Cooling house market growth in California affects US market as a whole

A California cooling effect could put a freeze on US property market growth with affordability in many of the state’s markets out of reach, says the latest analysis report.

Since 2012 price growth in California has buoyed the West of the nation and helped support nationwide prices appreciation, according to the report from Clear Capital, but now there is evidence of cooling price appreciation across the state.

It explains that typically, price increases are driven by increases in demand, however, a look at the San Francisco housing cycle shows that between 2011 and 2015 the spike in prices has not been the result of increases in overall transactions. Rather, the tight supply is pushing prices on an upward trajectory placing the market even further out of reach for new buyers.

It also shows that in slower growth markets like Los Angeles, a mortgage payment requires upwards of 70% of a potential first time buyer’s income, certainly quelling demand.

Even the San Jose MSA’s appreciation, which began experiencing dramatic bubble like growth in 2013, is beginning to slow down with quarterly growth of 2.5%, less than half of the 5.8% quarterly growth seen two years ago.

While the West continues to lead in sustained gains, markets outside of California will need to work harder to defend the region’s top position, according to the report.

Las Vegas and Portland have both seen boosts of 0.2% in quarterly growth since last month. Denver, Seattle and Sacramento continue to hold steady at 1.7%, 1.6% and 1.5% quarterly growth, the data also shows.

The Midwest and South continue to ride the wave of the peak summer real estate season with quarterly growth rates at or above the national benchmark of 0.8%. The South ends the quarter at 0.8% growth, and the Midwest ahead at 0.9%. Subsiding losses in the Southern region is a good sign for a region that has exhibited volatility in price trends, the report points out.
 
The Northeast continues to lag behind the rest of the nation in both quarterly and yearly growth at 0.2% and 2.1% respectively. While most of the MSAs in the region are still experiencing positive quarterly growth, with the exception of Providence with a fall of 0.8%, the rate of growth in markets like Boston and New York are over double that for the rest of the region, driving down affordability.

‘The strong continued growth in the Midwest, South and West, in particular the California Bay Area, suggests strong consumer and investor confidence has been seemingly unaffected by talk of looming interest rate hikes,’ said Alex Villacorta, vice president of research and analytics at Clear Capital.

‘However, if and when interest rates do rise, likely occurring by the end of 2015, it will be timed with a decrease in real estate market activity typical through the fall and winter seasons,’ he explained.
 
‘Unfortunate pairing will most likely cause a slowdown in price growth for most markets, which already seems to be in motion across much of the country. In bubble markets like San Francisco, San Jose and Los Angeles, growth has been unsustainably high in the last year l prices in San Francisco County are far beyond any historic level on a real basis and are doing so with some of the lowest level of activity this county has seen,’ he added.

He also pointed out that given the current obstacles to enter these markets, a rate hike is likely to have a negative impact, specifically making it more expensive for first time home buyers to engage.

‘In addition to high home prices, these markets also suffer from high rents, which prevent potential home buyers from saving for down payments. With the barrier to entry too high, a younger segment of potential home buyers may start to turn their sites eastward to the Midwest and South, where affordability continues to be within reach,’ Villacorta concluded.