A version of this article by Dr. Steve Sjuggerud first appeared on March 24th in the Daily Wealth Premium, published by Stansberry & Associates Investment Research, an independent investment research firm. You can visit them at www.stansberryresearch.com.
“Everyone here says Los Angeles is in a housing bubble,” my friend in L.A. said to me this week. Is it true? Is American real estate in a housing bubble again, just like it was in 2006?
The short answer is no – not at all.
The smartest thing my friend could do is be bold, ignore “everyone in L.A.,” make the contrarian choice, and buy a house (or two!).
We can most easily see the story in L.A. with a couple charts. The first chart is the median price of a house in LA, adjusted for inflation. You can see house prices soared in the mid-2000s… and then crashed:
At this moment, house prices are on their way back up… But importantly, they’re still nowhere near their old peak prices.
I get why “everyone” thinks L.A. is in a bubble… $500,000-plus is a lot of money for a house. And that’s what they cost in L.A. today.
But based on history, today’s prices are not extreme at all for Los Angeles… particularly when you take today’s extremely low mortgage rates into account.
This next chart does just that. It shows the Los Angeles “Housing Affordability Index.” This index looks at house prices relative to household incomes and mortgage rates. It lets us know how “affordable” homes are.
This affordability index chart gives us an even clearer picture… Houses were extremely unaffordable in 2006. Then they were extremely affordable in 2012. Today, we’re somewhere in the middle. Take a look:
In short, since L.A. homes are not near the extreme unaffordability that we saw in 2006, we are definitely not in a housing bubble in LA.
Can House Prices in L.A. Go Higher From Here?
Absolutely! Interest rates are still very low. And most importantly of all, there’s a near-record low of existing houses for sale in Los Angeles.
This is basic economics – if supply is low and demand is high, then prices rise. And that’s the case in Los Angeles today – there is no supply.
But now let’s shift our story a bit because this supply story is not just an L.A. story – it’s a national story.
Home Listings in the U.S. Just Hit Their Lowest Level
Home listings in the U.S. just hit their lowest level since people started tracking the data.
The supply is not meeting demand. And that means that NATIONWIDE, house prices can continue higher from here.
See for yourself…
In 2008, home listings hit all-time highs. Supply hit record levels. What do you think happened next? When there was too much supply relative to demand, prices crashed.
Now, house listings are at record lows. Supply is nonexistent. It’s the opposite of 2008. So what do you think will happen next?
Housing starts are still well below normal levels, as well. With so few new homes and lots of demand, we have hit a major supply-and-demand imbalance in America.
And as long as there are more people searching for homes than there are homes to buy, home prices will keep rising.
I am still bullish on U.S. real estate today. As I said [previously] if you buy today, you are not buying at the bottom. But there’s still a lot of upside left!
Is There a Bubble?
If you are looking to buy a home – but you’re worried that the housing market is “in a bubble” – then please, stop worrying. That “excuse” is no good with me.
There is no bubble. And because the current supply of homes can’t meet the demand, prices can go dramatically higher from here. Now is still a great time to buy a house in America! With low interest rates, and no supply, prices can still go a lot higher. Don’t hesitate. Take advantage of it!!! Good investing.