Many homeowners got into trouble during the real estate boom in the last decade when they refinanced their properties and pulled out excess cash to use as

Is now a bad time to buy a house in Southern California?

Yes, it’s a terrible time to buy housing in Southern California.

According to UBS, Los Angeles is the most over-valued real estate market in the United States, after San Francisco.

UBS Global Real Estate Bubble Index 2017: San Francisco is the most overvalued US urban housing market in the study; bubble risks grow in other developed world cities globally

Virtually every professional real estate investor I’ve spoken with thinks buying at current prices is insane, relative to rents. The smart money is waiting for a correction.

Because buying a home is such a large expenditure for most households, buying near the top is the kind of financial mis-step that could change the course of your life forever. Realtors and lenders will not be straight with you about this, because from their perspective, it’s always a great time to buy or sell—the critical thing for them is to drive transaction volume.

Unemployment and interest rates are both about as low as they can go, which means housing prices are close to as high as they can go, at least adjusting for inflation.

FRED Graph | FRED | St. Louis Fed

California markets are especially volatile—real boom and bust—not like the Northeast where prices are steady. We are clearly in a boom, and it cannot last forever.

You may have heard from real estate agents that in “X neighborhood, prices only go up or at least don’t drop much.” With “X” usually being somewhere relatively high priced and coastal (i.e, Beverly Hills, Santa Monica, etc.). I’ve checked the data and it is NOT true. Prices in these areas PLUMMETED during the 2008–2011 period.

You’re much better off buying when interest rates are high and prices are low and then refinancing after rates drop. If you get a mortgage when rates are high, you can refinance later. If you buy when prices are high, there’s no “undo” button.

It’s also great to buy a few years into a recession when housing prices crater because people have to sell (job losses) and falling prices scare away investors/speculators and many of those who can afford to buy but are afraid they might lose their jobs, feel poorer because the stock market went down, and won’t buy.

If you keep your job and have good credit and cash reserves, sellers and lenders will bend over backwards for you.

You may have heard that “inventory is tight” and so prices will keep going up. Inventory has always been tight in California because of limited construction, and whenever there’s a serious recession, prices still collapse (or at best go sideways for a long time and so drop in real terms).

In addition, Tax reform has just made homeownership much less attractive. But the reforms have yet to be priced into the market. Moody’s forecasts that prices will plummet 5% to 15% within the next 2 years (just from tax reform), with the steepest declines in the most expensive coastal areas.

The GOP Tax Plan Could Hit the Country’s Most Expensive Housing Markets

If you’ve got money that’s burning a hole in your pocket that you can invest long term, put it in the stock market. Stock returns are higher than returns to housing (even in Southern California), transactions costs are much lower, and carrying costs are much lower (no mortgage or property tax or maintenance).

Tax reform made holding stock more attractive (corporate tax cuts) while making housing less attractive. The political headwinds are favorable for stock and unfavorable for housing. When politicians need more revenue, they’ll go after real estate again long before they touch the stock market.

See Mike Simkovic’s answer to Is Southern California in a housing bubble?

Mike Simkovic’s answer to Is there any hope the tax “reform” will not cause a real estate sell-off and crash?