News Analysis
Amid speculation about the end of California’s real estate boom, there are no signs that a bust is imminent, according to the California Association of Realtors (CAR).
While there has been much talk among investors about the recent cooling trend—especially in high-end markets such as the San Francisco Bay Area—fears of a housing market collapse akin to that of a decade ago are unwarranted, said Oscar Wei, CAR senior economist and director of research.
“That was a crash, so I can tell you it’s not going to lead to that level,” Wei said in a recent interview with The Epoch Times.
The economy remains strong, with some softening in the housing market, but there is no reason for investors or home buyers to panic, he said.
So, is the real estate boom really over?
“I think from an investor’s perspective, it’s true,” Wei said. “The housing market is not growing as fast as it has in the previous two years … It is a fallback in terms of price. It’s an adjustment. That is definitely happening.”
Profit on investment properties won’t likely be as high this year, with a 12 percent increase in the median selling price in the Bay Area in 2017 and 2018, so a major crash isn’t on the radar, he said.
Lately, investor share has been dropping in the Bay Area, he said. Investor share of the market means any property that is bought with the intent of flipping it or renting it to tenants, but doesn’t include a second or vacation home.
“We are definitely seeing a slowdown in investor appetite in buying properties, partly because they are concerned about … slimmer profit margins,” Wei said.
Meanwhile, Orange County and San Diego may see a softening in home prices, but not as much as the San Francisco area, Wei said.
“If you look at the history of the Bay Area, it typically grows a little faster. San Francisco is a tight market with a low unemployment rate at about 3 percent, but the housing is more expensive than elsewhere in the state,” Wei said.
“In the first half of 2019, we continued to see some lackluster performance of the housing market, particularly sales demand,” Wei said. “In every single month since the beginning of the year, we had seen a decline compared to the previous year.”
At the beginning of the year, home sales fell by more than 12 percent. By June, the decline in sales was about 5.9 percent from the previous year. But, the downward trend shifted upward in July, when sales increased by 1.1 percent, and again in August when they nudged up 1.6 percent. Currently, sales are down about 6 percent from last year, Wei said.
Single-family home sales totaled 406,100 in August, down 1.3 percent from July and up 1.6 percent from August 2018, while year-to-date statewide home sales were down 4.1 percent in August, according to statistics released by CAR earlier this month.
With mortgage interest rates at near-three-year lows, state median home prices hit an all-time high of $617,410 in August, up 1.5 percent from July and 3.6 percent from August 2018.
Last year, the median price of a single-family home rose 6 percent to $570,000; with an expected 4 percent rise by the end of this year, the price will be about $593,000, Wei said.
“That’s still very high for many households, but it is increasing at a more moderate pace compared to last year and to 2017, when it increased by 7.1 percent,” Wei said.
Even with rising at a rate of four percent, when you consider that interest rates dropped from 4.55 percent last August to 3.62 this August on a 30-year fixed-rate mortgage, monthly payments drop by about 7.4 percent, Wei said.
“So, the low-interest rates definitely saved the day for many home buyers,” he said.
Before the second half of 2018, interest rates had stayed relatively low, steadily below four percent, but then began to rise.
“At one point, for a 30-year fixed rate, it went all the way up to 5 percent,” Wei said. “Today, the 30-year fixed rate is somewhere around 3.75 or 3.8 percent, so it peaked at 5 percent and then it dropped.”
What is considered low or high interest may depend more on a prospective home buyer’s age than any other factor. From a historical perspective, interest rates in the 1980s and ’90s ranged from 10 to 20 percent, Wei pointed out.
“It was really high and, of course, when you compare it to today’s rate of 4 percent, it’s ridiculously low, but many buyers, especially first-time buyers today … have not seen interest rates of 6 or 7 percent, and they think, ‘Wow, 5 percent is really high,” he said. “So, when people look at 5 percent, they kind of pull back a little bit.”
But, no matter what, the bottom line for most home buyers is price and whether or not they can afford the monthly mortgage payment.
“They don’t really care about sales; they care about price,” Wei said.
Though low-interest rates offset high prices by reducing monthly mortgage payments, buyers are still concerned they could lose home value if prices plummet and the owner owes more than the house is worth, he said.
“Affordability is definitely an issue,” Wei said. “If you take a look at our affordability index, which is the percentage of households who can afford to buy a [single-family median-priced] home in California, it’s at 32 percent,” Wei said.
By comparison, in the rest of the country, more than 50 percent of households can afford to buy a home, he said.
“In 2020, I think we’re pretty much going to flat in terms of sales,” Wei said. “We’re not seeing a crash. There’s going to be a slowdown or a dip depending on interest rates and demand … If you look at the economy, it’s still pretty solid.”
