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Welcome to the BeSmartee blog. Enjoy a wide selection of articles related to mortgages, the industry, and real estate.

Has the California Real Estate Bubble Burst?

By Laura Agadoni · Mar 29, 2016 · Real Estate

Has the California Real Estate Bubble Burst?

Image courtesy of Flirckr, Mikael Moreira

Home prices have been going up for a while now. Some real estate agents say we've hit the top...Have we?

Whether you saw the academy award nominated movie, The Big Short, or not, you're probably well aware of the housing crash of 2008. In the years leading up to the crash, America experienced a real estate bubble. Many people believe we're now in another housing bubble. And regarding California, many people think that bubble is about to (or has!) burst.

Related Reading: The Recent California Real Estate Bubble

California Is Already More Expensive than Most of the U.S.

Orange County: Let's start with Orange County, home of BeSmartee. The median housing price in Orange County in 2015 was $610,000, but the national median home price in 2015 was $298,000. That $610,000 figure might look awfully high compared with the national median, but if you analyze what's been happening in Orange County, you'll see that 2015, despite the high median price, was just an okay year. The price appreciation of 4.8 percent was lower than normal. The gain, for example, in 2014 was 7.4 percent.

The problem is that prices have reached the point where few people can afford to buy. But does that mean the bubble has burst in the OC? Not necessarily. It could just mean that prices are starting to normalize. What makes a huge difference in Orange County in 2015 from 2008 is that 1 in 8 homeowners lost their homes then, but today, you don't see nearly as many foreclosures and short sales on the market. To compare: In 2008, 4 in 10 sales in Orange County were foreclosures or short sales. In 2015, only 4 out of 100 were.

San Francisco: If you're unaware that San Francisco is an enormously expensive city to buy real estate in, then you just aren't into real estate. The tech boom and the wealth thereof largely contributed to driving real estate prices to unheard-of levels. The median price to buy a home in 2015 in the City by the Bay was about $745,000, making this the most expensive city in the United States in which to buy a home.

San Diego: San Diego is the second most expensive city in the United States in which to buy a home.

Los Angeles: LA (for these purposes, LA is defined as Los Angeles, Long Beach, and Santa Ana) ranks as the third most expensive city in the United States in which to buy a home.

Have you noticed yet that the top three most expensive cities are all in California?

What Will Happen to California in 2016?

No one knows for sure what will happen with California real estate; people can only speculate. But if you put together certain facts, you could conclude that while the bubble might not burst, so to speak, California real estate might not be experiencing the best year ever in 2016. It might be another "meh" year.

Why?

Fewer deals: In the early years after the housing crash, American real estate investors were buying up foreclosures and short sales and were flipping them. They were speculating that prices would rise. But today, with fewer of those homes on the market and prices in California at much higher levels, investor activity is down. (It's down for foreign investors as well.) All-cash investors were responsible for inflating housing prices by as much as 60 percent.

Mortgage rate increases: The Federal Reserve increased the interest rate in December of 2015, the first such increase since 2006. The increase was small, at 0.25 percent, but when interest rates go up, fewer people can afford to buy a house. Besides that, when interest rates rise, fewer people will refinance their existing loans, and that might push lenders to relax standards, as what happened before the real estate crash, to keep the mortgage process rolling.

Millennials can't afford to buy: First-time homebuyers traditionally make up 40 percent of the real estate market. This hasn't been the case in recent years. In 2015, first-time homebuyers made up only 32 percent of the market. Millennials are often saddled with hefty student loan debt, which prevents them from buying. And many millennials aren't getting high-paying jobs right after graduation.

Construction is down in California: All sorts of reasons account for why construction is down in California:

  • There are the NIMBY people (not in my backyard) who block new construction.
  • There are zoning restrictions (San Francisco). Note that the high prices of San Francisco did lead to a construction boom in 2014 and 2015, but there still wasn't enough housing for the population. Also, most of the new units available were (and still are) too expensive for most people to afford, particularly when you consider that tech companies, such as Twitter and Yahoo!, have been laying people off.
  • There are strict environmental policies throughout California.
  • There just isn't enough land left in the desirable areas.

Relaxed lending standards: Before the big crash of 2008, anyone with a pulse could get a mortgage loan. These loans were called NINJA loans (no income, no job, no assets). Standards tightened after that, but there are signs of standards loosening again. The Rocket Mortgage commercial that aired during the Super Bowl worried many people. However, the point of that commercial was that the application process is now better, not that standards are looser.

With that said, there are signs of loosening standards:

  • To qualify for an FHA loan, you need a credit score of only 580 and a down payment of only 3.5 percent. You can also qualify with a credit score of 500 if you put 10 percent down. To put this in perspective, any credit score below 620 is considered BAD credit.
  • Bank of America now offers a product called Affordable Loan Solution for low-income borrowers.
  • San Francisco Federal Credit Union starting offering a product called Poppyloan with very lenient terms to help people get in a home: borrowers can finance 100 percent of the loan — with an adjustable rate — up to $2 million (!), and pay no private mortgage insurance.

When lenders resort to "creative" financial products to keep business going, you might have an unsustainable situation on your hands.

The Bottom Line

If you're in the market for house, it's better to go by what you can afford than to try to speculate on whether housing will go up or down. As long as you'll stay in your home for at least five to seven years, you should be able to ride out any fluctuations. Use a mortgage calculator to determine whether you can afford to buy a house based on how much income and debt you have, what your credit score is, and whether you have enough money saved up for a down payment.


Real Estate Commission: Explained, Revealed and Compared
By Arvin Sahakian · Aug 17, 2015 · Real Estate Data

Real estate agents receive commissions from home buyers and sellers, collectively earning over $50 Billion per year. Learn how commission amounts are set, who pays them, and how they work in this article. Read more.

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California Property Tax: Complete List by County 2014-2015
By Tim Nguyen · Nov 26, 2014 · Real Estate Data

List of secured property tax rates for all counties of California fiscal year for 2014-2015. Read more.

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California Proposition 60 and 90: Your Complete Guide
By Tim Nguyen · Nov 28, 2014 · Real Estate Data

If you live in California and are over the age of 55 you can effectively reduce your property taxes when buying a new home. Read more.

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What to Expect During the Home Loan Closing Process
By Arvin Sahakian · Feb 24, 2015 · Mortgage

You've heard the term used before, but what does loan closing mean? Find out all you need to know about the process. Read more.

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The Surge in Foreign Real Estate Investment in the United States
By Laura Agadoni · Feb 24, 2016 · Real Estate

Foreign real estate investment in the United States, both commercial and residential, is a huge phenomenon that is only expected to accelerate, maybe even to skyrocket, in 2016. Read more.

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Houston vs. Dallas: Which One is Better to Live in?
By Amanda Curry · Oct 11, 2016 · Real Estate

Houston Vs. Dallas? If you are considering moving to either of these major metropolitan areas, we've created a resource to help you make the decision process a little easier. Read more.

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5 Illegal Borrowing Activities: Things That Are Illegal When You Try to Get a Home Loan
By Laura Agadoni · Jan 22, 2016 · Mortgage

Whenever there is money to be made or money to be spent, some unscrupulous folks will take advantage, trying to game the system or commit all-out fraud. Read more.

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Does Homeowners Insurance Pay Off your Mortgage if the House is Burned Down?
By Amanda Curry · Feb 8, 2017 · Mortgage

In this article, we explore how homeowners insurance works and what happens in the event of a house fire. Read more.

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16 Ways to Improve Your Debt-to-Income (DTI) Ratio
By Veronica Nguyen · Nov 29, 2014 · Mortgage

Your DTI is used by mortgage lenders to determine whether you qualify for a loan, and if so, for how much. Improve your DTI with these 16 tips. Read more.

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5 Tips on Getting a Mortgage Loan after Bankruptcy
By Veronica Nguyen · Apr 15, 2015 · Mortgage

A bankruptcy will make it very difficult to attain a home loan. These 5 tips will help you re-establish your credit quickly in order to qualify for a home loan. Read more.

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