An Introductory Guide to the Housing Market of California

A Quick Introduction to the Housing Market in California

When 2018 first began it was supposed to be the year that real estate home sales and related things began to stop, grind to a halt, and the historically low mortgage rates fueling the buying with cheap home loans would disappear. We are now almost through the first quarter of the year, and mortgage rates have only risen maybe a 0.5%, and home buying is continuing to burn hot in the state regardless. While the cost of borrowing did actually increase a wee bit for consumers, it only slowed refinancing down a little bit.

Historical Housing Prices in California

From a recent past trend perspective, California’s home sale market has been steaming along just fine, a big change from where it was back in 2010 in the depths of the Recession. Instead, the state has been producing home resales well over 400,000 units annually, with a 1.9% increase to 421,000 units in 2018. The state home buying has been fueled by solid economic drivers such as job growth, millennials needing to finalize their adult stage and become established with families, lots of incoming arrivals into the state for new opportunities, and existing residents staying put. All are doing their part to drive up pricing and another hot market.

Rates of Growth Differ by Region in California

There is no question that California as a whole actually represents a hodge-podge of smaller regional markets. Clearly, a home in Arcata is not going to command the same half million-dollar price deep in Silicon Valley or San Fernando Valley. That said, even the traditional rural areas of California are starting to again see influxes of new buyers, relocations from the suburbs and urban areas, and new out-of-state arrivals. All three are causing even the most urban areas to see up-ticks in their pricing and property values as well.

Breaking this Down by Regions of California

Northern California

The northern part of the state really splits into two zones; the Bay Area and the rest of Northern California. The Bay area is entirely in a different range, hitting highs well over $1 million in San Francisco proper for a detached home and only seeing pricing under $500,000 as far east as Solano County, almost next door to Sacramento. However, to the east Sacramento continues to feed into its historical position as a government town, with the requisite state and county worker population concentrated in the immediate 30-mile range area. Outside the immediate Sacramento zone, Northern California breaks down into a smattering of smaller towns, communities, rancherias and extended bedroom communities. Depending how far one wants to drive, homes range anywhere from $150,000 to as much as $550,000 on average.

Southern California

The California southland has continued to represent the lion’s share of the state’s home sales and demand. As much as the Bay Area and Silicon Valley have their bidding wars, as well as the Sacramento Valley for bargain hunters, Southern California remains the king of sales metrics and rising pricing. Orange County had the highest peak, hitting $789,000 in August 2017, and Ventura beat out San Diego by $35,000 hitting a whopping $640,000 median price value. Los Angeles, interestingly was cruising into the end of 2017 with almost the same median pricing level as the state as a whole at $565,000 to $575,000. Only the deep eastern side of the state past San Bernardino and reaching Kern County saw pricing at the lower $270,000 to $340,000 and similar more affordable ranges.

The Silicon Valley Effect

Since the 1980s Silicon Valley has been the epicenter of where anyone goes if they want to start a career in the tech world and work for one of the big computer names. In reality, however, the Silicon Valley Effect, has been overstated for years. Yes, the big names have their headquarters there, but plenty of branching out has been occurring all over the place. Google has multiple pods and field offices across the state as so does Microsoft. Numerous offices and smaller outfits exist in the Sacramento basin. And plenty of firms are located in San Diego as well. While San Jose and Santa Clara will continue to be the traditional headquarters of Silicon Valley industry, a good tech hand can find very lucrative work just about anywhere in the state, which means living options are far wider and varied than just the miniscule choices available in Santa Clara or Gilroy.

The big factor to consider, however, is how far one wants to drive between a home and job. The commute times are tremendous now in both the north and south, and the road infrastructure can’t seem to keep up. Two and three-hour commutes are common, with many folks living in two places to maintain solid careers and the home size they really want.

Factors that Can Affect Housing Value Growth

The scary new economy part that looks eerily familiar is how much consumer debt people in general are building up again. Refinances have been frequent in the last year with fears of mortgage rates rising. All of that equity borrowing has created additional but temporary buying power that eventually has to be paid back. And many conservative perspectives are worried a repeat is in play for California with a sudden and very abrupt stop when the personal liquidity runs out.

That above said, the Trump Bump, or economic boom with the arrival of a Republican President hasn’t seemed to slow down, even with a recent stock market correction of more than 500 points. As if shaking of a minor cold, the S&P continues to fire away at historic highs. And if folks thought the blip was just on the investment side, take a look at the current labor market. Unemployment continues to burn in the low 3-5% range. Only in remote locations like Bakersfield and Kern are the unemployment levels still above 7% regionally. And the labor field that is driving the most jobs in California is construction.

Tax law changes are the one big boogie monster that many worried will dampen house buying, and the 2018 effects remain to be seen. While the cap on interest mortgage deduction amounts was included in the final law signed, it wasn’t as severe as originally expected. Nor was the property tax deduction slam either. So many are now wondering whether there will be any real impact at all.

Housing Supply in California

Listings are the key factor in California’s housing prices and related market. In the Recession listings were as much as 8-9% of the overall housing inventory. However, 2018 has been a massive reversal since. Closing 2017, listing levels were as low as 2-3% percent, with the Bay Area seeing the tightest market overall at 1.9%. To compound issues, existing homeowners aren’t as keen to let go over their current properties. This is driven by fear of being priced out of a replacement, getting smacked with a capital gains penalty in taxes under new tax law changes no one really understands yet, and a fear of mortgage rates rising and being stuck with a more expensive loan.

One would think with the shrinking population able to buy a home in terms of affordability (1 out of 3 or 29%) that supply would start to rise, especially in high demand markets where affordability is as low as 1 out of 10 people (San Francisco, San Mateo). Further, many thought the demand went sideways as people were simply priced out or decided to wait with rental demands rising notably. However, tight supply remains, which continues to push pricing higher in a seller’s market. For example, at the close of 2017, 6 out 10 homes had multiple bids. And in every major market 1 out of 2 homes had multiple offers and stayed on the market less than 20 days total after initial listing.

Existing Properties

Baby Boomers are just not cooperating. Instead of fully retiring and moving into smaller units they continue to stay in their large property homes. This has been due to a combination of higher medical care quality, greater mobility tools for those with disabilities, and people living longer, healthier lives. And so housing inventory that would otherwise be available for younger generations has not manifested as fast. Given the fact that Baby Boomers are a huge population, only dwarfed by Millennials, that translates to a lot of existing homes kept off the market.

New Construction

The second key factor that could reduce pricing levels is not appearing yet is new construction. Instead builders have been practicing the same patterns as 2005, releasing only a little at a time to keep maximizing profits per new unit sold. And the high majority of purchases to be financed with cash buyers remains stable at 1 out of 5 purchases. That means the market is vulnerable to being caught with over-supply if lending rates suddenly skyrocket, an additional reason why builders don’t want to carry too many units for sale.

Housing Demand in California

In terms of metrics, home sales have been consistent in the last three years without a hard, definitive reason to see things suddenly stop. While the deep low of the Recession in 2010 was just above 250,000 units exchanged, housing sales have held quite strong above 410,000, with a recent 5-year high of 427,000 units sold in 2017 alone. It’s not surprising anyone that the pace and rate of growth is slowing, but it has not stopped to a dead halt in the water. Further, pricing continues to rise. Entering into 2018, the median state price was cruising above $565,000.

Population

The buying population for the last five years has been pegged on the arrival of the Millennials. And they have been showing up, just slower than many expected. In fact, the majority of buyers have been those in the 40-50-year range instead, otherwise known as Generation X. Rather than moving into homes the Millennials have been staying urban, spending their income on technology, experience, or saving. Only now as the drive to start families has created new pressures are homes starting to become a necessity. Many experts continue to wait, and market watchers expect a tidal wave of buying and income to hit all at once. However, part of the concern on the buyer side is that many Millennials may feel they are already priced out of the market, so why bother.

Lifestyle – Renting vs. Buying

Since 2009 and the great real estate crash, apartments and high-density living has been the path for many. Two generations collided during those years back into apartments: those who financially lost the ability to buy, hold onto and finance a home sale due to bad credit, and those who didn’t earn or save enough yet to have a down payment to buy a home. No surprise, the apartment world has been compacting so much, many cities are now literally building dozens of new apartment buildings and loft projects to compensate, increase the tax base of their urban core, and relieve pressure on mounting demands for affordable housing politically. That trend has created what many have described as an urban move back to cities only now reversing again as young people start families. This is not a new story, but when the swing back does occur, it just means that many more people looking for traditional detached homes in the suburbs and further out because the urban core becomes too expensive.

How Accurate Can a California Housing Market Forecast Be?

The past forecasts didn’t anticipate the 2009 Recession, but it was predicted clearly and loudly and the banking and financial markets. The problem was that no one was listening. As a result, every forecast since has been looking at two major elements: lending rates and labor figures for signals that the market is going to slow. One appeared with a slight raise in the cost of borrowing, but so far, the slowdown has not been realized. So, accuracy is about as good as shaking a magic eight ball; it’s anyone’s guess when the brakes will hit.  

In short, California right now is averse to a buyer and very much a seller’s market. There are no signs of slowing down, and buyers need to be prepared to move quick to win a good deal.

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