A lack of supply and low interest rates are two major reasons behind soaring house prices in California where it’s predicted that median home prices will rise even further in 2022.
However, supply constraints and those higher home prices will bring California home sales down slightly next year, said the California Association of Realtors (C.A.R.).
C.A.R has predicted that median home prices in California are expected to rise 5.2 percent to $834,400 in 2022, following a projected 20.3 percent increase to $793,100 in 2021.
About 70 percent of the top 75 fastest growing cities have a median price of at least $1 million said findings from C.A.R.’s 2022 California Housing Market Forecast. One out of four of those top 75 are “in markets with a median price of at least $2 million,” said C.A.R.’s Jordan Levine, the association’s vice president and chief economist.
“Demand for homes will continue to outstrip available supply as the economy improves, resulting in higher home prices and slightly lower sales in 2022,” he said.
Levine attributed the strong housing market to the increasing demand for housing during the pandemic, which he expected to continue into 2022.
“Particularly for those high income earners, it’s still a kind of dominant feature of the current housing market … So we expect the high end of the market to also do well,” Levine said.
The C.A.R. report listed the top three regions with the fastest growth in home sales: Northern California Bay Area, with a growth rate of 32.8 percent, the Central Coast, at 26.6 percent, and Southern California, at 23.2 percent.
Demand for California homes from foreign investors is also pushing up home prices.
Home Sales Expected to Drop Slightly
In December 2020, home sales in California reached the highest level in 15 years. However, according to the C.A.R. forecast, the number of home sales in 2022 will decline slightly. Moreover, as the market normalizes, structural challenges, such as lack of housing supply and deteriorating housing affordability, will persist.
Existing, single-family home sales are forecast to total 416,800 units in 2022, a decline of 5.2 percent from 2021’s projected pace of 439,800. Housing affordability is expected to drop to 23 percent next year from a projected 26 percent in 2021, the C.A.R.’s report said.
“But we are seeing that kind of hyper competition subside,” Levine said. “I think that is positive news from the standpoint of buyers, particularly buyers who may have gotten fatigued during this kind of hyper competitive market environment.”
Nonetheless, the sales in 2022 would still be the second highest level in the five-year period, if the prediction is close to reality.
A recent consumer survey conducted by the C.A.R. revealed that more than 70 percent of residents believe it is a good time to sell, but a bad time to purchase a house.
Higher Interest Rates May Curb the Price Hike
Lack of inventory and historically low interest rates are both considered major factors for California’s booming housing market.
“An imbalance in demand and supply will continue to put upward pressure on prices, but higher interest rates and partial normalization of the mix of sales will likely curb median price growth,” said C.A.R. President Dave Walsh.
Additionally, C.A.R. sees a shift in housing demand to more affordable areas, as the trend of remote working continues, will also keep prices in check and prevent the statewide median price from rising too fast in 2022.
The average rate for a 30-year mortgage was 3.1 percent in 2020 and projected to be 3.0 percent in 2021. Walsh thinks the rate will inch up next year but remain at a low level of 3.5 percent.