In a recent interview, UBS Group, an investment banking giant, revealed concerning findings in its latest research report about the Los Angeles real estate market. The report posits that the market is facing significant bubble risks, with potential for substantial price declines. We spoke with real estate expert Li Bingxin, who has nearly 30 years of experience in the field, about these insights.
“The current situation in Los Angeles is characterized by high prices and high interest rates. Only 12% of people can afford to buy a home. If this isn’t a bubble, what is? The standard used to be that 38% to 40% of people could afford a home, which would be considered normal pricing,” Li explained.
Li noted that real estate prices typically follow a cycle of about 12 years, with the last downturn occurring in 2010 when prices hit rock bottom. According to this cycle, 2022 was projected to be a low point; however, the onset of the pandemic delayed this cycle. An important indicator Li mentioned is that real estate downturns often begin with the Federal Reserve (Fed) lowering interest rates. “The recent rate cut by the Fed—could it be signaling the advent of a new economic storm?” he pondered.
Furthermore, Li raised concerns about recent layoffs in high-tech companies. “Employees with expensive homes may find themselves unable to meet mortgage payments due to job losses. If there’s a backlog of homes on the market that can’t be sold, prices are bound to drop,” he stated. He emphasized that while many view real estate as directly tied to interest rates, the more significant factor is the overall health of the economy. “If the economy falters, even low interest rates won’t prevent property values from declining,” he concluded.
On the other hand, Irvine-based real estate agent Paul Young held a contrasting viewpoint. He acknowledged that fluctuations in home prices—specifically minor dips following significant increases—are normal, but he expressed skepticism about predictions of a drastic crash. “Currently, there are no major factors that would lead homeowners to panic sell and flood the market,” he said. Young also pointed to the high costs associated with moving, labor, and materials as stabilizing forces for home prices in the near term.
In summary, while UBS’s report indicates that the Los Angeles real estate market is overvalued and suggests bubble risks, it also clarifies that the presence of risk does not necessarily mean a bubble will burst. The future of LA’s housing market remains uncertain, shaped by various economic factors and differing perspectives within the industry.