Higher mortgage rates are cooling off the red-hot housing market, and several California cities are among the most at risk for fewer sales and sliding prices.
The Inland Empire, better known as Riverside and San Bernardino counties to those outside Southern California, is the most at risk for a slump nationwide (see list below). The Inland Empire, a lot more affordable than next-door Los Angeles and Orange counties, has homeowners with smaller down payments (thus less equity) and is one of the fastest “cooling off” markets in the U.S., according to Redfin.
The combination, especially with higher mortgage rates thanks to the Federal Reserve’s two consecutive 0.75% hikes in as many months, will greatly affect the Inland Empire, says Redfin senior economist Sheharyar Bokhari.
“Recession fears are escalating, mostly because the Fed has signaled it will continue to raise interest rates to tame inflation and cool consumer demand,” Bokhari says. “Higher interest rates led to surging mortgage rates, which have already cooled down the housing market.”
HIGHER MORTGAGE RATES LEAD TO FEWER SALES AND LOWER PRICES
Indeed, home sales plummeted almost 21% in June compared to a year ago, with the fewest home sales since April 2008, according to the California Association of Realtors.
The Federal Reserve is attempting to combat the worst inflation in 40 years with higher interest rates, while also trying to avoid a recession. However, the nation’s gross domestic product – the combination of all goods and services combined – has declined for two consecutive quarters, often considered evidence of a recession.
Housing experts say that higher rates and a recession will greatly affect the housing market. The average mortgage payment has increased at least 40% since the Fed started increasing interest rates in late spring.
10 cities in California most at risk for a housing downturn
- San Diego
- Los Angeles
- San Jose
“If the U.S. does enter a recession, we’re unlikely to see a housing market crash like in the Great Recession because the factors affecting the economy are different: Most homeowners have a fair amount of home equity and not much debt and unemployment is low,” Bokhari says. “But a recession, or even a continued economic downturn that doesn’t reach recession levels, would impact some housing markets more than others, and there are a few factors that could put certain areas at risk.”
SACRAMENTO, BAKERSFIELD AND SAN DIEGO COULD SUFFER
Like big price gains during the pandemic. Choose any city in the West, from San Diego to Seattle to Salt Lake City – and pretty much anywhere in that triangle – and home prices increased at least 50% during the past three years.
Sacramento – one of the hottest housing markets during the pandemic – Bakersfield, San Diego and Stockton are among the cities in California with the greatest potential for a price slide. All were popular destinations for those who were able to work from home during the pandemic.
But don’t expect those crazy-high Bay Area home prices – five counties have million-dollar-plus median home prices – to come down much, since price increases were smaller compared to other regions in the state, and San Francisco, San Jose and Oakland residents have hefty incomes.
Riverside-San Bernardino; Boise; Cape Coral, Fla.; North Fort, Fla.; and Las Vegas are the five housing markets nationwide with the most significant risk of a slide.