This is the question that my clients ask most often. Are we at the end of the real estate cycle? Are we in a bubble, and is it about to burst? Yes it is true, real estate prices are hovering around the peak highs set back in 2006 — in July 2006 the median home price in Los Angeles County peaked at $569,000, and now, almost 10 years later, the median price of a single family home in LA County has recovered to $513,000 (according to Zillow). Although we are back near former highs, it doesn’t necessarily mean the current real estate bull market is over…
What is a “real estate market cycle” anyway? The best explanation, in my opinion, is this article from Harvard University. Another good summation is this article, from Bigger Pockets, one of the best real estate websites around, IMO. Per the Harvard article, economist Homer Hoyt figured out that the US market moves in 18 year cycles, from peak to peak. By that determination, the next market peak should occur in 2024. If you’re more a fan of graphs, and less of text, see the below graph of the market cycle from the Harvard article.
Exactly where we are in the cycle is the million dollar question, and more specifically, where is LA in the cycle? William Yu, a leading real estate expert at UCLA’s Anderson School of Business thinks that we may still have a few more years left in this expansion phase of the market. Yu figured out that the average cycle in LA lasts 12 years, of which 7 are bull market years and 5 years bear.
“On average, there will be four more years or 38% more price growth before we reach the turning point.” (Yu, LA Times, August 2015)
That was back in August of 2015, so shift his timeframe by 3 quarters, but the fundamentals hold true nevertheless. Read his thoughts on the LA housing market in the article he wrote for The Times here.
Yu points out that the issuance of building permits is still robust, which leads us to the issue of the LA housing shortage — population growth has been outpacing new construction for quite some time. While the average US metro grew its housing stock 54% between 1980 and 2010, LA’s stock grew by only 20%. See the below graphic from the state Legislative Analyst’s Office (LAO), which shows annual housing needed by county.
LA County is in such a housing crunch that we would need to build at least 100,000 units by 2021, in order to meet demand, according to the LAO. The LAO estimates that the state needs to build at least 100,000 units per YEAR, primarily in the costal regions. A variety of external factors will probably prevent LA from hitting its 2021 building goals, so I would expect to see continued pressure on housing prices and rents in the near future.
Compared to the last bull market, this market is different in that its not being driven by speculative, subprime lending — the very type of lending as exposed by the acclaimed film The Big Short. Instead, this market is being driven by low interest rates, a housing stock deficit, new household creation from millennials, and foreign direct investment, particularly from places like China where US real estate is viewed as a safe haven for the Yuan.
Our trusted lender and friend Ron Atniel at Movement Mortgage, demonstrates the affect of an interest rate hike of almost 1%, below.
For the same amount down ($61k), in the above example, your money buys a 610k property at an 4.375% interest rate, versus a 555k house at an interest rate of 5.25%. With interest rates set to rise in the near future, buyers are behooved to purchase while rates are still at historic lows, which should buoy prices in the near term.
In sum, it looks like we are still not at the “top” of the market, at least not in Los Angeles. Although again, real estate is hyper local — some parts of the country are just beginning to recover, some are expanding, and some are in recession, all depending on where you are located, so study your local market. There are fundamentals that were conspicuously absent in the last boom that should drive growth in the near term, or at least soften the blow of a recession. I think we still have room to grow, barring any unforeseen global event(s).
That all said, I can’t help but think of the ominous saying in the stock community that seems to precipitate the arrival of a bear market or a major pullback — “this time, it’s different”.