Timing the Market

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By MARK COHEN

While most of the Southern California real estate market has remained resilient over the past two or three years, much of the rest of the nation has experienced a more volatile market. In other parts of the country, homes are staying on the market for longer periods, asking prices are reduced, and bidding wars are rare. Sadly, in some places, foreclosures also have been increasing.


Some pundits have heralded a real estate “crash.” Perhaps in some parts of the country “crash” is an accurate term, but not to describe the market we have been experiencing in Los Angeles. I still think now is a good time to buy providing a homeowner plans to remain in the house for a few years.


Homeowners and would-be homebuyers are looking for answers as to what kind of real estate market Los Angeles can expect in the near term. Some real estate agents and mortgage banks have looked for these answers by comparing the current market with the down market of the late 1980s and early 1990s.


There are some similarities, but a significant difference is that home loan interest rates rose dramatically in the ’80s and ’90s and reached well into the double digits. Today, even after 17 consecutive Federal Reserve rate hikes since June 2004, interest rates for home mortgages are substantially lower than those of the late ’80s and early ’90s. Today’s fixed-rate loans are still near all-time lows.


Perhaps more importantly, the current economy of Southern California is considerably more diverse. Twenty years ago, the local economy was heavily dependent on the entertainment, aerospace and defense industries. That dependency meant a downturn in any one of those industries could have a dramatic impact on the housing market. Since that time, the area has experienced significant growth in the banking, manufacturing and professional service industries. Today the greater Los Angeles area enjoys the largest manufacturing base in the country, with some 700,000 jobs. That’s nearly twice as many manufacturing jobs as Chicago, the next largest base.


Additionally, homebuyers have access to a myriad of mortgage products that simply didn’t exist in previous real estate markets. For example, interest-only loans have helped to usher in greater affordability, making it possible for homebuyers to purchase more expensively priced homes.



Negative factors

Yet some significant negative factors also exist, which could impact the housing market in Los Angeles. With jobs and lower interest rates have come all-time high levels of consumer debt. Taxes, the price of health care coverage, and other everyday costs associated with doing business threatens our continued job base.


Subprime loans are another stumbling block. Although they are sometimes referred to as risky or “exotic” loans, some version of these loans has been available for several years. Used properly they are not inherently risky. However, in recent years, noteworthy lenders have used subprime loans more widely and in some cases they should never have been recommended or approved. This has caused subprime lending guidelines to become overly restrictive and the supply of dollars to fund these loans potentially reduced.


In spite of these challenges, when pundits declare that we are experiencing a real estate crash, they seem to be forgetting that prices always vary depending on the home and its location. And Los Angeles remains one of the most popular places in the country to live, which means there will always be a growing demand to own property here.


In spite of the slightly lower asking prices we’ve seen over the past couple of years, the Los Angeles real estate market has remained relatively strong and prices are already improving. Whether we will see home prices return to the levels of two or three years ago remains to be seen. But a crash or a long drawn-out correction has not and will not happen.


There is one important lesson that can be drawn from every real estate market on which homeowners and homebuyers can bank: No matter what fluctuations the market experiences, over time, prices in Los Angeles rise. During any market, I remain convinced that owning real estate in Southern California is one of the best investments a person can make. That was true in the late 1980s and early 1990s, and it remains true as well, today.



Mark Cohen is president of Cohen Financial Group, a Beverly Hills-based mortgage brokerage firm.

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