Some Of Us Are Wishing For a Bubble

This is crazy, but I've heard more homeowners and renters wish for a bubble lately. Yes, even homeowners. (Note: these are the same folks who bought in the crash and will do it again every time--I know I would).

When things crashed, there were many jumping ship, and just as many were clamoring to scoop up one, two or more properties. It sounds like crazy speculation but really, it's logic. These same properties at the crash were selling for crazy low prices such as $200-400k. Previously they sold for double those numbers. When you know that demand for these homes were there at double the price, why wouldn't you buy that property when it's half the price?

That's the past, and with no real bubble in sight for the next 2-3 years, prices are high. Some say it's unsustainably high, but that's all relative. Our friends in NY and London and SF are laughing at LA prices because they are so "low." In fact, folks from these cities are buying a second home in LA.

So what hope is there when inventory is low and prices are high and you want an investment property or a first home because renting sucks?

Two things:

1. You have to take advantage of the still very low interest rates

2. You have to give up the fantasy of buying a 3+2 in Silverlake or a 2000sf loft in DTLA for $600k.

Hot areas that are half dumpy but cleaning up:

1. Frogtown
2. Atwater Village
3. Glassell Park
4. El Sereno
5. West Adams
6. Leimert Park
7. Lincoln Heights
8. Garvanza
9. Hermon

Areas that people say are hot but will probably take 10+ years to see ROI:

1. Boyle Heights
2. East LA
3. Inglewood
4. Compton
5. Cypress Park (Some parts)

Areas that are so hot, it's over:

1. Echo Park
2. Mt. Washington
3. Montecito Heights
4. Highland Park

Are We In A Bubble?

What a crazy time in real estate--again. Prices are high, inventory is low, people with cash are buying left and right, open houses on good homes are a zoo and bidding wars are still happening.

What's the difference between now and 2007? A lot.

1. Inventory is very, very low. Sellers aren't selling. That's a lot of why good properties in good areas are mobbed by buyers who are ready to go.

2. Rents are super high. Unlike the last time, when rents were very low, right now, rents are super high. LA is having affordability issues. (Well, not compared to NY and SF). More renters are in the buying market because they are sick of paying skyrocketing rents.

3. Interest rates are still low, and while lending is getting more creative again, it's still hella conservative compared to the last time. I remember when I refinanced my place in 2006, and they basically didn't ask for any paperwork except a bank statement and property tax info. The appraiser didn't even come out to the property--they just did it using the MLS and google maps. Things have changed.

That said, it's important to know that the days of buying low and selling high within 1 or 2 years are pretty much gone. If you're buying now, the only way to gain substantial equity is to buy and hold for 5-7 years, or buy a fixer and do some rehabbing to add value. Example: My client just bought a Culver City adjacent dump for about 5k. Recent solds on the same street are $1Mill. With real estate, what you do and when you do it are very key.

As Long as Inventory is Low, Prices High, and Yet People Are Still Buying

Interest rates are now up to 4.4% for a 30-year fixed--it was 3.95% just a few months ago. Normally, this causes some slowdown. But things aren't normal. Inventory is unusually low. And the increase in the interest rate wasn't enough to scare off buyers.

This means that prices are still high. So why are people still buying? Because homeownership can be pretty lucrative if you can wait out low cycles. The average home owner has a net worth of $195,400 while the average renter has an average net worth of $5,400.

Plus you aren't subject to the pains of having to deal with annual rent increases. Or awful landlords. And you can make changes to your property. You can AirBnB your place if it's a single family home. You can add roommates. And you can deduct your mortgage interest and property taxes. And best of all, if you've done a 30-year fixed loan, your monthly "rent" won't change for 30 years!

Housing Shortage. People Moving to LA. Prices Up.

There have been a few articles floating around about people moving out of L.A. due to the expensive housing market. This may be true, but does the city feel any emptier? Certainly not to me.

If anything, it feels way more crowded everywhere in the city than it did 5 years ago. More cars, more people, more crowds everywhere. And lately, half of my clients are from out of town. They are moving from places like NY, SF and the OC. Many are moving for jobs. Many are moving for a different pace of life. In my experience, more people are moving to LA than ever before.

And there is a housing shortage, and when there’s a shortage of anything, what happens to the price? It goes up.

Housing Shortage Causing High Prices to Remain Steady

Things should be slowing down on housing prices. It should be, but it's not. It's not that LA is invincible--we all know that a financial crisis can affect every city. But the fact is, that there is a housing shortage. And where there is a larger demand, prices will be high. A few years ago, I was very bullish about buying, but that's because prices and loan rates were at historic lows. Today, loan rates are still super low, but prices are high, and to add to the mix, there is a massive housing shortage. The laws of supply and demand say this should lead to ongoing high prices. Some are saying to buy now because the shortage will continue. Others are saying that a dip is imminent. It's hard to say who's right at this time.

This according to LA Times writer Steve Lopez:

 "Today, home ownership in California is the best investment any of us will ever make, thanks, in large part, to a scarcity of housing. The pace of construction has not kept up with population grown and demand, so those of us with houses own a staggering amount of equity wealth that grows even as those without homes pay a higher price for survival.”