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Will The Real Estate Bubble Just Burst Already?

  • Don't expect a crash or real estate downturn anytime soon.

  • Sales prices are appreciating responsibly and gradually "leveling off".

  • The number of sales each year across the state and county is safe and stable.

People are probably getting tired of sounding like a broken record talking about a real estate bubble, but people still listen to them. So let's talk about it again, and help put our home buyers in the market back at ease.

First, all these "Chicken Littles" out there who think the sky is falling... in their defense, even a broken watch is right twice a day, so at some point, they HAVE to be correct, but they are more likely to fall through their worn-out soapbox waiting for it to happen.

Yes, eventually the market will shift and they will be right... but not anytime soon. Let's take a look at the people who talk about the bubble, mainly so we know who to ignore:

1. The Peanut Gallery. These are the people making all the noise. Repeating tidbits they hear from “click bait” news zealots who get paid by advertisers every time someone clicks on their links. Not to mention, most of the garbage you find was written years ago. Midnight on New Years Eve has come and gone, with no spaceship, just a bunch of dorks sitting around in their Keds drinking Kool-Aid.

Ignore them.

2. Real Estate "Enthusiasts". These people THINK they're in the market to buy, but they really just like talking about it. It makes them feel smart. Trust me, as an agent, I have the same conversation with these "enthusiasts" every single day.

Ignore them, too.

3. Actual Buyers. These are the ones going to open houses on the weekend, talking with their lender--people who actually have their agent's number saved in their phone. These people are on the front lines, writing offers, and have their finger on the pulse of the Los Angeles real estate market.

Let's look at the ACTUAL numbers, shall we? I could go on and on with data, but to keep this short, I'm only going to look at two things:

  1. Sales Prices

  2. Number of Sales

Sales Prices

We tend to think of sales prices in Los Angeles like a runaway train with nobody at the wheel. But, even though prices continue to climb, the RATE of how fast they climb is slowly decreasing. For example, in the City of Los Angeles, median sales prices jumped over 50% from 2012 to 2013. Then by 20% the year after. 15% the year after that, and by 9% in 2016.

Just like an airliner leveling off at 35,000 feet nice and easy. But in this case, homes settling in to a steady 5-7% increase year-after-year until something dramatic changes. In contrast, during the bubble, the rate of appreciation got faster and faster over time.

In L.A. County, it jumped from 5%, to 8%, to 12%, 19%, 21%, to 26% before it lost control and values dropped 33% in 2008.

Have We Passed The Peak Prices in 2007?

In the State of California, and even in L.A. County, we have not passed the sales prices yet, so we still have room to grow if you're simply looking at prices. At the highest peak in L.A. County, we were at $625,000 in September 2006.

In June 2017, we closed in just under $550,000. However, in the City of Los Angeles, we are above those values by almost 10% of where they were at the previous peak. In luxury areas like Los Feliz or Santa Monica, prices are 25% and 30% above their peaks (respectively). But we should also know, the bubble was created by artificial prices.

Homes with no business being valued at the prices they say in 2006 & 2007. But Los Feliz? This neighborhood is classic Old Hollywood, and Santa Monica is well, Santa Monica! There's nothing inflated about neighborhoods like this with real "merit".

Number of Sales

The Peanut Gallery also likes to discuss how the number of sales has been dropping...

This is 100% false.

In fact, in all of California, we are seeing the OPPOSITE of what happened last time during the bubble. After the recovery in the mid-90s, the number of sales DOUBLED over a span of 10 years from 1995 to 2005, and then crashed and burned, dropping by more than HALF (60%) over the next two years leading up to the crash. Then in 2008, the number of sales spiked with investors jumping back in the market, and has been lowering steadily by about 2% each year ever since.

Actually...the number of sales is higher than they were in the early-90s by almost 50%, but nothing like they were during the bubble.

Just so you know, I could keep going with more than just Sales Prices and Number of Sales:

(but I won't)

  • Lender Requirements

  • Crash Cycles

  • Misleading Affordability Indices

  • The Merit of Neighborhoods

  • Suppy & Demand

  • ... the list goes on.

My Advice

Relax. Don't freak out. It's not going to happen anytime soon.

But... even if values crash to $0.00 the day after you buy (which they won't), you still need a place to live, and you'd either pay for a mortgage or rent to live somewhere. In most neighborhoods of Los Angeles, the values always rally, and you'll end up better than you started.

The real estate market is strong because it is real and tangible, unlike Enron. You can't raise a family for 30 years in a piece of stock.

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