Housing Bubble

HOUSING BUBBLE….Do we have a housing bubble here in Southern California? It sure looks like it: housing prices in Los Angeles increased 22% in 2002 and 24% in 2003. That’s a 50% increase in 24 months.

But it’s trickier than that: maybe all that’s happening is that prices are finally moving up to levels they should have been at years ago. After all, if you look at the last eight years, prices have risen 97%, or about 9% per year. Still frothy, but not wildly out of line.

But wait. It turns out that housing prices actually declined during the early 90s, so if you look at the past 15 years of data prices have gone up exactly 100%. That’s an increase of less than 5% per year.

Everyone accepts that 5% annual growth in a housing market like Southern California is both reasonable and expected, and if you charted straight line 5% growth for the past 15 years you would have concluded in 1999 that housing prices were way too low and were set to rise. And they have.

So is Southern California housing a bubble? Or just making up for poor performance in the past? For a variety of reasons I still tend toward thinking it’s a bubble, but I’m less sure than in the past. Caveat emptor.