Are real estate prices in a bubble?

by Mike Cotter
Reprinted from Real Estate Section of the SUN POST NEWS July 29, 2005

Are San Clemente real estate prices in a bubble, stretched to the breaking point, about to burst?

If history is any guide, the answer is no.

True, San Clemente home prices have risen dramatically since 1996, averaging about a 16% annual growth rate, twice the rate enjoyed for the twenty years before 1996.

And true, the last five years have seen that average annual growth rate pushed to about 18%.

But while high growth rates such as these fill the headlines, it is clear that the rest of the world has in the last few years finally and permanently discovered San Clemente.  And a look at recent monthly local data shows that much of the highly touted air had already been quietly let out of San Clemente´s real estate balloon before June of this year.

Unnoticed by many, San Clemente´s residential real estate market assumed a decidedly horizontal bent between May of 2004 and May of 2005, when the median home selling price rose by only 1.3% to $800,000.  This is not the kind of growth rate that bursts bubbles.

The recent flat market did not last long, however.  After the largely overlooked 12-month respite, the median home price rose again to about $835,000 in June and to an estimated $875,000 in July.

Some think that after a sustained period of rising real estate prices, there is bound to be a period of falling prices.  But history does not support this assumption.

Very long-term Orange County statistics suggest that 8% is about the "average" annual growth rate over a period of many decades.  But during the 1970s, the annual growth rate accelerated to about 14% for many years.  Was this long-term up trend followed by a period of falling prices?  No.  In the 1980s, Orange County real estate prices did not fall, but instead returned to their historically average 8% annual growth rate.

Homeowners are naturally concerned about the possibility of a real estate balloon blowing up in their faces.  They are less concerned about a flat market, which most feel they can weather over a short or medium period of time.

In the last 35 years, Orange County has experienced a sustained declining real estate market only once -- during four years in the early 1990s.  But the early 1990s declining market was not caused by a real estate balloon blowing up.  It was a local phenomenon caused by a severe local recession, when local military bases were closing by the dozens and the area´s aerospace industries were decimated.  Job growth disappeared, and the local demand for housing dropped dramatically.

If history is any teacher, the real estate market is still a matter of supply and demand.  The County limits the housing supply very effectively, granting only about two thirds of the annual housing permit requirements suggested by population growth.  So demand is the key.  Without a local recession, demand should remain healthy.

Cotter has been a California Real Estate Broker since 1981, and is currently a Realtor and Broker-Associate with Century 21 O.M.A.  Contact him at or (949) 322-6009.

Mike Cotter, Broker Associate, DRE #00806890
Century 21 O.M.A., 229 Avenida Del Mar, San Clemente, CA 92672
Mobile 949.322.6009, Fax 949.492.7850
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