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Has Los Angeles real estate bottomed? Will LA see the 2006 highs again?

April 20, 2013 Leave a comment

Simple answer: Most likely

Why is it likely that LA county housing has bottomed?

It seems the 2006-2012 housing bottom in LA county is following a very different but possibly the same outcome price pattern that we saw from 1990-1995.

The magnitude of the drop from peak to trough was about 27% or (101-74/101).

Notice how it took just about a decade to make it back to the 1990 top.

Below is a graph of the very long drawn out bottom of the 90’s real estate bubble.

LA_1990_1996

It is impossible to project out perfectly how housing will trend from here on out but…

From a quantitative level there are several noticeable differences here when you compare the 90’s bubble with the Great Recession housing bubble.

First the magnitude of the drop far surpassed the one in the 90’s. The index dropped over 40% (270-160/270) compared with 27% in the 90’s.

Second assuming 2009 low holds the velocity of the drop in the 2006 housing bust was almost twice as intense. The 90’s bottom took about 5-7 years while the 2000’s housing bottom looks to have lasted about 3 years.

LA_2006_2013

Where does LA housing go from here?

If you look at the historical average return for LA county housing from 1987 to 2012 it stands at about 4.76% smoothing out the booms and busts.

So in a perfect financial modeled world we would see the 2006 peak reached in… 2020-2021. That’s only 6-7 years away for anyone who bought in 2006 to be made whole (assuming they have not rented out that property, refi’d through some government program, etc…) The final stages of the bull markets in CA real estate can average double digit annual returns. If history repeats itself or at least rhythms we could be headed for 2-3 more years of better than average annual returns north of 8%-10% which would accelerate the revisiting the 2006 top timeline and complete another 10 year cycle.

Of course we know that real estate returns is far from a linear progression and operates under the vicious market boom/bust cycles. California in particular is a very volatile marketplace compared with other markets.

“Knowing is half the battle” ~GI Joe.

housing_lacounty042013

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