Is The Conejo Valley in the Midst of a Real Estate Bubble?
This is one of the most common questions I get these days and understandably so. With prices increasing at a rapid pace and the last bubble still fresh in our minds, many people believe we are in the midst of yet another real estate bubble.
However, there’s very little evidence to support that. If we do see a major pullback in the market, chances are it will come from something outside the real estate market like a terrorist attack, large earthquake or a major change in federal lending policies. These are unlikely scenarios (hopefully).
The previous bubbles “popped” for a specific reason.
Generally speaking, markets usually pull back because of a major event or bad practices.
- In the 80s, our local real estate market pulled back after the Saving and Loan debacle.
- In the 90s, the market dropped after we hit a recession and the defense industry laid off tons of employees in California.
- And of course in the 2000s, lending standards were so lax that almost anyone could get a loan with no money down and below average credit.
What’s different about today’s market?
Markets that increase rapidly hit natural plateaus and remain there until incomes catch up to prices. During the 2000s, with almost no lending standards, we blew past these plateaus by lending to those who really shouldn’t be purchasing real estate. This led to a huge bubble that didn’t take much to burst.
Today’s market is different. Yes, prices are going up quickly and will most likely plateau for a bit before going up more. The difference today is that with tighter lending standards and more down payment required, there simply won’t be the infinite number of buyers to continue to fuel the market and blow past plateaus like we had in the 2000s.
If a typical buyer can’t qualify for a loan, the market will naturally slow and prices will stabilize (maybe even drop a little) which is how it’s supposed to work. We call that a market correction. There’s a big difference between a correction and a bubble.
However, most economists believe that while it’s a slow recovery, the economy is recovering and unemployment is expected to continue to drop. This should provide more “healthy” buyers to the market and continue to drive prices up.
From an affordability standpoint, real estate is not as expensive as many believe. When we had prices similar to today’s prices years ago, interest rates were also considerably higher and therefore the homes were less “affordable” than today.
Last but not least: We don’t have enough homes.
Here’s a very important reason why a bubble is unlikely: We are not building enough homes to keep up with the population growth. Since the Great Recession, many builders stopped building, but our population has continued to explode. Hence the low supply and high demand real estate market we’re in today. High demand + low supply = rising prices.
For the latest local home prices and market trends, click here.