AgentMarkets & Economy

How high can LA real estate prices skyrocket?

It’s going to take one major disruption or reversal in the system for things to start sliding back to affordability
  • Prices keep rising due to the fact that L.A. hasn’t returned to pre-recession prices, there are inventory shortages and a lack of credit availability, and some experts say believe that prices are going to continue rising for another two years or longer.

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The Los Angeles area is one of the most expensive regions in the country in terms of housing prices, and in defiance of most experts’ predictions, the prices just keep rising.

So how far can this trend continue, and what will happen if and when it finally reverses?

Why prices keep rising

In Orange County, just south of L.A., the median price of a condo is hovering around $500,000, which is astronomical compared to other areas of the country.

Median prices of homes and condos have continued to rise for 62 straight months, an unprecedented upward trend that emerged at the tail end of the country’s economic recovery.

Just five years ago, the median price of a similar condo was around $280,000, a fraction of today’s prices, and home prices were about $260,000 less than today’s, on average.

Beverly Hills houses for sale are going for $500,000 or more — and $500,000 will just get you a starter home. In L.A. County specifically, the year-over-year median price for a home jumped a whopping 9.4 percent.

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If homes are so expensive, why do they keep rising? There are a few possibilities, all working in conjunction with one another:

  • Pre-recession prices: We still haven’t returned to pre-recession highs in the Southern California area, despite five years of consecutive growth (once you account for inflation). This means homeowners are going to be less likely to sell if it means taking a loss, and homebuyers will still be willing to pick up new properties for a little while longer.
  • Supply shortages: Despite the high prices, demand remains relatively high; homeowners can’t keep up, so there’s been a shortage of homes on the market. A limited number of homes for sale and a consistent number of people trying to buy them means that prices are going to continue rising for the next few years (at least).
  • Credit availability: Home credit isn’t nearly as available as it was before the market crash, when financial institutions were giving out mortgages to practically anybody. This prevents people from buying homes they can’t afford and keeps prices from skyrocketing out of control. It also keeps homeowners from flooding the market with their record-high priced homes, which means the supply of homes stays in careful balance, gradually inching up in price for as long as that balance remains.

What happens next?

Some experts have stated they believe that prices are going to continue rising for another two years and maybe even longer than that.

Why? For starters, assuming that house prices and inflation both keep rising at their current rates, Orange County’s median home prices still won’t return to their pre-recession peak for another two or three years.

On top of that, the last upward trend featured year-over-year increases for a little over 10 years (though there were individual month-to-month fluctuations during that period); if that length of time is replicated, there could be another five years of solid home price growth.

However, there are some key sections of the market that could be hitting a peak.

For example, luxury homes (costing $2 million or more) are starting to flood the market, implying that the homes are starting to top out in terms of pricing and valuation. Some people have begun talking about a bubble starting to form — though a bubble like the one that caused the Great Recession in 2008 is unlikely.

It’s hard to say exactly when this trend will stabilize, or eventually reverse, but for the moment, it looks like home prices are going to keep on rising — at least for the majority of homes. As long as supply remains relatively scarce, credit is harder to come by, and we haven’t reached pre-recession highs, it’s likely the trend of growth will continue.

But all it’s going to take is one major disruption or reversal in the system for things to start sliding back to affordability.

Anna Johansson is a freelance writer, researcher and business consultant specializing in entrepreneurship, technology and social media trends. Follow her on Twitter and LinkedIn.

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