Rapid home price appreciation across California has raised concerns of yet another housing “bubble” on the horizon. According to the latest California Association of Realtors’ data, median prices of sold homes jumped almost 32 percent over the last year.
Other indicators which measure price changes show similar home price increases. The Case-Shiller Index, for example, showed a 25 percent home price increase from April 2012 to April 2013 in the Los Angeles metropolitan area.
An increase in prices itself does not equate to a bubble. During the last boom, price appreciation was fueled by sub-prime loans that were packaged as mortgage-backed securities and increases in construction activity which was not supported by demographics.
Current price appreciation is driven by the lack of available inventory of homes for sale. There are four main reasons for this:
1. Investors bought many distressed properties and are keeping them as rentals.
2. Many international buyers have entered the California market.
3. New home construction activity in California came to a halt following the housing bust.
4. Nearly one in five homeowners in California is still underwater on their home mortgages.
Going forward, the pace of house price gains is expected to slow. There are several reasons to expect this:
1. If prices continue rising at 12 percent year over year, housing will be overvalued relative to rents within the next few months and relative to incomes in early-2015.
2. Mortgage rates and mortgage servicing costs are rising and will keep rising.
3. Investors are having a harder time finding bargains
4. Demand from traditional buyers will replace investors but take time and a bit of steam out of the market.
5. Sellers are starting to return to the market in greater numbers. Inventory is increasing.
The “experts” predict now that home price appreciation will flatten to about a four percent annual increase in 2014. Stay tuned.
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