Califonia cooling?

A California cooling effect could put a freeze on nationwide appreciation and a sustained housing recovery, warns Clear Capital.

Since 2012, the churn of California price appreciation has buoyed the West, and helped support nationwide appreciation. But since Q1 2015, six California MSAs have seen house prices decline.

Typically, price increases are driven by increases in demand. But in markets such as San Francisco, the spike in recent years has not been the result of increases in overall transactions, but tight supply pushing property out of reach of buyers. In slower growth markets like Los Angeles, a mortgage payment requires upwards of 70 per cent of a potential first-time home buyer’s income, both of which are 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 per cent — less than half of the 5.8 per cent quarterly growth seen two years ago, notes Clear Capital.

"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 by the Fed," says Alex Villacorta, Ph.D., 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."
 
"This 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 fueled in large part by the white-hot rental market and low inventory environment. In fact, current 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."