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Will Los Angeles Blow Itself Up Into Another "Housing Bubble"?

Will Los Angeles Blow Itself Up Into Another "Housing Bubble"?

Some experts are claiming that 2016 is going to see the Los Angeles housing market blow itself out of proportions and inflate into a 'housing bubble' that may be equivalent to, or even exceed, the one that it experienced in 2006.

California's housing prices are notoriously steep. The real estate media writes about an "affordability crisis" that is brewing in the Golden State. Realty reports show that the California home premium - the difference between California median house prices and U.S. house price medians - doubled in the last four years, from $126,000 in 2011 to $255,000 right now. And prices continue to climb.

Rental prices are no better. The Joint Center for Housing Studies (JCHS) of Harvard University stated that in prime areas such as San Francisco and Los Angeles almost 60 percent of renters consumed too much of their income for a roof over their heads. About 58.5 percent of the renters from Los Angeles/Orange County (LA/OC) metro areas are "burdened" which means that they are using more than 30 percent of their income for rent and losing out on other necessities such as food and healthcare. As much as 32.8 percent of renters are said to be "severely burdened" consuming over 50 percent of their income for rent's payment. Los Angeles,they reported, had become the 22nd least affordable metro in the country and too many renters have been evicted due to their failing to pay their rent.

Experts trace climbing prices to a variety of factors:

Lack of space - Inner spaces are cramped as they are. As acerbic author of "Dr. Housing Bubble" blog puts it: You may as well look forward to becoming 'los sardines' in a future of relentless cramming and out-of-sight prices. To make it worse, federal construction looks for green space making it even more limiting for residents to set up tent. Regulations call for high rise constructions leading to monstrosities in some cities, although suburbs still have the roomy houses with swimming pool, tennis fields and accessories that belong to the affluent. Lack of space leads to higher prices

Foreign all-cash buyers - Foreign millionaires have their eyes focused on the Golden City of LA. Constructors outbid each other in erecting eye-boggling commercial and residential pieces and some foreign investors plunk those with outright cash. So houses are built but they are constructed on scales that appeal to the wealthy. And the less-wealthy working class or middle-class families remain without.

Opponents of the system have spent large amounts of time and money writing about the problem, fielding meetings, even trying to get government involved. Activists point to the growing chasm between rich and poor and argue that everyone - regardless of fortune - needs a place to call their home. No matter! Housing prices have imploded. Which is why experts lament that Los Angeles is busying itself with blowing another housing bubble which is going to be deeper and more insufferable than that in 2006.

Critics disagree

In a recent debate on the Motley Fool, critics argued that if you live in Los Angeles, you can still find affordable homes albeit in shorter demand. It all depends on where you want to live. Take poorer areas and farmlands in California, for instance. They have plenty of space and homes that suit your bank account.

The problem, these experts argued, is that there is a lack of affordable homes in certain areas, and that this lack of affordable homes in those areas is growing.

A bubble implies irrational price inflation. Inflation is fine. It is no larger or smaller than elsewhere in the USA. The problem is that there simply isn't enough housing supply in certain areas to meet demand. Generally speaking, prices rise when the supply of listed homes falls below six months' worth of sales. Right now the inventory of unsold homes represents 5.1 months' worth of sales at the current pace. Get more supply on the market, these experts argue, inflate the housing inventory and demand is met. This is logical according to the fundamentals of the Economic law of supply and demand. When demand is high but supply low, prices rise. Elevate supply and prices will drop.

The 'housing bubble' and private money lenders

Los Angeles has seen more alternative commercial lenders this past year and this may profit the City's housing problem since alternative lenders help borrowers who are unable to land mortgages gain their funds another way. Private money/ bridge/ hard money lenders focus on the value of the collateral rather than on the borrowers' credit history and trustworthiness. In this way, borrowers can actually sell or reconvert their homes and put them on market. This expands the inventory and stretches supply to meet the demand. True, that borrowers are dissuaded by the exorbitant rates of these lenders and true too that borrowers are intimidated by the risk of losing their property. But the bottom line is that alternative commercial lenders are a boon to the Los Angeles real estate environment. Whether or not LA is in a housing bubble doesn't matter because prices are tight regardless and all realty reports unequivocally state that most are unable to afford homes (or even to afford their rent). Alternative commercial bridge lenders help more people place their homes on the market. This may balance out prices and may - is this too wild to hope? - level out housing affordability somewhere down the line...

Some see hard money lenders as greedy and disreputable. If you know how to use them, they may help you and save your City.