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.


Why the Obama administration thinks the housing market is improving



An improving housing market is bringing buyers back.

The federal Department of Housing and Urban Development and the Treasury Department just released their October "Housing Scorecard," a rundown of all things housing and housing-related in the U.S. economy.

The October Scorecard contains a huge amount of housing data, but the really good news has to do with prices — and although there's a limited amount information related to Southern California and Los Angeles, the news is fairly positive. After crashing during the financial crisis and stumbling further in 2011, they’ve begun to steadily move up this year.

Even better, expectations for rising home prices are more optimistic. 

They never dropped as far as feared back in 2009. Rather, prices have bumped along, rising and falling, for three years. Now they appear to have formed a bottom and are projected to resume a trend of price appreciation that was completely distorted by the bubble that inflated between 2003 and 2007. Check out the two charts above in the short slide show. They tell a reasonably happy story.


September home prices: California is still down from the peak

Justin Sullivan/Getty Images

A construction worker cuts a piece of wood on the top of a home under construction at a new housing development in Petaluma, California. Homebuilding should pick up in California as demand rises and supplies stay low. This should put some downward pressure on prices.

CoreLogic released its September home price index Tuesday. It showed that while prices are up nationally by almost 6 percent from last September, they're still down over 37 percent in California since the peak of the housing market six years ago.

Given that we're experiencing a minor bubble in home prices at the lower end of the market in Southern California, this should provide some solace to buyers who are concerned that they're never going to be able to buy a house this cheaply again. 

Interest rates should remain at historic lows through next year at least, and with prices down almost 40 percent from the peak, it's going to take some time for the market to normalize. Additionally, more foreclosed properties will come to market, homebuilders will begin to build into surging demand, and homeowners who have been waiting out the aftermath of the housing crisis may decide to put their properties on the market.