With SoCal August home sales off almost 10 percent from this time last year, talk of the Housing Bubble has continued, and will probably continue for some time.
While the Inland Empire led Southern California in gains, other places such as Orange County saw huge drops in sales. In fact it was the weakest August in 8 years. More important, some analysts say, while the cost of single-family homes have continued to rise in Orange County, rental rates have not.
"The market isn't acting rationally," says UCLA economist, Christopher Thornberg, "Fueled by interest rates that have remained near record lows, prices have continued to soar, and the gap between home values and the underlying fundamentals such as personal income and job growth is greater than ever."
Since 2000, for example, San Diego property has risen in value 76%, but income increased little.
As interest rates rise, followed by soaring property taxes, some analysts speculate the market will revalue. While this might not normally be a problem, the reasoning goes, it will be particularly troublesome in areas like Southern California, where real estate has become so unaffordable, that 60% of new buyers are using ARMs to make up the difference.
As rates and taxes rise, ability to keep up with mortgage rates might tumble.
Others aren't buying that story. Those analysts point out that past real estate bubbles burst only after major economic crashes, such as Silicon Valley and the aerospace industry. Raphael Bostic of USC's Lusk Center for Real Estate states, "Nothing extraordinary will happen in the business of buying and selling houses."
Additionally, recent crashes were also preceded by huge building booms. No such booms exist today and the supply of houses seems to fall short of demand well into the future. According to the Harvard Joint Centers for Housing Studies, the supply of U.S. housing will have to rise 10% annually through 2015 just to accomodate the amount of new households being formed.
As ARMs mature into their adjustable rates in the next few years, an additional supply of houses might hit the market. The full impact of such short-sighted financing will be dependant upon many market conditions. Regardless, the final result is extremely hard to predict.