Will California’s housing market crash again or only modestly correct the overzealous buying of the pandemic era?
Instead, might homebuying just chill a bit?
As 2022 winds down, the market languishes as mortgage rates soar off record lows. Pricier financing is pruning those who can afford to buy. Those same high rates – a strategy by the Federal Reserve to cool an overheated economy – could ice the job market, which is so critical to robust homebuying.
The result is that recent huge price gains across the state are morphing into projections of noteworthy losses.
You know, it’s been a decade-and-a-half since housing rapidly turned from boom to bust. Let’s refresh our memories about California market downturns and where we’ll likely find clues about what’s ahead.
My trusty spreadsheet was filled with state home-price data from the Federal Housing Finance Agency dating to 1976 plus assorted economic and real estate variables. The goal was to create a guide to watching a market meltdown – or whatever you want to call the first grand housing upheaval since the Great Recession.
Yes, history certainly is no perfect guide for the next move. “It’s different this time” is always sort of true. But tripping down memory lane often can offer hints for California’s homebuying future.
California’s different
California housing is a very different animal than other U.S. markets – especially its price gyrations.
There’s a 25% chance that California home prices are falling, going back a half-century. That’s the fourth-highest loss rate among the states.
Meanwhile, there’s only a 16% loss rate for all states.
Yes, it’s a bumpier ride for Golden State homeowners, but they’re well compensated for those losses. Statewide home prices averaged 7.1% yearly gains since 1977, trailing only Washington, D.C. across the nation.
Compare those increases to the average gain for all states of 4.9%.
Jobs. Jobs. Jobs.
You need a paycheck to own a home, so consider housing hints dropped by swings in California’s jobless rate.
When unemployment is down over 12 months – like today’s job market – there is only a 15% chance of home-price declines in the next year.
But when joblessness is rising, there’s a 51% chance of home-price loss.
Or look at this key housing factor this way: When unemployment is falling, prices average 9% gains in the next year. When joblessness is up, appreciation runs just 1% annually.
It’s the economy, stupid
Housing demand requires growing paychecks.
To track housing’s ties to broader economic progress, I created a California cash flow benchmark measuring the growth of the total statewide income minus the inflation rate. This measure has averaged 2.9% annual growth since 1977.
Any rise in this income yardstick translates to only a 21% chance of home-price declines the next year. These rising incomes created 8% average home-price gains.
But when California incomes fell, prices dropped 63% of the time. And those dips translate to an average 3% home-price loss.
Note: This income yardstick has fallen in the past four quarters.
Rate reversals
The cost of borrowing money doesn’t hit home prices as you might think.
That’s because interest rates typically rise when the economy is hot. And as you’ve just learned, growing economies can boost home values.
So when mortgage rates have risen in the years since 1977 – only 40% of the time – there’s only a 14% chance of California home-price losses the following year.
But when rates fall, that’s often a signal of a sour business climate. And when mortgages are getting cheaper, 35% of the time California home price declines follow. The pandemic era’s surging prices clearly look like an anomaly.
So don’t be quick to root for cheaper mortgages. When rates are up, an average 10% home-price gain comes next. When rates are down, the next year’s gains run only 4%.
Do sales matter?
The ups and downs of sales counts aren’t just stats for the real estate industry.
Californians bought single-family homes at a 305,000-a-year rate in the three months ending in September, according to state Realtors. That’s the slowest quarterly buying pace in 14 years.
Summer sales were down 20% from the spring quarter – the second-largest three-month drop in this Realtor data that dates to 1990 – and off 29% from a year earlier – the fifth-largest 12-month drop.
Such dramatic drops suggest California sales have already crashed. And sales drops do impact pricing.
Appreciation measured by the California Association of Realtors’ price index went from 17% annually to 2% the past year – a 15 percentage-point slowdown. It’s no outlier.
Since 1990, when California buying declines by 10% or more in a year, the rate of appreciation shrinks on average by 4 percentage points.
Which index to watch?
Let me try to over-simplify most of the price yardsticks.
Geography: California pricing varies wildly from north to south, and coast vs. inland. Note that smaller areas often mean more volatile results.
Homes covered: Certain indexes look at all homes while others focus on single-family residences. Whether new homes are included is another variance. So, it depends if you’re tracking housing’s “core” – the existing single-family house – or taking a broader view.
Simple math: The median selling price – reported by the likes of CoreLogic and Realtors – is the midpoint paid on all sales. Moves in this metric, typically released shortly after a month ends, can be early warning signs of trouble ahead.
Fancy math: The Federal Housing Finance Agency indexes I used for this analysis and the widely discussed Case-Shiller indexes are created by “paired-sales” logic. This looks at price changes on each single-family house sold over a three-month period. This math takes time, so there’s a two-month lag in reporting. We typically use these numbers to confirm trends shown in other indexes.
Is there a best one? No, they’re best viewed collectively.
Wordsmithing
Crash? Correction? Chill?
History tells us California prices by the FHFA measure dropped in 46 of 186 quarters on a year-over-year basis — only three states have more dips.
And the median California loss among those declines was 4%. Only 11 states having deeper drops.
To me, a market “chill” is a modest slowdown. I’d suggest any 12-month California price drop smaller than the 4% median loss fits the “chill” definition.
Now double-digit losses over 12 months sound painful. And such slides happened just eight times in California in a half-century, so they’re a rarity. Thus, a “crash” could be seen as any 12-month drop of 10% or more.
That would mean a “correction” – the downturns between crash and chill – are price declines between 4% and 10% a year.
Please understand this is my home-price glossary. Yet whatever labels you prefer, the big question for California housing has changed from “big gains or not?” to “How big will the dip be?”
And watching only real estate benchmarks won’t give you the full picture.
Jonathan Lansner is business columnist for the Southern California News Group. He can be reached at jlansner@scng.com