Many people frequently attribute California’s real estate success to a booming economy going on nationwide. While this factor is a contributor, it is not the only reason why real estate values are climbing higher in the state than most of the rest of the country. A combination of factors have worked together or against each other to create an ongoing push of rising valuations in just about every major residential area of the state. However, other areas have been left behind, so the real estate rewards are not egalitarian; there are notable losers in the Golden State. Understanding these specific factors helps tremendously in seeing why valuations swing so wildly in today’s California real estate market.
1. Demographics
The first factor involves demographics. Generally, statisticians use the term for just about anything that counts as criteria for separating information into groups. Socially, demographics refer to how people are categorized. The first big demographic is economic power. People chase after and pursue living near areas where they think they will fare better than their current state. As a result, most folks are situated near major labor centers. That in turn drives up demand for local real estate in these areas versus other parts of the state. However, what is now occurring is that the circular area around a labor center is getting bigger and bigger as people look further out for affordable homes and are willing to drive hours to hold onto a job. This drives up prices along major traffic routes and interstate highways.
2. Interest Rates
The second big factor involves the interest rates charged for mortgages. They have been sitting at all-time lows, as deep as 3.5 percent on average. Only now in 2018 are the rates starting to rise significantly, getting close to the 5 percent mark again. This low-interest rate trend has been instrumental in allowing people to afford homes as prices have gone up. Significantly lower loan expense has allowed people to finance large sums for very low cost. When this goes away, the high buying demand among many middle-class buyers will dissipate.
3. The Overall Economy
The third component is the nationwide economy as well as the California economy. Both have been doing very well in the last two years, with many wondering how long the good times will continue. The scars of the 2009 Recession are still present in memories, and the effects are still being felt today. While there is now plenty of income being earned creating purchasing power, the Recession shut down home construction. Unlike the economy and workers, who rebounded fairly quickly, home-building did not because it requires a significant cash outlay from builders. Between tight credit and fears of bankruptcy many builders have eked out only a few homes at a time. Now, when the economy is booming, there is nowhere near enough building in California to match demand. That means a tight supply that goes up in value.
4. Government Policies and/or Subsidies
Recent tax changes at the federal level were not necessarily keeping California homebuyers in mind when being crafted. Both the property tax deduction and the mortgage interest payment deduction were clearly in the sights of tax law rewriters in the Fall of 2017. The results have generally protected both, but they remain the two outstanding big government benefits to home buying in California. If these eventually go completely, it will have a huge effect against middle class buyers.
5. Property Location
The three most important words in real estate are location, location and location. And with California that principle is proven again and again. As mentioned earlier, locations near urban centers, jobs, and amenities have the highest demand and result in the highest valuations. San Diego, Los Angeles, San Francisco, Sacramento, and Redding are all triggering rising home valuations beyond just the attractive coastal communities with an ocean view. In comparison, Fresno, Imperial County and the far northern areas of California have not seen anything close to these high home prices, being far too rural to be attractive to most. Even retirees are limited in how far out they can go, needing critical services such as medical centers within close distance.
6. Investors
An additional factor is the movement in and out of the California market by investors. There has been a lot of chatter about foreign investors coming in and snapping up homes. However, the data isn’t supporting this argument that well. Instead, good old-fashioned domestic cash investors are driving up prices with quick buying and speculating, only to turn around and sell for higher prices or to turn the homes into income properties charging high rents. Ideally, losing the play of investors could actually help buyers by reducing the quick cash bidding wars starting up again in many neighborhoods. But for that to happen, the demand over all needs to drop and make it unpalatable for investors to buy in. Most experts don’t see that happening short of another credit freeze like what happened in the 2009 Recession.
7. Inspection Report
There are some factors that will drive a home down in value, regardless of what is going on in the neighborhood. The inspection report is a key factor in lowering an inflated sales price and bring a crazy seller back in line. And if there are real issues with the home that need to be fixed, the inspection report is going to cause the home price to fall accordingly unless the issue is corrected. People will still buy the home, but they will want a discount for the cost of the repair needed.
8. Comparable Properties
Neighborhoods will have some containment influence on a home as well. Known as comparables, similar sales in the same area will restrain a home from getting much higher unless it has some really unique aspects that demand higher pricing on face value. Otherwise, agents won’t price a home higher than the comparables for the given neighborhood and recent time period.
9. Appraisal Value
Finally, the classic factor affecting real estate pricing is the appraisal. Regardless of how a home is priced, as long as financing is still a major player for home buying, appraisals will restrict prices. Appraisal is a combination of actual value and pricing based on comparables again. The appraiser, expected to be an independent expert evaluator, pegs the price of a home for what it should be worth, not what the seller or market wants to pay. This in turn will cause a lender to modify a mortgage to match the appraisal value so that they don’t lend more than can be recovered as collateral.
Analyze and Plan
Given all the above, the bottom line every home buyer should remember is to pay attention both to the sales price of a home as well as what’s driving the greater regional home pricing behavior. Some of the factors work against each other, and others combine and add to their mutual effect on pricing. A home buyer who does his or her research well will find trend opportunities, which is how effective home-buying occurs in California.
