In a way UCLA was way to early in predicting the peak for housing. Unfortunately this has discredited them from many mainstream media outlets but their early predictions are starting to pan out. That of increasing inventory and prices dropping. In regards to employment, hard to believe one would think that the local economy would have a factor on this, never has housing played such a crucial role in the overall economy of the country. Think of the industries that are primarily linked to housing:
-Home Development (for example Home Depot, Lowes, Bed Bath and Beyond)
-Lending and Banking
-Real Estate Brokering and Agents
-HELOC and the secondary market for spending. This feeds into another issue regarding easy credit which has added the main fuel to this red hot burning real estate market.
Access to quick equity has never been so easy. And thus the multiplier effect of quick money extraction and quick consumption has propped the economy up. Take a look at Los Angeles County median income: $50,035. The median home is $547,500. And this is for what one would consider starter homes. Think of a couple wanting to purchase their first home, they would need a down payment of over $100,000 for an entry house (homes that are in areas such as Glendale, Covina, Downey, or even Culver City). Not exclusive areas by any stretch of the imagination.
The fundamentals have been knocked out of whack but we are trending down and trending down much quicker than I had thought. Case and point, my uncle purchased a home in 2001 for $140,000 – at the time the same house would rent for $1,100 a month. That boils down to a 9.4% annual cap rate. Fast forward to 2006, that same house would only rent for $1,400 but has appraised for $450,000. Cap rates reflect the value of a home in rental equivalents meaning his home at a respectable 9.4% cap rate should be valued at $178,000. Think about that and ask yourself why would you purchase a home in the current market where appreciation is nearing zero and may go negative by the end of the year? No rush to buy since we are trending downward.
Enjoy life and wait this bubble out. The fundamentals are on our side and UCLA will be vindicated as being correct. Kind of like Schiller predicting the tech bust.
