California real estate prices have been skyrocketing and while it may feel like they can’t climb any higher, the market facts tell a different story. Though it got off to a slow start, economic growth and continued low inventory will likely boost home prices in California through 2022.
Are house prices going to drop?
No, home prices are not expected to drop any time soon. While we have seen a slowdown in sales and the record high price gains, the housing market is still going strong. A lot of people want to compare the real estate market in the wake of the COVID-19 pandemic to the real estate market in the wake of the Great Recession, expecting another bubble with a sharp drop in prices. However, nothing could be further from the truth.
Per their October forecast, Freddie Mac expects a home price growth of 16.9% in 2021 and a slower, but still upward, house price growth of 7.0% in 2022. If we review California’s current real estate market conditions, it’s clear that home prices are likely to continue rising throughout 2022.
One big difference between 2007 and today is the supply of homes. There are roughly 12 million more households today than in 2007, however, there are three million fewer homes for sale. That’s evidence of the housing shortage across the country.
When supply is low and demand is high, prices are driven up naturally. Until we have more new homes available on the market, we’re likely to see prices continue to increase amid low inventory.
It’s daunting to see that according to the latest affordability index from CAR, the minimum annual income required for a single-family home in California is $150,800 with a monthly payment of $3,770. However, affordability is a tricky thing to define when discussing real estate values.
Though homes are less affordable now than they have been in the past 3 years, if we compare historically, they are more affordable now than in the past. Black Knight calculated that over the last 25 years, the percentage of the household income needed for a monthly mortgage payment on an average home was 23.6%, versus 21.6% today. And although wages aren’t rising as quickly as real estate prices, they are rising enough to meet the higher typical monthly payment.
The economy has now reached above its pre-pandemic peak with GDP growth of over 6% in the first half of 2021, but the economy still has room to grow. And with that, prices have room to continue rising. California is still a seller’s market and with prices hitting record-highs due to tight supply, and nearly 62% of homes selling above the asking price in September.
The pace of home sales has cooled now from 7.8 million in Q1 2021, forecasted to hit 6.8 million for 2021 and 2022. But the strong housing market is expected to persist even with rising mortgage rates and continued high prices.
2022 California Housing Market Forecast
The outlook is great for homeowners who can expect increased home values and growing home equity in 2022. Let’s break down next year’s forecast according to the latest from the California Association of Realtors:
- U.S. GDP: 4.1% Increase
- Job growth: 5.2%
- Median price percent change: 5.2% Increase
- Housing affordability index: Decrease from 26% to 23%
- 30-year fixed-rate mortgage: Increase to 3.5%
Across the United States, Home Price Insights from CoreLogic® forecasts home prices to increase just 1.9% annually in 2022.
Home Buyers: It’s Worth The Uphill Battle
Despite low mortgage rates, many buyers are understandably discouraged from home buying because of the continued real estate price increases. The pace of home sales has cooled since the first quarter of 2021 which is promising, but buyers still face the tough rigors of a definitive seller’s market.
The story is the same for many buyers in California and across the county, scouring limited inventory, offering above asking price, and getting outbid by other buyers. New listings are scarce – especially within the lower price brackets including condos and townhomes – and with the median home price inching up it can feel impossible to break into the real estate market. But the results, are worth it.
Homeowners in the U.S. had a median net worth of $255,000, while renters have a net worth of only $6,300. That’s a difference of 40x! Homebuyers have the opportunity now to take advantage of low-interest rates that are only expected to rise – along with home prices – which means the sooner you purchase a new home, the better.
California’s Rental Market
National rent growth is 11% – 13%, with California lagging slightly. However, demand for rentals in Southern California is still rising in several areas including San Diego, Orange County, and Los Angeles. Trends in the rental market include the need for more multi-generational homes, and NIMBYism slowing the creation of more income properties.
Renters who are facing rising average prices in real estate need to realize that rental prices are rising just as fast. And although saving for a down payment and battling the seller’s market and housing inventory crisis is tough – in the long run the benefits of homeownership, including building wealth and happiness, make it all worth it.