This article provides a summary of the various factors influencing California’s housing market in 2019, followed by first tuesday’s forecast for California real estate in 2020 and beyond.
Home sales continue to slow
2019 was a year of preparation and transition for California’s housing market.
The slowdown in sales volume and prices that began in 2018 continued, with home sales volume on track to end 2019 3% below 2018. Meanwhile, after years of rapid price increase, average home prices are roughly level with a year earlier at the end of 2019.
Normally, when home sales volume declines, prices follow within 12 months. But even as sales volume has shown year-over-year decreases for the past 24 months, prices have not yet gone negative. The intrinsic link between home sales volume and prices has been disrupted by California’s low home inventory.
Our state’s population is always growing. But residential construction continues to lag far behind population growth and household formation. Single family residential (SFR) construction is on course to end 2019 11% below 2018. Multi-family construction is heading toward a 3% annual decrease.
As construction continues to lag, California’s for-sale and rental inventory fails to meet homebuyer and renter demand. Thus, even though sales volume is slowing, the supply-and-demand imbalance continued to prop up home prices in 2019.
Also giving home prices a helping hand in 2019 were declining interest rates. The average 30-year fixed rate mortgage (FRM) rate started off the year around 4.5%, falling to 3.7% by the end of December. As interest rates have fallen, homebuyer purchasing power has increased, allowing buyers to pay higher prices with an equivalent monthly mortgage payment.
Interest rates decreased in 2019 after several months of consistently rising rates in 2018. This action is partly due to actions by the Federal Reserve (the Fed) to cool the economy, easing it into the next recession, which is expected to arrive by late-2020.
2020 housing forecast
first tuesday forecasts that California’s housing market will continue to decelerate and decline in 2020, alongside a slowing economy. The next recession is expected to arrive by late-2020.
Cues informing us about the coming recession include the yield spread, that time-tested measure of economic performance. The yield spread figure went negative in mid-2019 for several months, indicating a recession will arrive roughly 12 months later.
However, unlike the 2008 recession — or Great Recession — the next recession will see more moderate job loss. Regulations put in place following the last recession and financial crisis have kept the housing market from overheating and destabilizing the broader economy. Thus, while the housing market will slow, creative and hard-working agents will still be able to make a living during the coming slow times.
first tuesday forecasts home sales volume to decrease a slight 5% in 2020. Even as the economy slows and recession talk continues, sales volume’s decline will be tempered by pent-up homebuyer demand, unfulfilled by sufficient inventory. 2019’s declining interest rates and broad wage increases will also continue to prop up sales volume and prices.
Home sales volume will rebound once it’s clear that home prices have bottomed, likely around 2022-2023. In turn, prices will continue their decline in 2020, with most of the decrease occurring in the high tier. California’s low-tier home prices are experiencing the highest level of demand compared to supply. That’s because what little residential construction has occurred during the past decade has centered in the high tier, where profits are greatest.
Overall, first tuesday forecasts home prices to decrease on average 10%-15% from today’s levels by the time they reach their bottom in 2022-2023.
SFR construction will decline more significantly than multi-family construction. This is due to various legislative efforts to promote the construction of more affordable housing, discussed below.
New laws for 2020
Dozens of bills related to housing passed in 2019. We’ve digested a few of the most important changes below, but you can read about all the new laws that take effect in 2020 here.
Starting in 2020, multiple listing services (MLS’s) are required to maintain listing data for no less than three years from the date the listing was created. This law change also revises the Transfer Disclosure Statement (TDS) and narrows the obligation of a broker to conduct an inspection of the property and disclose material facts only to those brokers working with a prospective buyer of residential one-to-four unit property or a manufactured home. [See RPI Form 304]
Another new law agents need to be aware of prohibits a landlord from terminating the lease without cause of a tenant who has occupied the property for at least 12 months, and for no-fault just cause terminations, requires the landlord to provide one month’s rent to cover relocation costs. Further, beginning March 15, 2019, a residential landlord is limited from increasing rent no more than twice in 12 months. Each increase can be no more than 5% plus the percentage change in the cost of living, or 10%, whichever is lower, of the lowest gross rental rate charged for the immediately preceding 12 months. The provisions in this bill expire January 1, 2030.
Additionally, several laws have been put in place for 2020 to increase the state’s low-tier housing inventory. Legislators focused on the creation of accessory dwelling units (ADUs) with the passage of AB 671, AB 881 and AB 68. Together, these new laws will promote the construction of more ADUs by shortening permitting times, reducing parking requirements and providing incentives to SFR owners who construct ADUs to be leased to low-income households.
Beginning January 1, 2020, new homes built in California will require smart solar systems. The full set of standard changes for new residential homes are requirements to:
- install smart solar systems on rooftops (excepting some properties where shade makes this choice inappropriate);
- install smart battery storage and heat pump systems that allow the home to store energy produced during off-peak periods;
- improve indoor air quality with high-efficiency air filters; and
- tighten the building envelope, including stronger insulation in attics, walls and windows.
While the cost of more energy requirements will be passed on to homebuyers, the California Energy Commission (which created the new standards) estimates this cost will be more than made up for with the energy savings.
Real estate professionals: What is your forecast for 2020’s housing market? Share your thoughts with other professionals in the comments below.