California Housing Plagued with Low Inventory and Affordability

The trials that plagued the California housing market in 2016 aren’t expected to get too much better in 2017 as the real estate market is projected to face another year of supply shortages and affordability constraints, according to the "2017 California Housing Market Forecast" released by the California Association of Realtors.

CAR predicted that 2016 would face a shortage of available inventory and continued high costs that would limit the state’s improvement, a predication that ultimately came true according to the state’s real estate agents.

Affordability is only projected to get worse, which is currently already California real estate agents' No. 1 concern for the market.

"Next year, California's housing market will be driven by tight housing supplies and the lowest housing affordability in six years,” said CAR President Pat "Ziggy" Zicarelli.

However, he added, "The market will experience regional differences, with more affordable areas, such as the Inland Empire and Central Valley, outperforming the urban coastal centers, where high home prices and a limited availability of homes on the market will hamper sales.”

“As a result, the Southern California and Central Valley regions will see moderate sales increases, while the San Francisco Bay Area will experience a decline as homebuyers migrate to peripheral cities with more affordable options," said Zicarelli.

The CAR predicts existing home sales will modestly increase and rise 1.4% next year to reach 413,000 units, up slightly from the projected 2016 sales figure of 407,300 homes sold. 

Sales in 2016 also will be virtually flat at 407,300 existing, single-family home sales, compared with the 408,800 pace of homes sold in 2015.

Interest rates aren’t estimated to change significantly, with the average 30-year, fixed mortgage interest rates to only rise to 4% in 2017, up from 3.6% in 2016.

Meanwhile, California home prices are forecast to slow down in pace, with the median home price to increase 4.3% to $525,600 in 2017, following a projected 6.2% increase in 2016 to $503,900, representing the slowest rate of price appreciation in six years.

The state’s overall U.S. Gross Domestic Product is projected to grow 2.2% in 2017, after a projected gain of 1.5% in 2016, while California's nonfarm job growth will rise 1.6%, down from a projected 2.3% in 2016.

"With the California economy continuing to outperform the nation, the demand for housing will remain robust even with supply and affordability constraints still very much in evidence. The net result will be California's housing market posting a modest increase in 2017," said CAR Vice President and Chief Economist Leslie Appleton-Young.

"The underlying fundamentals continue to support overall home sales growth, but headwinds, such as global economic uncertainty and deteriorating housing affordability, will temper stronger sales activity," Appleton-Young continued.

2017 California Real Estate Market Predictions: Coastal Cool, Inland Hot

The California Association of Realtors predicts 2017 is going to be a good year for the state's inland markets as those on the coast get less and less affordable.

The trade group's 2017 Housing Market Forecast, released Thursday, anticipates that the number of homes sold statewide will rise slightly between this year and next. But economists believe soaring prices in Los Angeles, San Diego and San Francisco could slow sales there, while the relatively affordable Inland Empire and Central Valley will see more activity.

"Job creation, low interest rates, the availability of low-down-payment mortgages... all make it a little more attractive and a little easier for first-time homebuyers to realize that demand. They can't always do it in the urban coastal area, which is slowing, but they can do it in the Inland Empire, the Central Valley and Northern California," said Leslie Appleton-Young, CAR's chief economist and vice president. "In general, the migration pattern fits hand-to-glove the housing affordability pattern and the creation of jobs."

Since 2014, when foreclosures and real-estate-owned sales returned to their historical levels, prices have risen steadily but inventory has remained tight as construction lags and homeowners stay in their homes longer. According to CAR, sales were effectively flat from 2015 to 2016. Median prices statewide rose 6.2 percent over the same period. In 2017, the group predicts a 4.3 percent rise in prices statewide and a continued drop in affordability.

Although interest rates remain historically low, 31 percent of Californians could currently afford to purchase a home at California's median price — $526,000 through the first seven months of 2016 — according to the forecast. In 2012, 50 percent could afford homes.

And Appleton-Young estimated that 400,000 to 700,000 single-family homes were purchased by investors during the recession and are now occupied by renters instead of owners, taking even more inventory off the market.

"The impact on first-time homebuyers has been really dramatic," Appleton-Young said, pointing out that first-time buyers have comprised just 29 percent of all buyers in 2016. Over the last 30 years, the average has been about 38 percent. "Even with this amazing rate environment, with jobs coming back, household formation, first-time buyers are still having a very tough time."

Statewide, a key demographic trend is contributing to the lack of inventory, Appleton-Young said. Millennials, the source of much hand-wringing by housing economists, are finally entering the market — but Baby Boomers aren't moving. According to the group's 2016 Annual Housing Market Survey, 71 percent of Californians over the age of 55 haven't moved since 1999.

"Historically, we've never seen quite a recalcitrant group in terms of putting their homes on the market as the current crop of Baby Boomers," Appleton-Young said. She said CAR's housing market survey found that 64 percent of Boomers don't plan to move when they retire, citing fears that they won't find another affordable home in their area, aversion to paying capital gains taxes on homes that have skyrocketed in value, or concern about paying higher property taxes when they move.

"Many, many of them are choosing to make their current home their dream home with remodeling and repairs," Appleton-Young said, pointing out that spending on home remodeling is up 16 percent year over year.

Webb and Bernal said they don't think that trend is visible — that people are staying in their homes longer and remodeling more — remains relevant.

"We tend to say no one keeps their home for more than five years," Bernal said. "There's a big segment of the population that, rather than selling and buying their dream home, they're modifying their current home and making it their dream home, because that's where their affordability is."