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Zillow: California housing market to cool off after a red-hot decade

Economists and real estate experts say several California cities could endure lower home prices and values. Also, impressive home price growth during the past decade and affordability is a major problem in the state.

California homeowners have enjoyed huge gains during the past several years, but those days may be coming to an end during the beginning of the new Roaring 20s.

The state has six of the most fragile housing markets in the U.S., including first-place San Francisco, according to 100 economists and real estate experts surveyed by Zillow and Pulsenomics.

Almost three of every five (57.1%) of those surveyed expect home values to drop and sales to slow in San Francisco in 2020. San Jose, Los Angeles, San Diego, Riverside and Sacramento also made the list (see below for the percentage of those anticipating darker days for these cities).

Percentage of economists, real estate experts predicting home values and sales to drop in …
  • San Francisco: 57.1%
  • San Jose: 50%
  • Los Angeles: 38.1%
  • San Diego: 28.6%
  • Riverside: 28.6%
  • Sacramento: 23.8%
San Jose enjoyed some big price gains, but homeowners could endure some price drops. Photo by mTaira/Shutterstock

Affordability, even with near-record-low mortgage rates, is a major concern for experts — and home shoppers, according to numerous reports. And California’s fast-rising home prices (check out the post below on home price growth in seven markets) are challenging for many consumers, with less than one of every three able to buy a home during the third quarter, according to the California Association of Realtors.

Is the South the new West?

The cracks in California’s housing market started to show during the third quarter, as home equity slowed to $2,000, one of the lowest rates in the nation — and well below the $5,300 average, according to CoreLogic.

Of course, that doesn’t mean every city, neighborhood or home will endure a price drop in 2020. A critical shortage of homes on the market coupled with a booming economy and job market will help housing but cost-conscious consumers may hold off on purchasing.

All six California cities had negative outlooks, derived from experts expecting the markets to underperform, perform about the same (also known as no change) or outperform. California had six of the nine markets with a negative outlook, led by San Francisco at minus-40 (64% expect the City by the Bay to underperform, while 24% predict an outperforming market).

Almost two of every three economists surveyed expect the San Francisco housing market to slow in 2020. Amogh Manjunath/Unsplash

So, where are the best-performing markets? Look at the South and Texas, with first-place Austin grabbing a score of 76, followed by Charlotte at 59 and Atlanta at 51.

A decade of (a lot) higher home prices in CA

California has eight of the 10 best-performing markets for home price increases during the past decade, with San Francisco leading the way.

The city’s housing market is a near-perfect-example of economics 101– booming demand and a dwindling supply. San Francisco, which has a serious shortage of homes compared to the number of workers, had a $711,000 home price increase during the past 10 years, with the median reaching $1.4 million, says Redfin chief economist Daryl Fairweather.

The city’s housing market is a near-perfect-example of economics 101– booming demand and a dwindling supply.

San Francisco, which has a serious shortage of homes compared to the number of workers, had a $711,000 home price increase during the past 10 years, with the median reaching $1.4 million, says Redfin chief economist Daryl Fairweather.

Redfin chief economist Daryl Fairweather

San Jose home prices have also more than doubled since 2010, reaching $1.08 million — or a $568,000 increase. 

The city, also dealing with too few homes for too many workers, has some of the most competitive neighborhoods for home shoppers. Half of the nation’s 20 most competitive markets are in California — and all in the Bay Area.

Fort Lauderdale, Fla., one of the hardest-hit cities with the foreclosure crisis, had the largest percentage increase nationwide, with a median of 16.5%. But four California cities — Oakland, San Jose, San Francisco and Sacramento — had annual double-digit percentage gains.

CURRENT MEDIAN HOME PRICE AND AVERAGE ANNUAL PRICE GAINS SINCE 2010 (RANKED BY PERCENTAGE GROWTH)

Buying a home remains out of reach for many Californians

Looking for an affordable community in California? Well, good luck.

For a large majority of the state, buying a home is going to take a large chunk of the average worker’s paycheck. In San Francisco and Santa Cruz, the average consumer will also need some dollars from a family member, friend or renter to make ownership work.

Affordability is a major issue nationwide, with at least 30% of income needed to buy a home in two of every three markets during the fourth quarter, according to ATTOM Data Solutions. But nowhere is the problem more apparent and harder to escape than California.

‘Typical home remained a financial stretch for average wage earners’

The state’s most affordable market is Bakersfield, where the average worker will need to spend about 37% of their paycheck on the mortgage. Nearby Kings County, better known as Hanford-Corcoran, is the second-most-affordable in the state at 37.3%, followed by Tulare County (Visalia-Porterville-Tulare) at 40%. 

Leave the Central Valley, where low pay is offset by more affordable home prices, and buying a home becomes more challenging — and, in some cases, impossible (see below how much of the paycheck is needed to purchase in many regions). 

Bakersfield is one of the most affordable cities in the U.S. Robert Hale/Shutterstock

“The typical home remained a financial stretch for average wage earners,” says Todd Teta, chief product officer with ATTOM Data Solutions. “However, homes were actually a bit more affordable because of declining mortgage rates combined with rising pay to overcome the continued run-up. As long as people are earning more money and shelling out less to pay off home loans, the market should remain strong with prices continuing to rise, at least in the near team.”

It’s the long-term that could be an issue, when mortgage rates increase and pay raises slow.

Irvine-based ATTOM compared the average wage earner’s annual income to the median home price in a region. The effort provides a more accurate look at affordability. The company’s quarterly report determines affordability by calculating the income needed to make monthly house payments — including mortgage, property taxes and insurance — on a median-priced home in a specific region, assuming a 3% down payment and a 28% maximum front-end debt-to-income ratio.    

Click the ATTOM Data map below to check on affordability rates by cities and counties.

Ron Trujillo

Longtime business journalist-turned-public relations executive who enjoys reporting on residential real estate in his spare time. He can be reached at ron@calhomenews.com.

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