California home prices could jump 7%. Where might biggest gains occur?
“Crystal Ball” assists in deciphering numerous forecasts that speculate on the economy’s future ups and downs.
Buzz: It could be another wild ride for California home values, with one forecast predicting a 7.3% gain over the next year after price drops.
Source: My trusted spreadsheet examined the June report for CoreLogic’s home-price indexes, examining what happened to values in 12 major markets and what might happen next. When compared to other yardsticks that only track median sales prices, this “paired sales” index is based on a study of price changes tied to individual transactions.
The trend
Home prices in California fell 2.2% in the year ending in June, with losses found in all but one of a dozen markets tracked. The drop comes after statewide prices rose 35.5% in the previous 24 months.
This reversal can be attributed largely to falling affordability following Federal Reserve rate hikes. In early 2022, the central bank shifted from a home-price pumper, using historically low money to resurrect a coronavirus-chilled economy, to a party pooper, rapidly raising interest rates to cool an overheated economy.
While the high cost of mortgages in mid-2023 slowed homebuying to unfathomable lows, a limited supply of homes for sale has kept prices stable.
CoreLogic forecasted a significant price increase in California through June 2024, with increases expected in all 12 markets.
The dissection
Here’s how the forecast divides projected gains among the state’s major housing markets, ranked by the magnitude of expected increases…
Orange County: 9.5% increase in the next 12 months vs. 0.5% increase in the previous year.
San Rafael: 8% increase in the next 12 months, compared to a 6.9% decrease in the previous year.
Inland Empire: 7.8% increase over the next year, compared to a 1.3% decrease over the previous year.
Ventura County: 7.4% increase in the next 12 months, compared to a 1.8% decrease in the previous year.
Oakland: 7.4% increase in the next 12 months, compared to a 7.3% decrease in the previous year.
Salinas: 6.8% increase in the next 12 months, compared to a 3.4% decrease in the previous year.
Napa: 6.5% increase in the next 12 months, compared to an 8.6% decrease in the previous year.
Los Angeles: 6.4% increase in the next 12 months, compared to a 2.4% decrease in the previous year.
Santa Maria-Santa Barbara: 6.3% increase in the next 12 months, compared to a 1.4% decrease in the previous year.
San Francisco: 6% increase in the next 12 months, compared to a 7.2% decrease in the previous year.
San Jose: 3.8% increase over the next 12 months, compared to a 4.3% decrease over the previous year.
San Diego: 3.5% increase over the next 12 months, compared to a 0.9% decrease over the previous year.
Quote
“The state remains one of the most undersupplied housing markets in the country as existing homeowners keep their low mortgage rates locked in and new construction lags,” said Selma Hepp, CoreLogic’s chief economist. “As a result, there is renewed downward pressure on home prices, and growth rates over the next year are likely to exceed the national trend.”
Plausibility
According to CoreLogic, the median home value in California in June was $720,000.
Mortgage rates were 6.7% at the time, and statewide unemployment was a manageable 4.6%. And, by all accounts, homebuying affordability was at or near long-term lows.
CoreLogic predicts that prices will rise by $50,000 in a year. Is that possible?
To begin, you must assume that the job market remains healthy. Because of the Fed’s economic throttling, unemployment has already risen from its all-time low of 3.8% in summer 2022.
Then assume that income in California will rise by 4% over the next year. Mortgage rates would have to fall to 6.4% to maintain the current rock-bottom affordability levels. They are currently running at nearly 7%.
This is a very optimistic forecast.
