Crash or climb? Jobs may decide fate of California home prices
Will California housing’s future be a crash, correction, cooling – or a climb?
Some folks are antsy about potential price tumbles. One poll found nearly half of Americans fear a housing crash in 2024. So my trusty spreadsheet looked at California home price history back to 1975 to see what might power the next move.
The analysis eyeballed gyrations in a California price index from the Federal Housing Finance Agency against the average 30-year fixed rate mortgage from Freddie Mac and inflation as tallied by the Consumer Price Index. Plus, we gauged home-price changes vs. statewide unemployment rate and the total income of Californians, minus inflation, as a benchmark for the broad economy.
This history lesson reminds us to keep our eyes on the job market. Paychecks are housing’s secret sauce.
Winners and losers
To make this math relatively simple, the spreadsheet compared one-year periods when the California price index fell vs. when it was rising.
In the 187 quarters studied, 47 had price dips – so price depreciation occurred 33% of the time. Those declines averaged 5.7% one-year losses – including a 23% drop in 2008’s third quarter amid the Great Recession’s financial crisis.
Conversely, California prices rose two-thirds of the time. Those upswings averaged 11% gains – including the biggest jump, 29% in 2004’s third quarter as housing’s bubble ballooned.
By the way, California prices rose 1.3% in the year ended in 2023’s third quarter, according to the FHFA index.
Real-time pressures
So what’s was going on in those 47 quarters when California home prices were falling?
Basically, sluggish economies.
Borrowers got 30-year rates averaging 7.4% when prices dipped vs. 7.7% in price upswings. Remember, mortgages are typically cheaper when the economy is weaker. Note that rates in 2023’s third quarter ran 7%.
Or think about inflation as yardstick for economic activity. The cost of living usually rises when there’s excess demand for goods and services.
So, the national Consumer Price Index grew at a 3.1% annual pace when California home prices dipped vs. 3.9% in price upswings. Third-quarter CPI showed 4.1% inflation.
You can see a similar pattern with California’s total incomes – even after inflation’s factored in.
This metric rose 0.9% annually when prices dipped compared to 3.4% growth in price upswings. The second-quarter measurement was 0.8% growth.
And perhaps an under-appreciated variable is the unemployment rate. You need a steady paycheck to be a homebuyer.
Joblessness averaged 9.2% when prices dipped vs. 6.5% in upswings.
So why is the 2023 housing market as buoyant as it is? Well, unemployment’s running 4.6% – the 14th lowest level since 1975.
Extreme views
So, we had to also examine history’s extremes – the 10% of the quarters since 1975 when prices were weakest or strongest.
You know, crashes or booms. These are periods when prices either tumbled 11% a year on average or soared at 27% annual rates.
Mortgage rates ran 7.1% in these big price drops and 7.7% when prices spiked. Plus, inflation gives another contrarian hint, with the CPI up just 3% in crashes but rising 4.8% in booms.
And you can’t ignore California’s paychecks.
In crashes, unemployment averaged 9.4% and incomes were flat. Contrast that to booms when we saw 6.7% joblessness with incomes growing 3.5%.
Bottom line
The three most important things in real estate are jobs, jobs and jobs.
Without a job, you’re probably not a house hunter. So likely less demand.
And without a job, a homeowner might become a forced seller. So perhaps, more supply.
Ponder what my spreadsheet found when it ranked California unemployment by quarter, then divided the past 48 years into thirds.
When joblessness was lowest – 5% on average – California home prices grew at a 10% annual rate.
But in times of high unemployment – averaging 9.7% – prices rose only 1% a year.
Jonathan Lansner is the business columnist for the Southern California News Group. He can be reached at jlansner@scng.com