With excruciatingly high home prices and fewer people able to afford houses, many fear that California is in the midst of a real estate bubble that could end in a potential housing crisis.
While many are still skittish and feeling pains from the 2008 housing crisis, are these alarmists right, or simply overreacting about the stability of the California housing market?
Before you full on panic, here's an in-depth look at whether there's a California real estate bubble and what you need to know about the market there.
1. The Great Exodus from California
For years, people flocked to California hoping to “make it”, snag a job in Silicon Valley, or simply for the weather. But now the staggering high home prices in the state are causing a major strain for those looking to buy a California home.
With incomes struggling to match the ever-rising California home prices, more and more people are being priced out of the market and are leaving the major cities and even the state. According to data from the Census Bureau, 2018 was Los Angeles' second year of population decline.
Other expensive areas like the San Francisco Bay, North Bay, and the Silicon Valley region have seen population growth slow down or fall in 2018 making some nervous that this will have an enormous impact on the stability of the housing market.
As the population drops, the state's economy slows and the fear is that home values and prices will plummet.
2. It's a City-by-City Basis
Not all of California is in danger of a real estate bubble. Again, it's mostly the higher-priced cities like Los Angeles, San Francisco, and other coastal cities that are more in jeopardy of seeing a housing bubble. San Francisco's at the top of the list with home prices 38% above citizen's income levels.
When home prices go over 25% of income levels it's a strong predictor of a real estate bubble. Many residents are fleeing inland to lesser expensive areas like Riverside, San Bernardino, and Sacramento counties where, for example, Sacramento home prices are only at 18% above income levels.
However, residents are balancing out the real estate market by turning to rentals instead. Oddly enough, apartment rents have been falling in California making renting an easy choice for many.
3. The Never-Ending Millennial Struggle
Blamed for the decline of just about every industry, millennials (of course) are entwined with the wavering real estate market. Adding to the real estate bubble fears, home sales have faltered because the last housing market crash devastated millennials ability to afford these overpriced homes.
Coming up with a down payment for a $500,000+ home can be a struggle for a young person starting out in an entry-level position and saddled with school loan debt. It will take a while for millennials and Gen Zers to save up enough to afford a home, effectively slowing down the housing market.
Average incomes haven't kept up with increasing California home prices — income rose 25% between 2011 and 2018 while home prices rose an astonishing 48% in that same time.
4. The Warning Signs
Many believe the writing's on the wall when it comes to an inevitable housing bubble in California mainly because of the stark similarities of the current housing market with the housing market before the 2008 crisis.
For instance, housing prices have risen beyond people's income along with the inventory of affordable housing dropping. Additionally, before the bubble burst in 2008, mortgage rates rose; currently rates are also on the rise, granted not as drastically.
The major difference, however, is many of the systems that caused the previous collapse are no longer around. Lenders have elevated their standards so only qualified buyers purchase a home with a mortgage and they are less likely to default.
Also, California prices and sales aren't falling quickly or drastically enough to indicate the housing market's unstable like when prices fell spectacularly in 2008. Rather sales have simply stagnated. Plus, the California market isn't oversaturated with new construction still leaving plenty of demand.
Work with an Experienced Real Estate Agent
Especially in a competitive and overly-priced market like California, you'll want to work with an experienced real estate agent who can help you navigate a tough market. And when you work with a Clever Partner Agent you'll be connected with a local, top-rated agent who can help you find a home that fits in your budget.
Your Partner Agent will guide you through the entire home buying process and use their extensive professional network and negotiating skills to get you the best price possible on the home you've always wanted.
Plus, when you work with Clever you may be eligible for our Home Buyer Rebate where you'll receive $1,000 on homes over $150,000 that you can put towards closing or moving costs. Get in touch with Clever to begin your housing hunting venture and save even more.