California housing market remains buoyant

Lalaine C. Delmendo | January 10, 2020

It´s the economy, stupid, is a saying that certainly applies to California´s property market. House and apartment prices continue to rise strongly fuelled by healthy economic growth, record-low unemployment and ultra low mortgage rates.  There´s also a supply shortage of properties.

California housing prices

California’s economy grew by 2.6% in 2019. This was a slowdown from the prior year’s 3.5% growth but outpaced nationwide GDP growth, which was 2.1% in the last quarter. California´s economy will continue to outshine the nation’s overall performance this year as employers boost payrolls, based on the latest UCLA Anderson School forecast.

“In spite of trade tensions between the United States and China, the economic news remains positive,” said Jerry Nickelsburg of UCLA Anderson School. “For example, the July county-wide unemployment rates from Marin to Santa Clara are below 2.2%; from Sonoma through the East Bay are below 2.7%; and in Southern California, Orange and San Diego counties are at 2.8%.”  Unemployment California-wide fell to a new low of 3.9% in October, down from 4% in the previous month, and 4.1% a year earlier.

“To be sure, Los Angeles and the inland regions are not doing as well by this measure, but unemployment rates are falling there as well,” Nickelsburg added.

The median number of days it took to sell a California home fell to 24 days in October, from 26 days a year earlier.  Existing single-family home sales were up 1.9% to a seasonally-adjusted annual rate of 404,240 units in October, according to the California Association of Realtors (CAR).

As a result, the statewide median price for existing family homes rose by a robust 5.8% to US$605,280 during the year to October 2019, based on figures from the California Association of Realtors (CAR). When adjusted for inflation, home prices increased by a modest 3.73% over the same period.

For condominiums and townhouses, the median price rose by a minuscule 0.7% y-o-y to US$473,400 in October 2019, actually declining by 1.3% in real terms.

In October 2019:

  • Central Valley saw 7.8% median home price rises y-o-y to US$345,000
  • Inland Empire saw 5.8% median home price rises y-o-y to US$380,000
  • Los Angeles Metropolitan Area saw 5.6% median home price rises y-o-y to US$545,000
  • Central Coast saw 0.8% median home price rises y-o-y to US$675,000
  • San Francisco Bay Area saw 2% median home price falls y-o-y to US$940,000

California’s economy is the largest in the United States, with a GDP of US$3 trillion in 2018. If it were its own nation, California would be the world’s fifth largest economy, ahead of France, the UK, Italy, Brazil or Canada. The state has an incredibly diverse economy, with Hollywood, Silicon Valley, agriculture and manufacturing all making substantial economic contributions.

California’s GDP per capita was US$58,619 last year, higher than the national level of US$50,577, according to the Bureau of Economic Analysis (BEA). The state’s median household income has grown about 17% since 2011, higher than the 10% growth nationally, adjusted for inflation.

California is the most populated state in the US with more than 39 million people.

California´s house prices forecast to rise by 2.5% in 2020

Early estimates suggest house price growth amounted to 4.1% y-o-y in 2019 to a median price of US$593,200. This follows strong house price growth in recent years - 6% growth in 2018, 7.1% in 2017, 5.4% in 2016 and 6.6% in 2015.

 “With interest rates expected to remain near three-year lows, buyers have more purchasing power than in years past, but they may be reluctant to get off the sidelines because of economic and market uncertainties,” said Jared Martin of CAR. “Additionally, an affordability crunch will cut into demand in some regions such as the Bay Area, where affordability is significantly below state and national levels.”

Rental yields range from modest to excellent

Gross rental yields - gross returns on purchase price if a home is rented out - can be excellent in California, ranging from 3.4% to 8.8% in 2019, according to ATTOM Data Solutions’ 2019 Single Family Rental Report

Kings, Hanford-Corcoran had the highest yields of 8.8% in 2019. They were followed by Tulare, Visalia-Porterville (8%); Kern, Bakersfield (7.9%); Shasta, Redding (7.3%), and; Madera, Madera (7.3%).

In more popular areas, particularly in San Francisco, rental yields are much lower, at 3.7%.

CALIFORNIA GROSS RENTAL YIELDS, 2019

County Metro Area Gross Yields
Kings Hanford-Corcoran 8.80%
Tulare Visalia-Porterville 8.00%
Kern Bakersfield 7.90%
Shasta Redding 7.30%
Madera Madera 7.30%
Fresno Fresno 6.90%
Sacramento Sacramento-Roseville-Arden-Arcade 6.60%
Solano Vallejo-Fairfield 6.50%
Butte Chico 6.40%
Contra Costa San Francisco-Oakland-Hayward 6.40%
Merced Merced 6.30%
Humboldt Eureka-Arcata-Fortuna 6.20%
Yolo Sacramento-Roseville-Arden-Arcade 6.20%
Stanislaus Modesto 6.20%
San Joaquin Stockton-Lodi 5.70%
Sonoma Santa Rosa 5.60%
San Diego San Diego-Carlsbad 5.60%
Ventura Oxnard-Thousand Oaks-Ventura 5.40%
El Dorado Sacramento-Roseville-Arden-Arcade 5.30%
Monterey Salinas 5.30%
Santa Cruz Santa Cruz-Watsonville 5.10%
Alameda San Francisco-Oakland-Hayward 4.90%
Placer Sacramento-Roseville-Arden-Arcade 4.80%
Santa Clara San Jose-Sunnyvale-Santa Clara 4.20%
Marin San Francisco-Oakland-Hayward 4.00%
San Francisco San Francisco-Oakland-Hayward 3.70%
San Mateo San Francisco-Oakland-Hayward 3.40%
Source: ATTOM Data Solutions

Demand remains very robust

All major regions continue to register rising demand. Central Valley saw the biggest increase in non-seasonally adjusted sales of 7.1% in October 2019 from a year earlier, followed by Southern California (7%), Central Coast (3.9%), and the Bay Area (1.4%).

Thirty-two of the 51 counties tracked by CAR saw y-o-y sales growth, with Merced gaining the most from last year at 24%. In contrast, Amador had the largest decline, with sales falling 31.1% y-o-y in October 2019.

California sales existing single family homes

Southern California accounted for almost half of total sales in October 2019.

The amount of inventory available for sale is falling fast

The unsold inventory index (UII), a ratio of inventory over sales, declined to 3 months in October 2019 from 3.6 months a year ago, as a result of rising sales and fewer listings. The index measures the number of months it would take to sell the supply of homes on the market at the current sales rate.

The main reason for the housing shortage is that long-time homeowners are not moving as often as in the past due to low rate on current mortgage, and low property taxes, among others.

UNSOLD INVENTORY INDEX, OCTOBER 2019

  Unsold inventory, in months y-o-y change
Los Angeles Metro Area 3.2 -20.0%
Central Coast 3.8 -7.3%
Central Valley 2.7 -18.2%
Inland Empire 3.5 -18.6%
San Francisco Bay Area 2.3 -8.0%
California 3.0 -16.7%
Source: California Association of Realtors

Sales of existing single-family homes in California are expected to fall by 3.1% to 390,200 units in 2019, according to CAR. Active listings fell in all price ranges except at the upper end of the market, falling by 18% in October 2019 from a year earlier, according to CAR, the largest decline since May 2013.

California unsold inventory

While California is now experiencing a housing shortage, other US states, such as New York, are now witnessing an oversupply of properties due to overbuilding in recent years – forcing developers and sellers to offer discounted prices.

Homes are selling faster

A home’s median time on market fell by 4 days in Central Valley; 3 days in San Francisco Bay Area; 2 days in South California; and by 1 day in Los Angeles Metropolitan Area. In Inland Empire, it took 2 days longer to sell a single-family home.

California median time on market days

Yet the opposite is true for condos, with the median time on market rising by 4 days to 25 days in October 2019 from a year earlier.

However foreign buyer interest is declining

Southern California is particularly popular with Chinese parents hoping to send their children to American universities. However in the midst of a growing trade war between the US and China, overall Chinese investment in the US housing market plunged by 56% to US$13.4 billion in the year that ended-Q1 2019, according to NAR. In California, Chinese buyer inquiries for US properties on Juwai.com were down 27.5% in Q1 2019 from a year ago. Inquiries have been falling in four of the last five quarters.

“We call it the Trump effect. It’s a combination of anti-Chinese political rhetoric, a clampdown on visa processing, and of course tariffs,” said Carrie Law, the CEO of Juwai.com. “The Trump effect is undercutting some of the primary drivers of Chinese demand for US property, including buying homes for students who are studying in the US and the country’s reputation as a safe investment.”

Developers clearly think the boom cannot last

Developers are being cautious. During the first ten months of 2019, the total number of housing units authorized in California fell 9.2% to 90,963 units from the same period last year.  This authorizations decline follows growth of 1.9% in housing authorizations in 2018, 14.6% in 2017, 2.9% in 2016 and 14.2% in 2015, according to the California Department of Finance.

California construction permits

By property type:

  • For single-family homes, the number of permits fell by 8.9% y-o-y to 46,862 units in October 2019, while the value of permits fell 12.2% to US$14.71 billion.
  • For multi-family homes, the number of permits fell by 9.6% y-o-y to 44,101 units, which the value of permits fell 15% to US$7.69 billion.

Interest rates falling again

Low mortgage interest rates are fuelling the boom:

  • The average interest rate for 30-year fixed rate mortgages (FRMs) was 3.69% in October 2019, down from 4.83% in October 2018.
  • The average rate for 15-year FRMs was 3.14% in October 2019, down from 4.25% a year earlier.
  • The average rate for 5-year adjustable rate mortgages (ARMs) fell to 3.38% in October 2019 from 4.08% a year earlier.

California interest rates

These declines were caused by the lowering of the Fed Funds target rate to 1.75%-2% in September 2019, and further to 1.5%-1.75% in October 2019.

California has an average mortgage debt of US$363,537 per borrower – far higher than the national average of US$202,284.  Mortgage debt outstanding in California is at a record high of US$9.5 trillion, according to credit reporting site Experian.

However nationwide, the size of the mortgage market was down to 75% of GDP in 2018, far lower than the 100.1% of GDP in 2009, based on Global Property Guide estimates.

Because of ultra low interest rates, in October 2019 the average monthly mortgage payment in California was US$2,226 - down 7.5% from US$2,405 a year earlier, according to CAR.

By area:

  • At San Francisco Bay Area, the average mortgage payment fell by 14.4% y-o-y to US$3,457 every month in October 2019
  • In the Central Coast, mortgage payment fell by 12% y-o-y to US$2,482
  • In Los Angeles Metropolitan Area, the average monthly mortgage payment fell by 7.8% y-o-y to US$2,004
  • At Inland Empire, mortgage payment fell by 7.6% y-o-y to US$1,398
  • In the Central Valley, mortgage payment dropped 5.9% y-o-y to US$1,269 per month

Housing affordability improves

The percentage of homebuyers who could afford to purchase a median-priced, existing single-family home in California edged up to 31%, from 30% in the previous quarter and 27% a year earlier, according to CAR’s Traditional Housing Affordability Index (HAI). Likewise, CAR also reported that 48% of first-time homebuyers in the state could afford to purchase a median-priced home in Q3 2019, up from 45% a year ago.

Housing affordability improved in 42 counties, declined in 5, and was flat in one county.  In San Francisco Bay Area, affordability improved in every country in Q3 2019 from a year ago. San Francisco County was the least affordable, with only 18% of households able to purchase a median-priced home of US$1,580,000. Affordability also improved in all South Californian regions, with Los Angeles and Orange counties tied for being the least affordable.

In the Central Coast, affordability improved in all counties except Santa Barbara. In Central Valley, affordability improved in 10 counties and declined in only one county.

California housing affordability index

But this is not expected to last. “Without an increase in housing supply – including new housing construction for sale or rent – fundamental issues...will worsen the affordability crisis down the road,” said CAR’s Senior VP and Chief Economist Leslie Appleton-Young.

Foreclosures are exceptionally low in California

California’s foreclosure filings, which include default notices, scheduled auctions, and bank repossessions, were down by 4% in November 2019 from a year earlier, according to Realty Trac.

One in every 3,239 housing units in California had a foreclosure filing in November 2019 – lower than the national foreclosure rate of 1 in every 2,713 units.

The state saw some of the biggest improvements in delinquency rates in the US, with the rate dropping by 10.58% in October 2019, according to Black Knight. California is also one of the five states with the lowest percentage of non-current mortgages, at 2.01%.

California´s has a low homeownership rate

California had one of the lowest homeownership rates in the US at 56.3% in Q3 2019, behind New York’s 51.6% and District of Columbia’s 40.2%, according to the US Census Bureau - far lower than the national average of 64.8%.

California homeownership

Rents increasing strongly in some areas, vacancy rates falling

California had 3 cities out of the top 10 nationally in a list of largest rent increases for apartments during the year to Q3 2019, according to Apartment Guide. Stockton, CA ranked no. 2, with the average rent of one-bedroom apartments rising by 24.73% y-o-y to US$1,349 per month in Q3 2019. Long Beach, CA was no. 8, with rents increasing by 11.03% to a monthly average of US$2,332. Sacramento, CA came in No. 10, with apartment rents rising by 10.7% y-o-y to US$1,561 per month.

However average rents for all residential properties in California rose by a modest 2.2% y-o-y to US$2,652 per month in November 2019, according to Zillow Rent Index.

California rental vacancy rate

San Jose-Sunnyvale-Santa Clara Metro had the most expensive rental housing in California in November 2019, with an average rent of US$3,354 per month, according to Zillow. It was followed by San Francisco-Oakland-Hayward (US$3,354), Santa Cruz-Watsonville (US$3,282), Napa (US$3,008) and Los Angeles-Long Beach-Anaheim (US$2,933).

The rental vacancy rate in California was 4.3% in Q3 2019, down from 4.6% in the previous quarter and 4.5% from a year earlier, based on figures by the U.S. Census Bureaum - lower than the national vacancy rate of 6.8%, and in fact one of the lowest vacancy rates in the country.

Statewide rent control law signed

In October 2019, California governor Gavin Newsom signed a rent control law that will cap annual rent increases at 5%, plus the rate of inflation, in an effort to address rising housing costs and homelessness. The law took effect in January 1, 2020 and will run until January 1, 2030. It also bans no-cause evictions.

However the law has many exceptions. It does not apply to houses built within the last 15 years; single-family homes, except those owned by corporations or real estate investment trusts; and duplexes where the owner lives in one of the units. In addition, the law will not apply to the 2 million people in the state already covered by previous rent controls.

California and Oregon are now the only US states that cap rent increases statewide.

Statewide economic growth modest, unemployment at record low

California’s economy grew by a modest 2.6% in 2019 – a slowdown from the prior year’s 3.5% growth but outpaced nationwide GDP growth, which was 2.1% in the last quarter. California´s economy will continue to outshine the nation’s overall performance this year as employers boost payrolls, based on the latest UCLA Anderson School forecast.

The US economy is projected to grow by 2.1% this year and by another 1.9% in 2021, following annual expansions of 2.3% in 2019, 2.9% in 2018 and 2.2% in 2017, according to California’s Department of Finance.

During the year-to-date, the state’s merchandise exports totaled US$129.1 billion, down 3.2% from a year earlier. Likewise, merchandise imports dropped 6.3% y-o-y to US$304.6 billion.

California gdp growth

California’s labour market remains fundamentally strong, with the unemployment rate falling to a new record low of 3.9% in October 2019.  It is now a full percentage point below the 2007 pre-recession low of 4.9%!  About 23,600 nonfarm jobs were added in the state in October 2019, up 1.8% from a year earlier.

California’s minimum wage will increase to US$13 per hour in 2020. But the new minimum wage, which will take effect in January 1, applies only to large employers with 26 or more employees. This is the fourth consecutive year that the minimum wage was raised, as the state moves toward a goal of a US$15/hr minimum wage for large employers by 2022 and for all employers by 2023. Several municipalities in California have their own minimum wage that exceeds that of the state.

Sources: