To outsiders, the California real estate market has been something of an enigma; luckily, we don’t need Alan Turing to crack the code when we have local experts on the Studio City, Encino, and Sherman Oaks market. Ultimately, California real estate has defied the law of averages and is regularly doing either far better or far worse than the rest of the country’s housing market.
This year, the California market has flirted with entering into the “bubble realm” and must, therefore, be watched very closely. To wit, the following California markets have home prices that are about 1.25 times the “income price” – a metric which has historically been associated with “bubbles.” These markets include: (1) San Francisco; (2) Anaheim; (3) Riverside/San Bernardino; (4) Oakland; (5) Los Angeles; (6) San Jose; (7) Santa Cruz; (8) Santa Rosa; and (9) Vallejo/Fairfield. This does not mean a bubble is ensuing, the income metric typically stabilizes over the course of a few years while housing prices stop growing at unsustainable rates.
As a general rule, these markets have high-priced homes as a direct result of a very basic economic concept; the local demand for houses far exceeds the local supply of homes for sale. Further, the demand in these markets is so disconnected from the supply, that builders are hard-pressed to keep pace with that booming demand. Using the Bay area to highlight another factor in the wild price growth, the Bay area is home to numerous tech industries (and they pay very well); as such, the demand paired with the high net worth of those seeking homes, artificially drives housing prices higher (the market dictates the price of a good, and the part of the market’s “decision” is how much money is in circulation in that area). In the next few years, assuming the economy slows down (which the Fed usually ensures by manipulating interest rates), the markets with the largest discrepancies using the index metric will “cool down”, and homes will become more affordable.
In a nutshell, if you are a seller, you want to sell your home before the market stabilizes. Conversely, if you are a buyer, you can expect prices to come down if the economy slows down. The United States’ economy has been booming, and it would not be wise to simply wait for a few years; it would be wise to keep an eye on the Fed’s decisions impacting the interest rates.
At the Chernov Team, we know that knowledge is power, especially when it comes to understanding the mystery that is the California real estate market. At the Chernov Team, we understand that whoever comes to the table most prepared leaves with the most, and the Chernov Team always leaves the table with the most.