Is It Time to Wave Goodbye to California Housing Highs?

The most recent report from the California Association of Realtors looks at the state of the economy and housing in California, and the forecast is looking grim. A perfect storm of declining home sales and rising interest rates, a slowing economy, and would-be buyers choosing to move rather than purchase are responsible for home sales in 2018 being the lowest in four years – and point to a weakening housing market in 2019.

Home Sales Trending Downward

The trend is not the friend of home sellers in California. The 2019 California Housing Market Forecast by the California Association of Realtors (CAR) shows home sales steadily sloping downward:

Interest Rates and Home Prices on The Rise

Although California home sales have been slumping the past several years and interest rates are rising – from 4% in 2017 to a projected 5.2% in 2019 – the median home price in California is still expected to rise by over 3% in 2019, following a 7% increase in 2018.

The California Economy Is Slowing Down

California’s economy also appears to be leveling out. Although the unemployment rate in 2019 is expected to remain steady at 4.3%, nonfarm job growth is forecast to be just 1.4%, down from an expected 3% this year. Nationwide, GDP is forecast to be 2.4% in 2019, down from an expected 3% gain in 2018.

Buyers Sitting on The Sidelines

Even in the best of markets, there’s a disconnect between buyers and sellers, with sellers usually wanting more than what buyers think a property is worth. At TwinRock we’ve been saying for quite some time that there’s too much money chasing too few deals, and that it’s best that buyers step back and sit on the sidelines.

According to California Association of Realtors President Steve White, that’s exactly what’s happening:

Would-be buyers who are concerned that home prices may have peaked will wait on the sidelines until they have more clarity on where the housing market is headed.

When buyers take a timeout, sales decline – both housing demand and sales are expected to go down in 2019.

We expect that the housing market in California will be especially hit hard. According to the CAR report between August and September, the median home price in California declined by 2.9%. At the same time, the average number of months of inventory on the market grew to 31 months – the highest level since 2014.

Leaving California

Back in 1976 in their hit song Hotel California, the band the Eagles sang, “You can check out anytime you like, but you can never leave.”

Fast forward 40 years and home buyers in California are not only checking in – they’re also checking out and moving away in almost unprecedented numbers, in large part due to the high cost of housing and living in California. This outward migration is a major factor contributing to the decline of home sales in California.

CAR’s 2018 State of the Housing Market/Study of Housing: Insight, Forecast, Trends report notes that this year 28% of homebuyers moved out of the county they used to live in, compared to 21% in 2017. In both the Bay Area and Southern California, 35% of homebuyers moved out of their county because of affordability constraints.

The Worst Is Yet to Come

We expect homeowners to continue leaving California as rising interest rates and increasing home prices make the state much less affordable and desirable than it once was.

Back in April, we wrote, “We believe the housing market is primed to roll over just as it did between 2005 and 2006 while the economy was then also looking good.”

Although we hate to say we told you so – especially when it comes to bad news – we were spot on with that analysis and likely with today’s. As this article was being written the housing market has continued to retract and the financial markets are in a correction mode and any year-end upswing is simply window dressing or from a temporary lift when a trade agreement is finally reached.

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