Forecast: California Real Estate Market Could Outperform the Nation into 2020

A recently revised forecast suggests that the California real estate market could outperform the nation through 2019 and into 2020 — at least in terms of annual home-price appreciation.

Positive Home-Price Forecast for California

This new housing market prediction came from the research team at Zillow. In February 2019, the group wrote: “California home values have gone up 4.0% over the past year and Zillow predicts they will rise 7.3% within the next year.” Their 12-month outlook for the country as a whole was 6.6%.

Two things are noteworthy about this particular forecast:

  1. The housing analysts at Zillow expect home prices in California to rise more in 2019 than they did in 2018.
  2. They also expect house values in the state to outpace the nation as a whole, between now and early 2020.

Of course, California is a huge state. And real estate conditions can vary quite a bit from one market to another. But in most cities across the state, home prices are expected to continue climbing through the rest of 2019 and into 2020.

The chart below, created by Zillow, shows their proprietary home value index for the state of California going back nearly a decade. It also shows the group’s price forecast for the California real estate market through early 2020 (green shaded area).

Chart: California home price trends. Source: Zillow.com

As you can see from the above chart, home prices in California have been following an upward trajectory since 2012. That trend is expected to continue through 2019 and into 2020 as well.

Inventory Shortages Still a Factor in CA Housing Markets

These positive predictions are largely the result of a supply and demand imbalance (an ongoing condition we’ve written about in the past).

In many real estate markets across California — and across the nation as a whole — there just aren’t enough homes on the market to satisfy demand. This puts upward pressure on home prices and increases competition among buyers.

As of January 2019, most of the major cities across California had less than a three-month supply of homes for sale. According to economists, a “balanced” market has closer to five or six months of supply. This is partly why we are seeing positive housing market forecasts for many California cities, stretching into 2020. There are plenty of buyers out there, but not enough homes to go around.

Among California’s major cities, supply is particularly low in Oakland. That city had about a 1.5-month supply of homes for sale in early 2019. Note the decimal there. That’s an exceptionally low level of inventory. It’s also why homes in Oakland are selling faster than in many other cities.

San Francisco’s real estate market is also experiencing a severe inventory shortage at the moment. But when is that not the case?

California Home Buyers Still Enjoying Low Mortgage Rates

Something strange is happening in the mortgage world. This time last year, many economists were predicting a gradual rise in mortgage rates throughout 2018 and into 2019. But we are now seeing the exact opposite.

In mid-February 2019, the research team from Freddie Mac wrote:

“The combination of cooling inflation and slower global economic growth led mortgage rates to drift down to the lowest levels in a year.”

At that time, the average rate for a 30-year fixed mortgage loan was 4.37%. Three months ago, 30-year mortgages held an average rate of 4.94%. So they’ve come down quite a bit since then.

Chart: Average 30-year mortgage rates. Source: Freddie Mac.

The chart above shows the average rate for a 30-year fixed mortgage going back to February / March of 2018. The right side of this chart shows the steady decline that has occurred over the past few months.

As we’ve seen, recent forecasts for the California real estate market suggest that home prices will keep rising for the foreseeable future. And low mortgage rates are part of the reason why. These historically low rates help entice buyers into the market, boosting demand for housing.

And when you add in the constrained inventory conditions mentioned earlier, you have all the ingredients for continued price growth.

Population Loss Could Affect Future Real Estate Trends

California’s population has grown considerably over the past ten years. But it’s now starting to “shrink” due to outmigration. The short version is that the number of people leaving the state (for other states across the country) exceeds the number that is coming in.

According to a 2018 report from the California Legislative Analyst’s Office:

“For many years, more people have been leaving California for other states than have been moving here. According to data from the American Community Survey, from 2007 to 2016, about 5 million people moved to California from other states, while about 6 million left California. On net, the state lost 1 million residents to domestic migration—about 2.5 percent of its total population.”

Of those Californians who have left the state, the number-one destination has been Texas. Home prices are considerably lower in Texas, and that state also boasts a strong economy and job market. This appeals to many who have been “priced out” of the California real estate market.

If home prices across California continue to rise (as recent housing market forecasts suggest), these outmigration patterns will likely continue. Over time, this could weaken demand in many real estate markets across the state and lead to smaller home-price gains.

Disclaimer: This article contains home price and housing market predictions for California extending through 2019 and into 2020. Those forecasts were provided by third parties not associated with the Home Buying Institute. They are the equivalent of an educated guess and could prove innacurate over time.