The California housing market has been strong this year. And experts seem to agree that the state’s positive 2015 Housing Market will not only carry over into the new year, but will be even stronger. Realtors expect home sales to increase by nearly 26,000 closings. If this holds out to be true that translates to 433,000 total sales next year, which would make 2016 the greatest year for home sales since 2012. However, despite these numbers California is estimated to have the slowest rate of home appreciation in the next five years.
One of the biggest reasons is that California’s big markets face a low inventory. Take the San Francisco CA real estate market for example. “In regions where inventory is tight, such as the San Francisco Bay Area, sales growth could be limited by stiff market competition and diminishing housing affordability,” says Chris Kutzkey, president of the California Association of Realtors. This will force investors to start looking to markets more inland and in the northern regions of the state.
Another reason that California will see a slow rate of home appreciation in the future is that the average interest rate will increase starting in 2016. Recent years have seen interest rates dip as low as 3.4%, but some forecasts think that the average interest rate for a 30-year, fixed mortgage could climb to 4.5% within two years. This is still near historically low levels, but the increase in rates could deter a population of would-be buyers.
One positive that California can hang its hat on is a strong local economy. “The foundation for California’s housing market remains strong, with moderating home prices, signs of credit easing, and the state continuing to lead the nation in economic and job growth,” says CAR Vice President and Chief Economist Leslie Appleton-Young. California has a projected 2.3% growth in nonfarm jobs. And economists predict that the state’s unemployment rate will decrease to 5.5% in 2016. This would continue a steady fall in recent years – in 2015 it was 6.3%, and in 2014 it was 7.5%.
To sum up, the California housing market is strong but expect the rate of home appreciation to slow down. “Global economic slowdown, financial market volatility, and the anticipation of higher interest rates are some of the challenges that may have an adverse impact on the market’s momentum next year,” says Appleton-Young, but also adds, “As we see more sales shift to inland regions of the state, the change in mix of sales will keep increases in the statewide median price tempered.”
Influencing Factors for the 2015 California Housing Market
• The Home Value Index on real estate website Zillow has the median home value in California at $449,500. This is a 5.8% change in the past year and housing market predictions have this rising another 2.8% in the next year. However, markets with tight or limited inventory will see a slower price appreciation rate.
• Because of the high median home value in the state, the California Association of Realtors warns that affordability will continue to be a problem for prospective homebuyers. To put this into perspective, half of the homes considered to be affordable in 2011/2012 are now considered unaffordable. Predictions say that the percentage of homes that are considered affordable will decrease 27% next year.
• The state has a lower foreclosure rate (2.2 per 1,000 homes) than the national average (3.3 per 1,000). California also has a lower mortgage delinquency rate.
• Homes spend an average of 66 days listed on Zillow.
• Rental costs in California are extremely high. On websites that list rental units such as apartmentfinder.com and craigslist California has an average of $2,268.
• Fixed rates on 30-year mortgages are expected to rise to 4.5% in the next 2-3 years.
• Realtors are predicting that inland markets and the markets surrounding popular cities will account for a higher percentage of sales for the 2016 California housing market.
Best Places to Live in California
Some of the more expensive places to live in California include San Francisco, the nation’s most expensive place to live with a median sale price of $1,312,500, Los Angeles ($486,310) and the San Diego real estate market ($521,200). The inflation in housing applies to rental prices as well. In San Francisco, rental website Zumper reports San Francisco has a median monthly rental cost for a one-bedroom apartment of $3,530, and on Zillow Los Angeles CA has a median rental price of $2,630. That’s $1,000-2,000 higher than the national average.
And the housing market prices are bleeding into the cities’ surrounding areas. On the outskirts of the Los Angeles real estate market are now ultra-popular places such as Venice. Once known as the arts district Venice is now being run by big money, evidenced by the million dollar listings for real estate that doesn’t warrant such a high price. And according to real estate website Trulia Los Angeles’ always-popular areas (Hollywood Hills, Bel Air, etc.) can trend in the tens of millions of dollars.
But San Francisco and the southern portion of the San Francisco bay area known as Silicon Valley are ground zero for the high housing costs. The inflated cost to the surrounding housing markets is due to the several high tech giants and startup companies that call the area home. Just south of San Francisco, even the San Jose real estate market is seeing home values hovering just under $800,000. This is why realtors think that markets outside of the state’s major cities and the Silicon Valley area are primed for a big year. “Demand in less expensive areas such as Solano County, the Central Valley, and Riverside/San Bernardino areas will remain strong thanks to solid job growth in warehousing, transportation, logistics, and manufacturing in these areas, says Chris Kutzkey.
Some of the smaller cities to look at in Solano County are Vallejo, Fairfield, and Vacaville, all with less than 150,000 residents. Vallejo is located right on San Pablo Bay and has a median home value of $292,600, an incredible price for a market on the water. Likewise, the cost for rental units averages $1,746 – nearly $500 less than the state average. But trends see the prices starting to rise at an increased rate. The median home value increased 12.7% in the past year. Vacaville and Fairfield both have more expensive home values, but the inventory is higher and sellers have more of an advantage compared to more popular markets.
For anyone interested in being close to the excitement of Los Angeles but want to get more bang for their buck the Riverside and San Bernardino housing markets to the east are a great option. Both have reasonable median home values of $310,000 and $212,400 respectively. And the cities unique geographic locations give it an added incentive. Small and large mountains surround them, but neither is more than an hour away from the beaches of the southern California housing market. Both adhere to a wide variety of lifestyles.
Another area that is primed for a big gain in home sales is the Central Valley. Just as it sounds the Central Valley is a large flat valley that makes up the geographical center of the state and accounts for nearly 15% of California’s total land area and provides some of the state’s best agricultural areas. Some of the gems located in the Central Valley are Bakersfield, Modesto, and Fresno.
In August of this year Freddie Mac, the government-regulated buyer of mortgage securities, ranked the Fresno CA real estate market as one of the five most stable markets in the country. Median home values ($186,400) in Fresno have increased nearly 6% in the past year, and this will continue to increase as inventory begins to dwindle down. And for those interested in a great small city, a two-hour drive east of San Jose is Merced. Merced is a college town that is also on the up-and-up, seeing median home price tags under $200K.
Located in the heart of the Central Valley, capital city Sacramento is a great option for investors. Sacramento CA real estate has median home values at around $252,000, an increase of $22,000 since November of 2014. For a city of its size Sacramento is an affordable piece of real estate as well as an affordable rental option. Sacramento’s average rental price is around $1,397, nearly $1,000 less than the state average. Realtor Pat Shea thinks that Sacramento will see some slowdowns in sales if and when the interest rates rise but thinks that the city’s strong job growth and the number of new home building permits will keep the market’s momentum going forward into 2016.