According Jeff Daniels of CNBC, citing a recent study by UCLA, California housing market is cooling off. Job growth and demand for housing in the state remain strong, but home sales have slowed and prices are falling across the state.
Rising interest rates are a factor, but do not account for all the cooling in the market. The average home mortgage rate grew by 0.5% in 2018 to around 4.5%. This causes an increase of just $88 per month on a $300,000 mortgage, not enough to cool an entire housing market.
So what is going on?
Daniels reports that “another possibility is that prices are so expensive, everyone (or almost everyone) is leaving”
This is spot on.
In a recent study by California Association of Realtors as posted on scribd.com, the affordability index fell from a peak of 54% in 2012 to just 22% today. This means that only 22% of median wage earners can afford a home. This is an overall average, and the reality is the closer you get to the job centers the harder it is to afford a home. And, California is 1st in the US with the highest rate of unaffordable homes.
The effect is felt most severely in the market with the highest housing prices. In the very expensive markets of Cupertino and Santa Clara (home to Apple’s spaceship), the average home price dropped from $1,500,000 in early 2018 to $1,250,000 by years end; that is a quarter million dollar loss in value in less than one year. In commute locations around the bay area the softening of the market is much less severe, but markets are softening everywhere.
The issue is supply and demand.
The state’s housing shortage began 1970, during a decade long period of high GNP growth, and by 2019 California has the 49th lowest ratio of housing per resident, according to a report by California Legislative Office. Many cities like San Jose have built hundreds of condos in an attempt to provide affordable housing. But, according to the local MLS the average price of a condo in San Jose is $740,000, and the cheapest is $475,000 for a 1 bed 1 bath 544 square foot condo!
A recent Bloomberg article says the Bay Area added 400,000 new jobs from 2012 to 2017, but issued only 60,000 building permits for homes. California communities are leaders in green technology and have historically had the most stringent growth control measures intended to fight urban sprawl and to protect the environment. But the last two housing market crashes have shown the negative side of adding thousands of new jobs, but doing little to provide housing for the workers.
Now, people are leaving. According to a 2018 article in lao.ca.gov, between 2007 and 2016, 5 million people moved to California, but 6 million people left. The last “out-migration” in the state occured in 2005 which if you recall was another period of very high housing prices and low affordability, and just before the housing meltdown.
Governor Newsom has put forth plans to step up the pace of new home construction, but the number of new homes needed number in the millions. And with a softening housing market, builders are looking forward to 2020 when a slowdown in the economy is anticipated.
Luck. I honor the Governor’s good intentions, but the sled he is trying to pull is loaded with 45 years of very bad housing policy.