Summary:With nine out of the top 10 highest-priced home markets, the much-talked-about housing "bubble" is a preeminent concern for Californians. Housing in the state is at an all-time low-affordability level, with average single-home prices hovering around $450,000, compared with the national average of $220,000, though prices have begun to slow down in the past three months.
So is there a housing "bubble"?
Emile Haddad of Lennar Corporation, one of the nation′s leading home builders, thinks not. Although the market is cooling off, the demand for housing is real, and we will continue to see modest single-digit gains below 6 percent, he said.
Angelo Mozilo of Countrywide Financial Corporation predicts that the market will slow and even decrease by a couple percentage points "so that incomes can catch up with the price of homes." His concern reflects the historic low affordability level that prices many potential buyers out of the market unless they resort to creative financing, which is inherently riskier.
With new-loan originations now being comprised of 60 percent adjustable-rate mortgages and 40 percent fixed-rate mortgages, Mozilo concedes that his company "may be selling products to individuals who can′t manage risk." Risk is particularly prevalent in the expanding condo and apartment conversion market, with 70 percent of condos being sold to speculators who quickly turn their properties around.
The condo market is even more susceptible to commodity price increases that, in turn, raise the cost of construction. "As the builders pass on the increasing costs of construction, we will see investors pulling out," said Delores Conway of USC. This leaves developers potentially losing up to 80 percent of their pre-construction buyers. This level of capital flight could create a falling out of the condo market in some regions.
If there is a bubble, it seems to be founded upon rational underpinnings. Housing is essential because people need a home, and this need is often closely tied to a job. With the ever-increasing shift of jobs to the Inland Empire and the undersupply of housing, prices are driven upwards.
But Mark Zandi of Economy.com said other pressures will keep prices from falling.
"Global investors can′t get enough of U.S. real estate," he said. So although we are seeing record prices, the truth may be a bit more conservative. Demand will decrease as interest rates rise, and prices will level off. But with the constant influx of new residents to California and continued demand for U.S. real estate investments, there will be an ever-expanding base of demand to support current pricing levels.
