Your Guide to Home Price Losses – Orange County Register

Will California’s housing market collapse again, or modestly correct pandemic-era overzealous buying?

Could home buying relax a bit instead?

As 2022 draws to a close, the market weakens as mortgage rates rise from record lows. More expensive financing squashes those who can afford to buy. Those same high interest rates — a Federal Reserve strategy to cool an overheated economy — could freeze the job market, so crucial to resilient home buying.

The result is that recent huge price gains are turning into projections of notable losses across the state.

You know, it’s been a decade and a half since housing went from boom to bust. Let’s refresh our memories of the California market decline and where we’re likely to find clues as to what lies ahead.

My trusty spreadsheet was filled with 1976 state home price data from the Federal Housing Finance Agency, as well as various economic and real estate variables. The goal was to create a guide to observing a market meltdown — or whatever you want to call the first major housing disruption since the Great Recession.

Yes, history is certainly not a perfect guide to the next step. “This time it’s different” is always kind of true. But stumbling into the past can often provide clues as to the future of homebuying in California.

California is different

California homebuilding is a very different beast than other U.S. markets — particularly its price volatility.

There is a 25% chance that California home prices have been falling and have been for half a century. That’s the fourth-highest loss ratio among states.

There is now only a 16% loss rate for all states.

Yes, it’s a bumpier ride for homeowners in the Golden State, but they’re well compensated for those losses. Nationwide home prices have risen an average of 7.1% per year since 1977, behind only Washington, DC nationally.

Compare these increases to the average gain for all states of 4.9%.

jobs. jobs. jobs.

You need a paycheck to own a home, so keep housing hints in mind, which fall due to swings in California’s unemployment rate.

If unemployment has fallen over a 12-month period – as in today’s job market – there is only a 15% chance that house prices will fall next year.

But if unemployment rises, there’s a 51% chance the home price will go down.

Or look at this important housing factor this way: if unemployment falls, prices will rise by an average of 9% over the next year. When unemployment is high, the increase in value is only 1% per year.

It’s the economy, fool

The demand for housing requires growing paychecks.

To trace housing construction’s links to overall economic progress, I created a California cash flow benchmark that measures the growth in statewide total income minus the rate of inflation. This metric has averaged 2.9% annual growth since 1977.

Any increase in this income measure means only a 21% chance that home prices will fall next year. These rising incomes resulted in average house price gains of 8%.

But when incomes fell in California, prices fell 63% of the time. And those drops result in an average home price drop of 3%.

Note: This income bar has fallen over the past four quarters.

course reversals

The cost of borrowing doesn’t affect home prices like you might think.

That’s because interest rates usually go up when the economy is hot. And as you just learned, growing economies can increase home values.

So if mortgage rates have risen in the years since 1977 — only 40% of the time — there’s only a 14% chance that California home prices will lose ground the following year.

But when interest rates fall, it’s often a sign of bad business sentiment. And when mortgages get cheaper, 35% of the time, a fall in California home prices follows. Pandemic-era soaring prices clearly look like an anomaly.

So don’t rush to find cheaper mortgages. Next comes an average house price gain of 10% as interest rates rise. If interest rates go down, next year’s gains are just 4%.

Do sales matter?

The ups and downs of sales aren’t just statistics for the real estate industry.

Californians were buying single-family homes at a rate of $305,000 a year in the three months ended September, according to state realtors. That’s the slowest quarterly pace of buying in 14 years.

Summer sales fell 20% from the spring quarter — the second-biggest three-month decline in this brokerage data that dates back to 1990 — and down 29% from a year earlier — the fifth largest 12-month decline.

Such dramatic declines suggest that sales in California have already collapsed. And sales declines affect pricing.

Appreciation, as measured by the California Association of Realtors Price Index, rose from 17% annually to 2% last year — a 15 percentage point slowdown. It’s not an outlier.

Since 1990, when California purchases have declined by 10% or more in a year, the rate of appreciation has contracted by an average of 4 percentage points.

Which index to consider?

Let me try to oversimplify most price measures.

Geography: Prices in California vary greatly from north to south and from coast to inland. Note that smaller ranges often mean more volatile results.

Covered houses: Certain indices look at all homes, while others focus on single-family homes. Whether new houses are included is another variance. So it depends on whether you follow the “core” of living – the existing single-family home – or take a broader perspective.

Simple math: The median selling price — reported by companies like CoreLogic and Realtors — is the average paid for all sales. Movements in this metric, which are usually released shortly after the end of the month, can be early warning signs of upcoming problems.

Interested in math: The Federal Housing Finance Agency indices, which I used for this analysis, and the much-discussed Case-Shiller indices are constructed using “paired sales” logic. The price changes for each single-family house sold are observed over a period of three months. This math takes time, so there is a two-month delay in reporting. We typically use these numbers to confirm trends shown in other indices.

Is there a best? No, they are best viewed together.


Crash? Correction? Relax?

History tells us that, as measured by the FHFA, California prices have fallen 46 quarters out of 186 year over year – only three states have more falls.

And the average California loss among those declines was 4%. Only 11 states with deeper drops.

For me, a “cooling down” in the market is a slight slowdown. I would suggest that any 12-month decline in California that is less than the median 4% loss falls within the “chill” definition.

Now double-digit losses over 12 months sound painful. And such landslides have only happened eight times in California in half a century, so they’re a rarity. Thus, a “crash” could be viewed as a 12-month decline of 10% or more.

That would mean a “correction” – the downturns between crash and chill – are price declines between 4% and 10% per year.

Please understand that this is my house price glossary. But whatever your terminology, the big question for California housing has changed from big wins or not? to “How big will the burglary be?”

And just looking at real estate benchmarks doesn’t give you the full picture.

Jonathan Lansner is a business columnist for the Southern California News Group. He can be reached at Your Guide to Home Price Losses – Orange County Register

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