California’s Inland Empire is not a housing bubble
House prices in California’s Inland Empire are at or below their stable relationship between the cost of ownership and the cost of rent.
After the devastating collapse of house prices in 2008-2012, buyers are rightfully wary of buying into another bubble. After watching their neighbors suffer with excessive payments and negative equity, prudent renters don’t want to suffer the same fate. And with a nearly 80% increase in house prices in Riverside and San Bernardino Counties over the last three years, people have reason to worry.
There are very few economists with any credibility to comment on whether or not housing is a bubble. Lawrence Yun of the NAr has no credibility to comment on anything related to real estate, and most other economists completely missed the housing bubble because their analysis techniques weren’t up to the task. One of the few economists with any credibility in this area is Chris Thornburg of Beacon Economics. In his opinion, the Inland Empire is not in a bubble right now, and my analysis agrees with him.
Home prices, sales continue to rise but UC Riverside director of economic forecasting says Inland Southern California homeowners need not fear a housing bubble.
The job pace is still running at 1.5 million a year, he said, and a drop in employment is a lagging indicator to flat industrial production in the United States over the last eight months. “We may have slowed from 75 to 50 miles an hour, but we’re not going in reverse,” he said.Thornberg flashed the slide on the screen because he said he’d just read a Bloomberg report that had an survey of economists predicting a U.S. recession in 2018.
“This is one of the silliest things I have ever seen in my life,” he said. “Is there going to be another recession? Of course. Do we know when it’s coming? No.”
Inland Southern California lived under the shadow of the Great Recession for so long, folks fret everything’s going to come to a crashing halt at any moment because things are okay, Thornberg said.
Though there are some headwinds, Thornberg said the labor market has turned the corner. The housing market is bouncing, and credit is expanding, he added, “We are not in a bubble.”
This kind of pessimism is common after a major financial bust. Just as people in 2005 believed nothing could wrong, the same people in 2015 believe nothing could go right. The truth is rarely at the extremes.
A Claremont McKenna College Inland Empire Economic Forecast for 2015, delivered in partnership with UCLA Anderson Forecast, said the Inland housing market is showing signs of life. Even with home price gains, Inland home price is still 25 percent below the peak.
“Those prices were the result of a bubble, and were not sustainable.”
Thornberg sees home price gains settling into the 5.5 percent range. The housing market still has at least 15 to 20 percent headroom on price, he said.
What does the data show for the Inland Empire?
The median recently climbed above $300,000. Despite the rapid rise in house prices since early 2012, they are not overvalued by historic standards because low mortgage rates have dramatically increased supportable values over the last 10 years.
The same is true in San Bernardino County.
Stable rent growth reflects an improving economy, and for the first time in over three years, the rate of home price appreciation is less than the rate of rent growth, which strongly implies the current rate of home price appreciation is sustainable — at least as long as mortgage rates remain low.
After the remarkable reflation rally, the rate of home price appreciation has slowed to a sustainable rate. This is the first time home price appreciation exceeded 7% without a major home price decline.
The relationship of rent to the cost of ownership suggests today’s home prices are reasonable; thus the market is rated highly by my system.
Capitalization rates exceed mortgage rates, so cashflow investment opportunities still exist across Riverside and San Bernardino Counties.
The deals are not as good or as common as they were a few years ago, but the opportunity has not entirely evaporated.
The data demonstrates that the Inland Empire is not a housing bubble waiting to pop. If mortgage rates rise, houses may become less affordable, and sales volumes may suffer, but unless mortgage rates rise significantly, or we get a major economic contraction, the housing market should remain stable.