California property bubble
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While it is generally accepted among economists that there is a US property bubble, California is considered to have the most severe case. "There is no reason that a house should be worth 40 percent more today than it was two years ago," UCLA Anderson Forecast economist Christopher Thornberg wrote in a report, "This is a bubble." With prices rapidly outpacing personal income (prices are growing at an average rate of 20% per year), many economists feel that it is only a matter of time before the bubble "pops".
Economic Analysis of \"Bubble\"
However, assuming the supply is roughly balanced with demand, a housing market is a seller's market, and as such home prices will reflect how much the buyer is able to pay (and not necessarily what they are just willing to pay), As such, a) the Bush income tax cuts of 2001-2003, b) the Fed lowering interest rates to historic lows at the same time, c) loosening of credit standards (high loan-to-value ratios, undocumented income loans), and home-rich owners increasingly leveraging their existing real estate equity to acquire investment properties, were in retrospect a 'perfect-storm' of asset inflation inducements, since a), b), and c) combined to put more money in every buyer's pockets, resulting in increasingly higher & higher price bidding on properties, while d), the speculators, serve(d) to restrict the supply available to actual home-buyers, driving prices up for them even more.Future Indications
There are varying predictions as to where the market will go from here, as it has already begun to show signs of cooling. Housing prices have driven several major employers to move their headquarters out of California, including Toyota and Nissan. The increase in percentage of homes owned by investors rather than residents has led to a situation where there is an oversupply of rental property, which can be expected to lead to a reduction in rental income and negative cash flow for many landlords. These factors, combined with the effects of interest rate increases from adjustable-rate mortgages originated over the past few years has led to a rise in foreclosures, which is expected to continue. All these factors are indicators that seem to predict that housing prices will decline over the next few years and reach an equilibrium.
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