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