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How spooked is California’s housing market? 12 factors to watch

October 27, 2023

A witches’ brew of economic forces is stirring unnerving thoughts about what’s next for California’s homebuying market.

One particularly ghoulish factor in these spooky times is that most Californians can’t afford to buy a home in the state – whether they are a first-time house hunter or an owner looking for a new place.

That’s largely due to a scary reversal of mortgage rates, which have risen to 23-year highs, less than three years since we saw record lows.

Yes, prices have not cracked and remain near record highs.

Still, these gut-twisting gyrations walloped the pace of statewide home sales, which are eerily slow and run 35% below average this year.

Forecasting California’s homebuying future requires a peek into a spine-chilling concoction of market forces that may not mix well.

Remember, housing’s history is filled with painful memories of the Great Recession and the very gloomy days of the early 1990s.

But any California outlook means pondering a potentially haunted house with a dozen real estate characters lurking.

No. 1 Central bankers: The scariest thing about the Federal Reserve has been its resolve to fight the worst bout of inflation in 40 years. Driving up interest rates – notably home loans – “higher for longer” to cool the overheated economy has iced homebuying. Spooky stat: A borrower’s buying power has shrunk by 45% from its peak when mortgage rates fell to 2.65% in January 2021.

No. 2 Lenders: It’s frightening to see the pullback in mortgage-making. Loans counts have tumbled as layoffs multiplied. Meanwhile, lenders seem fearful. So borrowers face increased qualification standards. Spooky stat: The Mortgage Bankers Association’s Credit Availability Index this summer hit an 11-year low.

No. 3 Bond traders: This normally anxious flock seems extra antsy. To protect their mortgage investments from inflation’s ravages, they’ve demanded premium rates to keep funds flowing to homebuying. Spooky stat: Thanks to rising rates, mortgages as an investment have lost 8% of their value this year – and 20% over three years.

No. 4 Investors: It’s spine-tingling to think how dark homebuying might be without this often-derided slice of the market. But how long can deep-pocketed investors keep buying amid market turmoil? Spooky stat: 34% of California home purchases in the second quarter were made by investors – the highest share in the nation, according to CoreLogic.

No. 5 Owners: The move-up market is a ghost. This group is petrified of selling because they likely can’t afford to buy another home – an inability to move which cuts demand and supply. Spooky stat: California listings have run below 2022’s slim pickings for five consecutive months, says California Association of Realtors.

No. 6 House hunters: Jittery first-time homebuyers are staring down an unsettling clash of lofty prices and low affordability. Plus, there’s worry high rates could stick around and limit future refinancing savings. Spooky stat: Only 32% of Californians could qualify to buy in the second quarter – the lowest level in 17 years, a Realtor starter-home index shows.

No. 7 Builders: The ghastly cold market for resale homes created opportunities for sellers of new construction. But developers have run into various shortages – materials, labor and land to build. Spooky stat: How short are builder supplies of property lots? San Diego (71% below normal), Los Angeles-Orange County (66%), San Francisco (48%), and the Inland Empire (46%).

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No. 8 Landlords: Soaring rents pitchforked folks into ownership two years ago. But 2023’s fears of empty rentals nudged apartment owners to chill their pricing – motivation for tenants to stay put. Spooky stat: California rents were rising at a 16% annual rate as recently as April 2022. In August 2023, they were falling at a 2% yearly rate.

No. 9 Employers: Jobs drive homebuying. And a strong hiring pace has helped keep the California housing market stable. But bosses now seem skittish and slowed staffing growth. Spooky stat: California hiring is off 10% this year.

No. 10 Consumers: Shoppers’ overall psyche is the bedrock for homebuying. And that foundation seems a tad creeky of late amid a host of economic and political tensions. Spooky stat: California’s future looks 15% gloomier over the past year, according to the Conference Board’s consumer confidence index.

No. 11 City planners: California’s horrifying inability to build enough housing seems like a never-ending nightmare. Getting residential projects through local approval mazes remains daunting. Spooky stat: California is home to 11 of 25 US metropolitan areas with the largest housing shortages.

No. 12 Movers: The hair-raising cost of California living is pushing residents out and scaring off potential relocations to the state. Perhaps that exodus lessens congestion and helps a housing shortage short term. It could strangle the state economy long term, too. Spooky stat: In 2021-22, California lost 1.65 million residents to other states but only 900,000 people moved here.