Friday, August 19, 2005


I stopped counting the number of articles in the last few weeks about the Real Estate Bubble. The experts all assert that most of the trouble areas are in California. I find it intriguing that they all seem to ignore one fact that makes the California market different then other areas of the country.. Namely we have more people coming to California in a week then most states have in six months or a year. The population continues to increase dramatically each year while the housing supply increases only marginally. Inland... Bakersfield, Riverside and east San Diego County still have land to expand so they can increase their housing supply. But even in these areas traffic and density issues are an increasing problem to local communities. California coastal communities and major metro areas have housing dilemmas due to lack of land and infrastructure issues that make expansion of housing very difficult.
The South Bay is built out..they aren't making new land here. Locally, when an older structure is replaced with a new one, it is usually a large and expensive home or perhaps two upscale townhomes. An older home might become a rental or if it is not torn down a more affordable home purchase then a large new home or townhome. As these smaller older properties (single family homes and small income units) disappear and are replaced with significantly more expensive choices the prices on the few remaining older properties go up. Unless cities make major zoning changes to allow for higher density it is physically impossible to increase the housing supply. The current traffic and infrastructure problems in all South Bay cities make higher density housing unlikely without other major changes.
Are we facing a bubble or just supply vs demand. I suspect it may be a bit of both. The market is probably due for a price correction because income is not increasing as rapidly as home prices. Interest rates increases will make financing more expensive and fewer buyers will qualify for loans. But don't expect to see huge price declines. A more likely scenario is a flat price market or at worst modest price cuts of 5-10%. When you consider that in the last 5 years home prices in our area have increased almost 100% that is a very minimal decrease. As population increases; the demand for existing homes will invariably push up prices. I've lived in California most of my life and while prices may dip from time to time home values always increase far over previous levels.

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