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Question: Is there a price bubble forming in California’s housing market?

Answer: It’s possible, but not likely. Here’s why:

California home prices began to rise in 2012 and continue to increase in 2016. 2013 saw the steepest increases, with annual price rises soaring as high as 40% over the previous year in some price tiers. Since 2013, price increases have gradually subsided, and in the third quarter of 2016, prices are averaging 5% higher than a year earlier in low tier sales, 6% in mid-tier sales and 5% in high tier sales.

Further, the sudden rise in mortgage interest rates — and consequent decrease in mortgage funds available, known as buyer purchasing power — lowers the amount of money buyers are able to spend on their home purchase. Typically, when buyer purchasing power falls, home prices follow suit within 9-12 months. Since annual price increases are already leveling off, the price decrease may arrive even sooner, likely around mid-2017.

More support to the hypothesis comes from home sales volume, which started the year off strong, only to dwindle throughout 2016. With higher sales numbers at the start of the year and lower sales volume in the second half of the year, the total number of homes sold in California during 2016 will likely end essentially level with 2015 or maybe even slightly below.

Prices have increased too far and too fast for most homebuyer incomes to keep up, causing local markets to become overvalued and buyers to hold back. Prices have already slowed, and they will likely head into the negative numbers soon.

While news of falling prices ahead is troublesome for sellers and their agents, the good news is that the more prices stabilize, the less likely a sudden drop in prices — as in the bubble bursting in 2007 — becomes. It’s possible the dip in prices will look more like a flat stagnation in prices than a true month-to-month decrease in home prices.

Further, California’s constantly growing population and jobs market point to a growth in the homebuyer population on the near horizon. Our state’s sizeable Baby Boomer population is poised to retire in the coming years, likely to sell their current homes and relocate to more manageable homeownership situations like in-town condos, and members of Generation Y are eager to take their first steps into homeownership.

first tuesday forecasts the next real estate boom will occur at the end of this decade, peaking around 2019-2021.