Real Estate Bubble Indicator

Here are a few links to see how real estate in your area compares to the bubble indicator...

Los Angeles, CA, June 2005
Los Angeles is the “poster child” for how a lack of adequate new housing near employment centers can adversely affect an economy.

Los Angeles still has fewer jobs today than it did in 1990. That’s right, 15 years with zero net added jobs. During the 1990s, Los Angeles lost jobs, built only 111,000 homes, and added more than 650,000 people. That’s right too, only one housing unit for every 5.1 people who moved in. The result has been a pretty miserable deterioration of a great area.

That being said, some great things are finally happening. Downtown Los Angeles is slowly revitalizing. The Playa Vista community is adding thousands of new homes after more than 20 years of entitlement battles, and Lennar will soon be bringing to market the next phase of Newhall Ranch, which will include more than 10,000 housing units. Some of the largest home builders in the country have formed urban infill divisions to build homes for an area greatly in need of it. Still, there is not enough volume for many builders to support operations, so they have stretched their geographic territories to Bakersfield to get enough sales.

Orange County, CA July 2004

With only 6,436 single-family permits and less than 3,000 multifamily permits issued in the last year, Orange County builders are constructing 63% fewer housing units than they did in the late 1980s. Clearly, this new lack of supply has contributed to the phenomenal home price appreciation that has occurred. Since the end of 1996, home prices have appreciated 160% to a median detached resale home price of $572,000. Orange County is the most expensive metropolitan housing market in the country.

While the 14 Giants who build in Orange County are not building too many homes, the percentage of the company balance sheet devoted to Orange County is fairly significant. Land prices frequently exceed $3 million per acre, and most builders have started urban infill divisions to pursue small opportunities throughout the county.

While lack of supply has driven prices to astronomical levels, low supply does not assure builders that price appreciation will continue, or that current pricing can even be maintained. Almost all of the builders have established strategies for a price decline, and many have ventured into more affordable areas in adjacent counties to soften the blow of a price decline in Orange County. With growth of 14,900 jobs per year, and an unemployment rate of only 3.2%, immediate price declines do not seem imminent. However, with 72% of the median household income needed to purchase the median-priced home, which is a comparable level to 1989, builders wonder just how much more expensive housing can get. Our advice: Monitor housing market conditions, especially days on the resale market, carefully, and keep your cash balances high.

Riverside – San Bernardino CA, October 2004
The Riverside – San Bernardino market, which has successfully promoted itself as California’s “Inland Empire,” has a booming construction market that will soon have more homes constructed than Los Angeles, Orange and San Diego counties combined. It is the 4th largest construction market in the country.

In the last 12 months, Inland Empire builders have pulled 48,491 total permits in comparison to 50,519 permits issued in the three coastal counties. Almost 16 million people live in the three coastal counties, in comparison to only 3.6 million people in the Inland Empire.

With 15 of the 20 largest U.S. builders in the Inland Empire, including at least five (K. Hovnanian, DR Horton, Lennar, KB Home and Pulte) exceeding 1,000 sales per year, the Inland Empire is an important housing market. With the median detached resale home price up more than $75,000 in the last year, to $292,900, a significant portion of the large builders’ current profits also come from this market.

Our staff identified more than 250,000 units expected to receive entitlements in the next five years, so we don’t see foresee any slowdown in supply. More importantly, with decreasing competition in the coastal markets, we don’t see any decrease in demand either. The market is not immune from getting overpriced, but there is little question that the long-term demand is solid

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