Explaining Southern California's economy

LA home buyers beware! Investors are inflating the real estate market

Justin Sullivan/Getty Images

A construction worker installs a window in San Mateo, California. He needs to build a lot more homes in Southern California in order to get the market back to normal.

DataQuick released data on October Southern California home sales Tuesday, and while the news looks superficially good — sales are up, prices are rising, foreclosures are down — the market remains distorted.

There are three factors that should make prospective homebuyers wary:

  • There's a shortage of housing supply in Southern California, creating a bubble, with demand outstripping existing inventory and pushing up prices.  Few new houses have been built in the region the past four years.
  • Money is cheap. Mortgage interest rates are at historic lows. Combined with prices that were depressed by the bursting of the big housing bubble four years ago, this is drawing buyers into the market and convincing sellers that now is the right time to put homes on the market.
  • Investors are major players in the market.
That last point should concern plain Joe and Jane buyers the most. This is from DataQuick's release:

Investors continue to account for an unusually large share of all sales.

Absentee buyers – mostly investors and some second-home purchasers – bought a near-record 28 percent of the Southland homes sold last month. That was up from 27.7 percent the prior month and up from 25.4 percent a year earlier. The record was 29.9 percent in February this year, while the monthly average since 2000 is 17.6 percent. Last month’s absentee buyers paid a median $245,000, up 22.5 percent from a year earlier.

Buyers paying with cash accounted for a near-record 32.1 percent of October home sales, down insignificantly from 32.2 percent the month before and up from 30.0 percent a year earlier. Cash purchases peaked at 33.7 percent of all sales this February, and since 2000 the monthly average is 16.8 percent. Cash buyers paid a median $250,000 last month, up 21.1 percent from a year ago.

In other words, if you're looking to buy a house in Los Angeles, expect to run into buyers with quite a bit more financial firepower that someone who's coming to the table with designs on a mortgage. It doesn't matter how creditworthy you are if the competition has pickup truck full of cash. And remember, investors are...investors. They can afford to lose money and make money, as long as they make more money in the long term. Everyday buyers have different motives for buying a home, a losing money usually isn't one of them — even if the losses are only temporary in a market that will inevitably adjust.

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