The Breakdown

Explaining Southern California's economy

3 reasons why you don't want to buy a house in Southern California right now

40782 full
40782 full

The Commerce Department released data on August new homes sales today. Bottom line: sales were flat from July to August, but well up over last year: 18 percent. That sounds great, but there are several other factors to take into account. First, the latest Case-Shiller index provides strong evidence that housing prices in the U.S. are forming a bottom (don't get too excited — we're only back to 2003 levels, even with hard-hit regions like Phoenix posting double-digit price gains). 

Second, housing inventory in Southern California is tight. The supply of foreclosures coming to market is being reduced, and during the downturn, homebuilders didn't do much building.

Third, that lack of supply is colliding with a surge in demand, as buyers decide to take advantage of low prices and historically low interest rates. The interest rates are the Federal Reserve's doing; the central bank wants people to buy houses and bid up prices to get the housing market back on its feet and restore equity appreciation to borrowers who now owe more on their mortgages than their homes are (for the time being) worth.

It's this last part that's the fly in the ointment of what looks like a housing market recovery. And here's why you might want to avoid buying a house in SoCal right now, based on that knowledge...

It's a bubble. Yes, a bubble. Remember that last housing bubble? You know, the one that nearly led to the destruction of the global economy? This one isn't anywhere near that scale. But it's clear to anyone looking at the SoCal market that our lack of housing inventory has caught up with us. You want to buy a house because prices are low and so are rates. It's an irresistible formula: borrow low and buy low — you almost can't not make money, assuming that we have hit bottom and that prices will begin to resume historic patterns of appreciation. Except that for the next few years, the market probably isn't going to behave normally. The Fed is supressing rates. The banks are making strategic decisions about how many foreclosures to sell. If you don't wait until this all smooths out, you could see prices level off or even fall as more inventory comes to market, as it likely will to address the demand.

A wave of selling could put even more downward pressure on prices. Even a small bubble could entice homeowners who've been sitting on a slightly underwater mortgage, once they get back to even or slightly above water, to sell, sell, sell, on the assumption that owning a highly illiquid asset like a house (which also demands maintenance and tax payments) isn't worth the risk, or even the mortgage-interest tax deduction.

Wouldn't you rather own a new house? Because we haven't built a lot of new homes in the past four years, buyers are fighting over older properties, or "existing homes," in the parlance of the trade. If you want to be the first person to move in — and enjoy the real-estate equivalent of that new-car smell — waiting around for homebuilders to, you know, build some homes to capitalize on recovering demand could get you a more modern home, with non-balky plumbing and superior energy efficiency, saving you money over the long haul.

Follow Matthew DeBord and the DeBord Report on Twitter. And ask Matt questions at Quora.

blog comments powered by Disqus

Enjoy reading The Breakdown? You might like KPCC’s other blogs.

What's popular now on KPCC