As we make our way through 2014, it’s time for our annual check-up of California’s housing market. Some vital signs include:

  • home sales volume year-to-date is down 9% from 2013;
  • home prices have peaked out at an unsustainable 26% year-over-year increase in the low-tier as of March 2014;
  • multi-family construction starts have grown by 43% over the past year, while single family residential (SFR) starts grew by 13%;
  • personal savings continue to fall, dropping to an average of 4.1% of disposable income saved in the first quarter (Q1) of 2014;
  • cash buyers have decreased over the past year but remain abnormally high at 27% of all home sales in SoCal and 23% in the Bay Area as of April 2014 (the normal market share is around 17%);
  • absentee buyers have likewise decreased since this time last year, but remain disparately high, at 26% of all home sales in SoCal and 20% in the Bay Area; and
  • first-time homebuyers remain scarce, with Federal Housing Administration (FHA) loans decreasing to 19% of all home loans originated in SoCal and 10% of loans originated in the Bay Area as of April 2014.

Taken together, all of these factors point to a continuing recovery. But clearly, the recovery itself is not yet complete, and the doctor cannot dismiss the patient just yet.

However, despite this ambiguous prescription, the public’s view on the housing market tends to be positive. This may be due in some part to the popular media’s well-documented and gleeful coverage of rising home prices in 2013. You may even have seen some of the now ubiquitous rah-rah-real estate TV ads produced by California’s real estate trade union. In Q4 2013, three out of four surveyed national consumers still thought it was a good time to buy, according to the University of Michigan (this, despite the rapid rise in prices occurring at the time the survey was conducted).

Further, more than one-third of consumers expect home prices to continue 2013’s trajectory and increase in 2014, while about half expect prices to remain the same. Only 11% expect home prices to decrease.

The truth is, home prices have leveled off and will head south in the second half of 2014. This is due primarily to:

  • falling home sales volume; and
  • the lack of support from end users, coupled with the decrease in absentee homebuyers.

The rise in multi-family construction says it all: builders sense increased demand from renters – not homebuyers. The fact is, end userhomebuyers aren’t yet ready to contribute en masse to the nascent housing recovery. They don’t yet have sufficient jobs or income, because (believe it or not) California still has not returned to its pre-recession job numbers (and that’s not even counting California’s intervening population increase).

Further, with reduced incomes for lack of suitable employment, most would-be homebuyers don’t have enough savings put away to pony up a down payment, 20% or otherwise. There has even been tell of some creative homebuyers emptying their IRAs to fund their home purchases, shifting their savings from stocks to property they will occupy (which is usually a strategy reserved for investors).

The good news is that jobs are likely to return in full by the end of 2015, the true antidote for a solid California housing recovery.

The fever is most certainly breaking and we’re almost out of hospice – but California’s housing market isn’t well enough to run any marathons just yet.