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Concerning Signals Within California’s Real Estate Market

Signals Indicate Market Slowdown

California’s real estate market has recently started to show signs that not only is it slowing down, but it might actually be heading towards yet another crash. New data is currently showing that overall sales for new and existing homes, as well as condos, are down a whopping 11.8 percent compared to last year’s data. Despite overall sales falling, the median home purchase price has risen to just under $540,000, a 7.3 percent increase from last year.

The sales slump seems to have started in June 2018, hitting a new 4 year low. Data for these figures were collected from around the state, especially within the normally booming real estate markets in Los Angeles, San Diego, Riverside, Ventura, Orange, and San Bernardino counties.

While sales slumped across the market for new and existing homes and condos, it was new home sales that slumped the worst out of the three market segments. New home sales are currently down state-wide by 47 percent compared to last year, which is an extremely concerning stand-alone figure. These figures become even more concerning when you consider the fact that the California real estate market has on many occasions been a predictor for the near-term health of the greater national real estate market.

Why is the Housing Market Slumping

Experts across the California real estate market all seem to agree on the main culprits behind the home sales slump. Lack of affordability and shortages in housing inventory are likely the two main causes. With the median home price in California sitting at an all-time record high, that means there are simply fewer affordable homes on the market than ever before. Prospective buyers are not only finding it to be increasingly difficult to find a home that they can afford, they’re also becoming far more apprehensive taking on the risk associated with mortgaging a home in peak market conditions.

With median home prices peaked, prospective home buyers are also finding it to be increasingly difficult to attain affordable financing. Saving the required down payment for an average California median-priced home of $540,000 is an extremely daunting task, with many potential buyers simply being unable to save that much money. With the down payment obligations unlikely to be realistic for many home buyers, this issue alone automatically disqualifies many potential home buyers, especially younger new home buyers.

California and the National Real Estate Market

Over the last several decades, the health of the real estate market in California has always been a very accurate predictor for the health of the markets throughout the rest of the country. This is due to the fact that California has a massive housing market and one that is amongst the largest nationally. As is usually the case, national markets are again reflecting the state of California, albeit with a slight delay. Nationally, housing prices are rising throughout most states. Similar to the conditions in California, national real estate inventories are shrinking while median house prices are rapidly increasing. If the real estate market does crash in California, then it just might foreshadow a greater real estate market crash nationally.

Renting Can Often Be Cheaper Than Buying

Although renting a home, condo, or apartment in California can be exceptionally expensive, it is still much cheaper than buying a home in many cases. Take San Francisco, for example, which has one of the most expensive housing markets in the country. Renting a home is almost 20 percent cheaper in the city than buying a home, creating a huge disincentive for many new prospective home buyers. In most cases, when median home prices in the US shoot up rapidly, they outpace rising rent prices by a fair margin. This usually creates a window of 2-3 years where renting will suddenly be more attractive than buying, as the rent prices take time to shadow median home prices. When this happens, local markets generally see a large percentage of prospective home buyers pull out of the market and opt to rent instead.

Can California’s Economy Handle a Huge Real Estate Slump?

While another huge real estate market bubble burst could happen in the near term, it’s not likely to cause any serious calamity to California’s relatively healthy economy. California just this year became the world’s 5th largest economy, unbelievably surpassing the United Kingdom. The state has an impressive total GDP of about $2.7 trillion dollars, a figure that is hard to even fathom. Due to the sheer enormity and power of California’s economy, it is widely agreed upon that the state has enough economic cushion to withstand even a severe real estate market collapse. That is not to say that such an event wouldn’t leave a painful market on the economy, however, it definitely would not have enough sway to harm California’s long-term prosperity.

Is it Wise to Sell a Home Today

With the possibility of a real estate bubble bursting in California, it would be wise to sell your home, but only if you plan to rent or reinvest your equity gains into a real estate market outside of the state. Speaking to a local real estate agent can help you to keep an accurate pulse on the market conditions should you consider selling in today’s potentially volatile market.

If you plan to buy a home, most experts are saying that it would be wise to continue saving up a sizable down payment and waiting out a potential fall in median house prices. Most experts do not believe that the median house prices will continue to rise over the long term, as the inventory shortages alone should be enough to pull home values down a bit in the coming years.

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