Volatility in real estate prices is not new to California. During the 1970s, real estate prices detached from typical valuations of three-times yearly income seen in the rest of the country. Once residents realized they could push up prices in their real estate markets to dizzying heights, they have been doing it ever since. Greed springs eternal.
In the late 1970s prices rose to nearly five-times yearly income in a widespread real estate bubble. After the crash, prices stabilized at around four-times yearly income for a few years before Californians began inflating the next housing bubble. This first bubble was widely documented. It is credited with creating the bubble mentality in California. Prior to this bubble house prices were near three-times income as was common in the rest of the United States.
In the late 1980s prices rise to over six-times yearly income. Since this bubble was larger, it took longer for prices to fall to sustainable fundamental valuations. In a six-year decline from 1991 to 1996 prices fell about 20% across the state again bottoming at four-times income. The deflation of this second bubble also stopped at four-times income. Neither bubble deflated all the way to the three-times income levels seen in the rest of the country.
The most recent housing bubble is the third such bubble in the last 30 years, and it is the largest of all. The detachment from traditional measures of valuation was so extreme that it is difficult for many to comprehend. In most California markets, prices rose to over eight-times yearly income. This is more than double the stable, fundamental value. There are some markets where the price-to-income ratio exceeded twelve times. The really crazy part was that people still believed that prices would continue to rise even at valuations that were nearly incomprehensible.
As of early 2009, most markets in California have corrected more than 35% from the peak in 2006. Prices are still falling, and they will continue to do so until the four-times income ratio is reached again. This price-to-income relationship is the stable and predictable bottoming price in California real estate. Prices stop falling in this range because it becomes less expensive to own than to rent.
Each time the bubble bursts, the crash is incorrectly blamed on some outside force, and each time the rally is thought to be different than the rally in previous cycles. It never is.
Lawrence Roberts is the author of The Great Housing Bubble: Why Did House Prices Fall?
Learn more and get FREE eBooks at: http://www.thegreathousingbubble.com/
Read the author’s daily dispatches at The Irvine Housing Blog: http://www.irvinehousingblog.com/
[tags]housing, real estate, buying real estate, housing bubble, real estate bubble, house for sale[/tags]
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