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A construction worker installs a window in a new home in San Mateo, California. Housing starts need to pick up significantly if the supply and demand imbalance in Southern California is to be corrected.
There is not housing bubble. But of course you could be excused for thinking that there is, if you live in Southern California. The real estate market here is distorted, with supply and demand out of whack.
The Great Recession meant that we didn't build any houses for four years. The supply of "distressed" properties — foreclosures — is getting tight, because banks are working through their backlog and because they don't want to flood the market and crush what is for them a good thing: rising prices.
But rising prices are a mixed blessing. In some parts of Southern California, everyday buyers who need a mortgage are getting priced out by all-cash buyers and investors looking to snap up properties at a reduced price, relative to what they hit during the peak.
This has led some market observers to say that we're dealing with a housing bubble in the region. But that's not really the story. There are some micro-bubbles. But if you look at the Case-Shiller home price index, it's clear that, although prices have trended up steadily in Los Angeles County since the beginning of last year, the region isn't seeing a price spike on the order of what's happening in, for example, Phoenix, where prices have surged by double-digits.
"We're not at a bubble level yet," said Terry Sandven, Chief Equities Strategist for U.S. Bank Wealth Management.
He added that "housing is a bright spot in the economy," but he echoed an observation that has now become commonplace when studying the Southern California market: inventory is tight. "It's at 1990s levels," he said.
Sandven said the overall outlook for housing is favorable.
The National Association of Realtors has pointed out that the inventory crisis will eventually ease, bringing supply and demand back into balance.
But before that happens, housing starts need to pick up — and they're currently running well below the 1.5 million-per-year average they've achieved over the past four decades. What will close that gap is a more free flow of credit — both to consumers and to homebuilders. But it could take a while for that to develop, given that banks have been much stingier with loans since the financial crisis.