indeed not in a housing bubble, but rather a bull market that won’t necessarily lead to a devastating crash.
Like any other real estate market, Los Angeles housing prices are cyclical. Yu believes Los Angeles is about three years in to a cycle that on average lasts about 12 years.
“If history is any guide, the L.A. housing price cycle seems to last about 12 years on average, of which seven years is spent in the bull market with at least 65% real price appreciation, and five years is spent in the bear market. We are three years into the housing recovery that started in 2012, with 27% appreciation so far. On average, there will be four more years or 38% more price growth before we reach the turning point.”
Yu utilizes a number of historical data points for his analysis, including the all-transactions house price index from the Federal Housing Finance Agency, the rate of home price appreciation, building permit numbers and price-to-rent ratio.
The editorial by Yu is an interesting read. I know a number of veteran brokers who have simultaneously argued that we are simply in the middle of an incredible bull market cycle showing incredible pricing gains.
Whether you want to spend more than a million on a small bungalow in a hip neighborhood is up to you, but it doesn't look like the current cycle is on on the brink of an epic collapse.