Pity the homeowners of million-dollar properties. They are losing the most – at least on paper – than the rest of us.
While the overall housing market has bounced back, in some cases with a trampoline-like jump, high-end home prices are stumbling in California.
In fact, California has seven of the hardest-hit high-end markets in the nation, the latest evidence that the current housing market is anything but normal. Of course, keep in mind that we are talking about a few clouds on the horizon, not a sky’s falling situation like during the housing crisis that prompted the Great Recession.
3 OF THE 5 LARGEST DROPS OF MILLION-DOLLAR HOMES ARE IN CALIFORNIA (SAVED BY SEATTLE)
But for those who like to keep a close eye on their home values, it could be a worry. And those toss-and-turn sleepless nights are from the Bay Area to San Diego.
The number of million-dollar homes in Oakland, Oxnard and Los Angeles has declined more than 5 percentage points compared to June 2022, the largest other than Seattle’s 6.3 percentage-point drop, according to a recent Redfin report.
And all 12 markets surveyed in California had a drop in high-end home values compared to last summer (see table). The average decline is about 3.5 percentage points statewide.
EVEN HIGH-INCOME CALIFORNIANS WORRY ABOUT RATES
Blame The Fed, and its ongoing inflation-rate increases to combat the highest inflation rate since 1990. California – arguably one of the most mortgage rate- and price-sensitive markets in the nation – is also dealing with a critical shortage of available homes regardless of price, including those that would fetch $1 million or more.
“The supply shortage is making many listings feel hot,” says Chen Zhao, economics research lead for Redfin. “In most of the country, expensive properties that are in good condition and priced fairly are attracting buyers and in some cases bidding wars, mostly because for-sale signs are few and far between right now. Still, there’s no rush to offload high-value homes.”
8 OF 10 BAY AREA HOMES ARE VALUED AT $1 MILLION-PLUS
Indeed, a large majority of homeowners considering selling – whether they have an entry-level home or a million-dollar property – are holding off with the highest mortgage rates in more than a decade.
The drop in prices has led to a rise in bargain-hunting at the high end of the market, especially in markets where prices have slipped the most such as the Bay Area, and a smaller-than-expected slowdown in sales, according to another recent Redfin report.
Despite the dip in high-end home values, California boasts the most million-dollar properties. In the Bay area alone, about eight of every 10 homes are valued at more than $1 million.
Nationwide, 8.2% of homes are valued at $1 million or more, close to the record of 8.6% in June 2022. Bridgeport, Conn., had the largest increase at 2.7 percentage points in the U.S.
Percentage of $1 million-plus homes by region
|% of $1 million+ homes in June 2023
|% of $1 million+ homes in June 2022
Equity gains return, as prices rebound
While the rich may feel a bit less wealthy, a large majority of homeowners in California can enjoy a boost in equity.
Almost two of every three homeowners (63%) were considered “equity rich,” with more equity than debt based on the current value of their home – a healthy increase from the 60% during the first quarter, according to real estate-tracker ATTOM Data.
It’s an about-face after two straight quarters of slightly lower home prices that affected homeowner’s equity. But with slightly higher home prices in recent weeks, primarily because of a critical shortage of homes on the market, homeowner equity has improved as well.
“The second-quarter market revival bestowed immediate benefits on homeowners around the nation in the form of better profits for sellers and rising equity for those staying put,” says Rob Barber, CEO of ATTOM. “Equity levels were high even during the recent downturn, and now they are going back up and better than ever. It is well worth noting that the market remains in flux and the recent improvement could easily be temporary.”
3 OF EVERY 4 SAN JOSE-AREA HOMEOWNERS ARE CONSIDERED ‘EQUITY RICH’
Higher mortgage rates are the primary worry and have caused home prices to bounce around in a narrow margin for the past 18 months. But with few homeowners willing to give up near-record-low mortgage rates – some below 3% – the housing market has faced a severe inventory shortage.
Bad for buyers, but a gift for homeowners in California.
The Golden State has the second-highest percentage of equity-rich homeowners at 63%, though a distant second from the 78% rate in Vermont, where buy-and-hold is apparently the state motto.
San Jose’s 76% equity-rich rate is the highest in the nation, followed by Los Angeles, San Francisco and San Diego – all at about 69%. In even more affordable markets where price gains are often slower, such as Bakersfield and Fresno, equity has increased during the past two quarters.
“Lots of changing forces are at work affecting whether boom times are really back, especially amid a recent increase in mortgage rates,” Barber says. “But with the 2023 peak buying season still underway, it seems that homeowners can reasonably expect their household balance sheets to grow a bit more in the near future.”
Percentage of equity-rich homeowners
|% of equity-rich homeowners
Source: ATTOM Data
EQUITY-RICH SELLERS BECOME OFTEN OVERPAY FOR THEIR NEXT HOME
Now, what they do with that equity when they sell their home is another issue. For many equity-rich homeowners-turned-sellers, all of those dollars encourage them to consider more homes – and often pricier properties – and pay top dollar, according to a new report.
The study, authored by Brigham Young University and University of California, Los Angeles (UCLA) professors, determined that buyers with equity from the sale of a previous home overpay, on average, about 2% – or about $16,000 for an $800,000 home.
And equity-rich owners-turned-buyers will often overpay in a neighborhood where it’s more difficult to determine the price of a home, such as custom or hard-to-find features – think that RV garage or rock waterfall pool.
So, who cares if some home-seller nets a big gain and wants to spend more than they should on their next home? Well, it matters, a lot. That 2% cost will likely boost home prices in the neighborhood. Again, bad for buyers; good for owners looking to sell, at least in the short-term.
The study says that buyers may want to hold off until equity-rich buyers have bought in a neighborhood.
And those deep-pocketed buyers may endure a painful reality down the road when they realize they overpaid for their home, and the offers from buyers come in lower than expected.
California rent control is back on the ballot, again
Maybe the third time’s a charm. Or perhaps it will be another swing and miss, striking out for the third time in six years.
Californians will get to cast a vote on rent control – and, more specifically, if cities can establish their own limits on how much landlords can increase rent – in November 2024.
Michael Weinstein, head of the Los Angeles-based AIDS Healthcare Foundation and the primary financial supporter of the current and the previous ballot measures, says Californians may be more likely to favor rent control because housing costs have become so “extreme and dire and catastrophic” for tenants.
1 IN 3 TENANTS SPENDS MORE THAN HALF OF THEIR INCOME ON RENT
An almost three-decades-old state law, the Costa Hawkins Rental Housing Act, bans cities from establishing rent control for apartment communities and single-family homes built after 1995. And landlords can boost rent as much as they would like with new tenants.
A more recent law established a statewide cap on rent hikes of a maximum of 5% plus the inflation rate for existing, but cannot exceed 10% in a year.
But some associations, labor groups and lawmakers say the 5%-plus-inflation cap is still too high for housing-strapped renters in California.
Indeed, a large majority of renters in California are cost-burdened, spending at least 30% of their household income on housing. And 28% of renters are severely cost-burdened, with half of their income spent on housing.
LIBERAL, EXCEPT WHEN IT COMES TO RENT CONTROL
But rent control, even in liberal-heavy California, has been a challenge. Previous rent control propositions were defeated by at least 19 points in 2018 and 2020, primarily because of big-time spending from the California Apartment Association.
The association says that, if passed, rent control could slow the construction of affordable housing, affect homeowners who may want or need to rent their homes and small landlords, and possibly increase the homelessness crisis.
Renters occupy about 45% of the state’s housing units, another challenge for the proposition. In general, homeowners favor the ability to rent their homes for as much as possible, if needed.
But Weinstein says out-of-control rents could help encourage more tenants to register and vote in November 2024, and maybe even garner some empathy from homeowners, who may remember the challenge of renting in California.
It’s also worth noting that the presidential election will also greatly boost voter registration and participation – and could help increase the interest in rent control.