Wednesday, December 12, 2018

Hoover Institution: Why California Home Prices Will Soon Fall

By  Lee Ohanian

The median price of a single-family home in California has increased to about $546,000. This is a record high, and is more than 80 percent above the 2012 median of $300,000. California home prices are likely peaking now, and I expect that they will decline soon. The simple analytics of the California housing market is that not nearly enough California households have sufficient income to support the cost of home ownership at current price levels and with current lending standards.

The first signs of a weakening housing market are already occurring.

The number of homes sold in California is declining sharply and, in some areas, sales volume is approaching the very low levels recorded at the depth of the 2008–09 recession. Single-family home sales declined nearly 18 percent in Southern California, and more than 22 percent in Los Angeles earlier this fall. Average time for a listed home on market has increased, and the listing price of nearly half of homes for sale is being reduced.

Only about 20 percent of households in the state—roughly 260,000 households—can afford the median-priced home, assuming a 10 percent down payment and given current mortgage rates for borrowers with good credit. With over 200,000 homes selling at or above the median price, you can see the difficulty in maintaining existing sales volume and home prices in the state. In the absence of a large inflow of new money from out-of-state households, California home prices and sales will likely decline.

The California housing market stands in sharp contrast to many other housing markets in the country, where significantly more households can afford home ownership. In Arizona, which has attracted many households previously located in California, roughly 42 percent of households can afford the median-priced home of about $250,000. Moreover, Arizona employment and household incomes are growing faster than in California, indicating that the number of qualified buyers in Arizona will rise at a significant rate.

California housing affordability is even worse in the highest-income locations in the state. Only about 15 percent of households in San Francisco and Silicon Valley—which feature some of the highest-paying jobs in the country—can afford the median-priced home, which is about $1.4 million in San Francisco and about $1.3 million in Santa Clara County, encompassing much of Silicon Valley.

Read the rest here.

Lee E. Ohanian is a senior fellow at the Hoover Institution and a professor of economics and director of the Ettinger Family Program in Macroeconomic Research at the University of California, Los Angeles (UCLA).

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