Another Housing Bubble Coming In Los Angeles?

The housing market continues to face a few trends in 2013.  Low inventory, higher leverage because of low interest rates, and high demand from investors.  Take for example the share of foreclosure re-sale properties that are being sold.  In Southern California, the peak was reached in 2009 at 58.3 percent of all sales.  Today foreclosure re-sales make up only 15 percent of all sales.  This of course is one reason why the median home price has soared in the last year.  With such high demand and low inventory, investors are able to poach high quality properties since coming in with an all cash position is much better than relying on a mortgage which most typical buyers will use.  Also, the shadow inventory is being slowly leaked out since there is little reason to flood the market and depress prices.  Banks have figured out that frenzied buying and record breaking low inventory is a good recipe for causing prices to jump up.  Does distressed inventory even matter in Los Angeles anymore?

Los Angeles Distressed Inventory

One interesting point in all of this is that people now somehow think that there are no foreclosures or that somehow the housing market is back to the days of 2005 and 2006.  Let us look at foreclosures in Los Angeles County:

LA Foreclosures
Foreclosures in Los Angeles County – March 2013

Over 17,000 properties are in some stage of foreclosure in the county.  Is this high?  Well let us take a look at the non-distressed inventory that is listed in the MLS:

los angeles county non-distressed

What is interesting is that for every one property on the MLS that is non-distressed, you have one that is in some stage of foreclosure.  Obviously this does have an impact on market conditions and also price.  Yet if banks are not releasing these properties, what difference does it make to your average Joe or Jane on the street?  So now, the average buyer looking to buy now has to compete with the mania like conditions and lose out to all cash investors.  Yet many of these investors are looking for cap rates and a potential sale down the road.  They do not have a 30 year buy and hold strategy.  Flippers are another group that have an even shorter timeframe.

The comments sections are filled with case after case of people going to open houses and finding out that already multiple offers have been made and many of them way above asking price.  So this is the market you are left to contend with.  Housing purchases are driven by emotions and right now, the air is filled with “I don’t want to miss out this time” and “the game is rigged so let me dive in.”  Given rental yields in many places, I don’t see investor demand at this level for much longer, certainly it will cool down in one or two years.  In fact, many larger funds are looking at ways to securitize rent streams into tradable securities.  Good luck with that in the unpredictable rental market.  Many are beyond optimistic on vacancies and costs moving forward.

Without a doubt these conditions are boosting housing prices:

Housing Price Index

Ironically none of this is being driven by income growth or solid household income growth.  It is interesting that some people say “income doesn’t matter” because of course it does.  Essentially what we are developing is a perpetual system of boom and bust and the only way people can keep up is by guesstimating what is the next bubble.  What do you think will happen when investors are exhausted of rental real estate?  For years 30 percent of all purchases have come from this group.  Then what when things return to their inevitable equilibrium?

You see from the chart above that home prices in Los Angeles are up.  In fact, they are up by double-digits:

Home Price Index in Los Angeles

Income is stagnant.  So you have to reconcile these facts but as we have discussed, investor money is coming from Wall Street and foreigners so it is not driven by local economics.  Does shadow inventory matter?  Probably not since regular buyers can only act on homes that are available on the MLS.  You can have all the shadow inventory in the world but if banks refuse to list the property, you can only act with what is available.  This is a part of freezing mark-to-market accounting regulations and in a game of attrition, many people are falling in line and now diving into the market (or trying at least since they are losing out to the all-cash crowd).  What the distressed inventory tells us is that many regular buyers are still having a tough time paying their mortgage.  No problem.  Let an investor take it off your hands and then you can rent it back.  That is the mantra.  Yet many of these regular current buyers are with the mindset of being put many years (decades) while investors have a 1 to 5 year time horizon.  We are definitely in the mania stage of the housing market and talking to average folks on the street, they are back to the good old days.

Source:  Dr. Housing Bubble

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