Is there a point when real estate markets can become too expensive?
While most of the world still sees U.S. real estate as a bargain, some stateside investors are griping about rapidly appreciating house prices. With that in mind, when does a market become dangerously expensive? At the very least, is there a time when they can become overpriced and unprofitable? How do you spot the indicators? How can you work to ensure the sustainability of your destination? Is there a certain price point at which you should stop hunting for real estate deals?
The answers to each of these questions, and more, can be found below:
The California Real Estate Market is on Fire
Earlier this month, Bloomberg News ran a feature on how strong real estate growth is in California. Of course, it isn’t just California: Miami and New York are seeing fast growth as well. In fact, markets all across the country are. However, Bloomberg notes that June 2015 saw homes selling at their fastest pace in almost 10 years. This put San Francisco home prices just $5,000 under their previous high in 2007. National housing starts are also at their highest level since 2007. However, CoreLogic data shows Southern California is also seeing faster sales growth than the north. The big difference is that San Diego home prices are at an average of $223,000 less than in San Francisco. They are still well below their previous 2007 highs. That said, there is a lot of value if you look in the right places.
The Affordability Crisis
The rapid growth of the U.S. housing market has many worried about affordability. There is no question that both home prices and rents are bounding back from distress steadily. However, it is important that they do so. Prices have been depressed and at lower than normal discounts for almost a decade. We still aren’t even back on par in many areas. It is once we reach that point that historical data suggests we’ll see further growth.
While some say jobs have been slacking, the dynamics have changed. It’s hard to track the new remote working clan. Where house price growth and building is strongest, jobs are being added. For example; In Northern California, Bloomberg reports five or six jobs are being added for every new house being built.
Affordability becomes a problem when key workers can’t afford to live close enough to work. While working at home can solve this challenge for a large percentage of the population, there are still some key functions that require hands-on monitoring – at least until new technology catches on. That includes teachers, law enforcement, fire fighters, food service workers, transportation workers, and others. They can only commute so far. They can only qualify to buy or rent up to a certain percentage of their incomes. However, the biggest tell of when housing became too expensive in the past was when people could no longer afford to buy houses they were willing to live in. When the housing you can afford isn’t up to your standards, it becomes an investor only market. Only investors will buy. Old housing stock needs to be replaced to make room for more appealing housing for more affluent buyers and renters.
However, we do seem to be seeing new dynamics and rules in some of the hottest destinations. Top vacation destinations are now being taken over by real estate investors seeking asset protection, and the income produced by vacation rentals. Some markets are continuing to see growth in this arena, thanks to creative living arrangements and online booking tools like Airbnb.
Building New Solutions
It appears that housing prices will continue to march up for quite a while. How sound it is to invest in the hottest areas will depend on how much investors and buyers are leveraged, and how sustainable the growth is.
Those seeking the best sustainability for their real estate investments can look for cities with smarter planning. While a better housing mix can sometimes appear to be uncomfortable for both the 99% and 1%; ensuring affordable housing is crucial for long term growth. Real estate investors can also bring their own smart planning. Do your part in paying a livable wage or providing affordable housing, even if your main focus is on the ultra high-end luxury real estate.
