While the California real estate market is experiencing a major shift, it's still one of the strongest, most attractive, and most dynamic in the country. Therefore, there's no shortage of good investment opportunities in this state.
Many believe California is a real estate investor's paradise since property taxes are reasonable. In addition, this state is considered a great place to retire, is home to a great infrastructure, and has a perfect climate with sunny weather and mild winters.
Does that mean you should consider buying properties in California and starting your rental business? What about this year's trends? Is a real estate market crash on the horizon? Here's what investors need to know to make a wise decision!
California Housing Market Overview
Based on March 2023 reports, houses in California sold for a median price of $742,800, showing that home prices fell 7.9% compared to last year's figures.
However, even though prices were lower, the number of homes sold didn't increase. In fact, it fell by 33.2% year over year.
The latest reports showed that 24,000 homes were sold in March 2023, which accounts for 35,950 fewer houses sold compared to the same period last year.
In addition, the latest trends have also revealed that there was a drop in demand, as the median days on the market increased to 37 days. Compared to last year's reports, it's 17 days more year to year.
California Housing Market Trends
The California housing market remains competitive but is experiencing a major shift.
Although the median sale price is the highest since December of last year, the number of houses sold fell considerably. In addition, properties spent more time on the market before going under contract.
However, the supply of homes remained low in California. Only 21.5% of properties had price drops, and 38.8% of houses sold above the list price.
California Median Home Prices
In March 2022, the median sale price of a California property was above $800,000. However, it's down 7.9% year over year based on this year's reports.
As mentioned, the statewide median price for a home is $742,800.
California Housing Supply
According to Redfin's March reports, there were 72,289 homes for sale in the California real estate market. The figure is down 12.6% year over year compared to last year's trends.
In addition, the number of newly listed properties was also down by 38.4% year over year, with just 26,704 homes listed in March 2023. At two months, the average months of supply remained the same.
Homes Sold in California
March reports also showed that the number of homes sold fell 33.2% year over year. While 35,950 houses were sold in March 2022, 11,950 fewer properties were purchased during the same period this year, totaling just 24,000.
However, the number of homes sold reported in March 2023 is the highest in the last five months.
California Housing Demand
In terms of prices, the California real estate market remained competitive even though related figures were down 30.1 points year over year. On average, 38.8% of homes sold above the list price in March 2023.
Additionally, only 21.5% of California homes sold for lower prices. Last year, 12.0% of properties sold below list price. However, the number is lower compared to the January 2023 figures.
According to Redfin statistics, the list price was 99.7%, a year-over-year decrease of 5.6 points compared to the March 2022 figures.
Median Days on the Market
The amount of time homes spent on the market was also higher in March this year, reaching 37 days. It's 17 more days compared to the median days on the market in March 2022.
Factors Affecting the California Housing Market
Several factors affect the California real estate market and influence housing prices. However, these are the main ones:
- Economy: The health of the state's economy always impacts the real estate housing market. According to the California government, the unemployment rate remained unchanged (4.4%) in March. However, real personal income is expected to decline by 0.4% this year before rising in 2024 and 2025.
- Mortgage Interest Rates: Mortgage interest rates also affect the real estate market. As they reach record highs, remaining at 6.9% for a 30-year fixed loan, many investors are reluctant to buy properties.
- Government Policies: The demand for homes often fluctuates in response to government policies related to tax credits, deductions, and subsidiaries. Overall, California is considered a strong real estate market with reasonable property taxes.
- Demographics: Changes in the composition of the population in terms of income, migration patterns, age, gender, and race can also impact the housing market. According to Redfin reports on migration trends, California was one of the top 5 states homebuyers searched to move from.
Will the Housing Market Crash in California?
Although economists and analysts expect a slowdown, most don't believe that the California housing market will crash soon. Home prices will likely fall, but property owners shouldn't worry about turbulent times and extreme situations similar to what they experienced during the Great Recession.
Here are a few reasons why the California housing market is unlikely to crash:
Low Housing Supply
As of March 2023, the housing inventory was still low, with only a 2-month supply available. Many buyers have to bid up prices as a result. The supply-and-demand curve also shows that the market won't crash.
More Hispanics and Millennials, who are in their prime buying years, are purchasing homes. This strong demand for properties across different demographics means the inventory will remain limited.
Fewer Newly Constructed Homes
The number of newly constructed properties available has not yet returned to pre-2007 levels. In addition, most people are no longer interested in investing in land and getting regulatory approval to increase the supply.
Drop in Foreclosures
Many have significant equity in their residential properties and stronger personal balance sheets compared to the trends seen 15 years ago. As a result, the risk of a foreclosure crisis is lower.
California Housing Market Statistics
If you need more data on the California real estate market, check out these statistics:
- In California, all regions reported annual home sales falls of over 30%. Central Valley was the only exception, with a 27.7% decline.
- Far North had the most significant drop at 38.9%, followed by the San Francisco Bay Area with a 35.5% home sale decrease.
- Southern California and the Central Coast reported a 33.8% and 31.2% sales decline, respectively.
- ATTOM Data Solutions revealed that 34,501 US homes had foreclosure filings as of August 2022.
- Home sales have decreased 23.9% from last year and 1.5% from August nationwide.
- Lenders repossessed 3,938 properties in August last year through "real estate owned" or REO (completed foreclosures). Illinois (493) and New York (337) had the most REOs.
- According to ATTOM, Illinois and Delaware had the highest foreclosure rate in August 2022, with one foreclosure filing out of 1,926 and 2,387 homes, respectively.
- Housing affordability experienced a significant decline in last year's second quarter. Monthly mortgage payments on a single-family home with a 20% down payment increased by nearly a third compared to the first quarter.
- The average price for a California home is down 7.9% compared to last year.
Housing Market Predictions
According to experts' analysis and forecasts, here are a few real estate housing predictions for 2023:
Increased Mortgage Interest Rates
Experts believe mortgage rates will continue to rise because of the potential recession, rising inflation, and geopolitical tensions.
In addition, financial market participants believe that the Fed will increase the target funds rate by at least 175 basis points.
As a result, the 30-year mortgage rate could reach 8.50, while the rate for 15-year loans could be 7.70.
Lower Home Sales
Home sales are expected to drop in California and other states as a result of rising mortgage rates.
Analysts predict that higher interest rates could lead to a 10% drop in home sales between 2023 and 2024.
Additionally, experts believe homes will spend more days on the market, with the median reaching 35 days or more.
Lower Home Affordability
According to experts, homes will remain less affordable due to the high monthly mortgage payments.
Although prices are expected to fall, the drop won't be enough to offset higher interest rates. As a result, the affordability won't change.
Reports show that California has a 2-month inventory. Also, many homeowners are unwilling to trade in a 3% mortgage for a new property with a 7% interest rate. Most buyers consider this option only if it's strictly necessary.
Based on these facts, analysts expect the housing supply to remain low.
Lower Home Prices
California home prices are also expected to fall in 2023. Analysts believe that low inventory will play a key role in this drop.
However, many believe sellers will be forced to lower home prices in response to higher interest rates.
Experts expect unaffordability to result in a 5-10% drop in homes' value this year as the Fed continues to raise mortgage rates to control inflation.
California Housing Market Forecast
The California Association of Realtors (C.A.R) released a housing and economic forecast in October last year, revealing that experts believe rising inflationary pressures will keep mortgage rates high and reduce purchasing power. Home affordability, prices, and housing demand will also fall this year.
Here's more key information released by the C.A.R:
- Single-family home sales are expected to decline by 7.2% this year.
- The median home price in California is forecast to fall by 8.8% in 2023.
- Housing affordability is expected to fall by 18% this year in California.
The competitiveness in the California housing market continues to heat up, but major changes and potential falls are undeniable. In this state, properties still have a high value, and there are many potential buyers.
Home prices may fall considerably. However, experts say that the real estate market will unlikely crash. Also, while mortgage payments are expected to be higher, homeowners have stronger personal balance sheets.
Despite the negative trends, many houses in California sold above the list price, which means these properties likely received multiple offers. In addition, it shows that the market is still competitive.
Frequently Asked Questions
What Causes Housing Prices to Fall in California?
Overall, home prices drop due to rising interest rates and economic downturn.
Rising interest rates make affordability more difficult and result in a demand decline. In addition, an economic downturn usually brings fewer job openings, higher unemployment rates, and less disposable income. Eventually, it also causes a drop in home prices.
Is It a Good Time to Buy a Home in California?
When interest rates are high and the supply is limited, investors must look at different aspects before buying a property.
If your financial position is stable, buying a house during a slow market doesn't pose great risks, but you should make a sound decision based on your budget and needs.
Do you still want to know if buying a home in California is a good investment? Contact a real estate agent!
Is the California Real Estate Market Showing Signs of a Housing Market Bubble?
Increasing demand, rising home prices, and limited supply may cause a housing market bubble.
Many people believe that a bubble-like projection is forming in the California real estate market due to low inventory and high mortgage rates. However, home prices are down compared to last year's figures.
Inflated and unsustainable home prices are the main cause of a housing market bubble.