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Tuesday, August 31, 2004
The Southern California Real
Estate Bubble Debate Continues
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With the economy continuing on at its snail’s pace and with little job creation, the Southern California real estate market continues to spark a debate about whether
or not Southern California real estate is a market ready to burst, much like the Internet
bubble
As some markets in Southern California begin to build a larger surplus of houses, such as Orange County, some expect a “day of reckoning”. For example, Edward E. Leamer, an economist at
UCLA states, “The question is how that reckoning is going to occur.” While the O.C. had only a supply of 1.4 months of housing in April, it is now up 7.5 months, based on July numbers, which has cooled the massive over-bidding wars on many home sales.
On the other hand, many argue that the real estate market might be temporarily slowing, but that it will definitely not burst, and that it might even pick up steam yet again. An obvious advocate, David Lereah, chief economist of the
National Association of Realtors believes that boom will definitely continue.
In the early 1980s, during the last Southern California boom real estate market, a large number of new houses were built, and when the crash hit Southern California in the early 90s, home prices tanked. Homes in Los Angeles, for example, dropped as much as 20 – 30 percent, seemingly over night.
Since that time, the population has swelled, and is expecting significant future growth, yet not nearly as many houses are being built. Consequently, one might make an argument that Southern California did nothing but make back its losses, as it positions itself for a ‘realized’ housing shortage. Right now, many potentially in the market for a home, are afraid of the economy, afraid of prices, but if they realize prices might stay at current levels and only interest rates will rise, another huge run could be just on the horizon.
Still, much of the real estate market in Southern California isn’t reflective of rental prices. While Southern California rental property has skyrocketed, it has not kept pace with the price of home sales. Either rents will continue to rise sharply, even after housing slows, or the market might have to take another tumble.
The rub is that if the population continues to skyrocket, there won’t be enough housing to support the population; thereby, extending demand for houses. Since the homebuilding industry isn’t raising significant amounts of capital, it is doubtful that a huge surplus could be created anytime soon.
So pick your side of the debate.
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