California Home Price Increases Expected to Slow

Home Price Increases Expected to Slow Rapid home price growth across California has called for concerns of yet another housing “bubble” on the horizon.

According to the latest C.A.R. data, median price of sold homes jumped almost 32 percent over the last year. While CAR’s median home price measure is affected by the mix of sales, other indicators which measure home price changes on the same home show similar increases. The Case-Shiller Index, for example, showed a 25 percent home price increase from the year before in the Los Angeles metropolitan area in April. The San Francisco metropolitan area had a 30 percent increase, while San Diego showed a 21 percent increase.

An increase in prices itself does not equate to a bubble. During the last boom, price appreciation was fueled by sub-prime loans that were packaged as mortgage-backed securities and increases in construction activity which was not supported by demographics.

Current price appreciation is driven by the lack of available inventory of homes for sale.

The depletion of inventory is the result of several factors:

1. First, distressed property (foreclosures, short sales, REOs) inventory was absorbed by investors who intend to keep the properties instead of flipping them. 
2. Second, there has been an influx of international buyers in the U.S. housing market, and particularly in the California markets. 
3. Thirdly, construction activity in California came to a halt following the housing bust. 
4. And lastly, nearly one in five homeowners in California is still underwater on their home mortgages.

Going forward however, the pace of house price gains is expected to slow.

There are several reasons to expect a slowdown in price growth. If prices continue rising at 12 percent year over year, housing will be overvalued relative to rents within the next few months and relative to incomes in early-2015.

In addition to increases in mortgage rates, which have been rising, mortgage servicing costs will rise by two to three percent of income each year.

Further, with increased prices and tight inventory, investors are having a harder time finding bargains. With fewer discounts available, investors are seeing their yields disappear.

Demand from traditional buyers will need some time to replace investors which will take a little of the steam out of the market. Also, sellers are starting to return to the market and putting their homes up for sale in greater numbers.

Price boosts have elevated some previously underwater homeowners and allowed them to gain back a portion of their equity.

The inventory of homes available for sale increased about 2 percent between April and May, and has shown increases since the beginning of this year. Also based on the sharp increase in the share of consumers who think that now is a good time to sell, further increases in inventory are underway.

Tight inventory has been a key driver of home price increases, but as the balance of supply and demand inches closer to equilibrium, price gains will slow and we expect home price appreciation to flatten to about a four percent annual increase in 2014.

Source: California Association of Realtors