Crash Warning: California Housing Market Could ‘Decline Precipitously’ in 2020

Highlights from this housing report:

  • The California Association of REALTORS® issued a gloomy forecast recently.
  • California’s housing market is expected to “deteriorate” over the coming months.
  • Shelter-in-place orders have slowed the real estate industry to a crawl.
  • Ongoing job losses could lead to fewer home sales in Q3 – Q4 2020.
  • Home prices, on the other hand, might actually weather the storm.

On March 20, the California Association of REALTORS® (C.A.R.) reported that the ongoing coronavirus pandemic — and the government restrictions associated with it — could cause the state’s housing market to decline in the weeks ahead.

According to 2020 C.A.R. president Jean Radsick:

“As the coronavirus pandemic worsens, the housing market is expected to decline precipitously in the coming months, particularly in counties and cities with a ‘shelter in place’ mandate, where open houses and home showings cannot be held.”

As of April 2, the state of California was third in the nation for the number of confirmed coronavirus cases (after New York and New Jersey). At that time the Golden State had more than 9,800 cases and 212 deaths linked to the disease. That’s according to the New York Times case count.

There are three main factors that are slowing real estate markets across California:

  1. The rise in unemployment means there are fewer qualified home buyers.
  2. Stay-at-home and distancing requirements make it harder to buy and sell homes.
  3. Fear of contagion has caused some buyers and sellers to shy away from the market altogether.

So there are financial and psychological forces at work here, and they’re all having a dampening effect on the real estate market.

Is a California Housing Market Crash Looming?

All of this leads back to that frequently asked question we opened with. Will the California housing market crash in 2020, as it did back in 2007? Our view is, probably not. But we could certainly see home prices drop in some cities across the state.

The entire state of California has been ordered to “shelter-in-place,” which means residents are limited to essential activities like obtaining food, getting gas, etc. These orders — while necessary to halt the spread of the virus — have placed a huge burden on many businesses and employees statewide.

The restaurant industry, which makes up about 10% of the total workforce, has taken a big hit. But that’s only the tip of the iceberg. Everyone from hair dressers to dentists are finding themselves without customers and patients — and without income. That’s the biggest concern right now, from a socioeconomic standpoint.

In comparison, home prices and housing conditions are a lesser concern right now, as the public health crisis drags on. The health and wellbeing of the general populace is paramount. But judging by the emails we receive, the housing market is also a top concern among many California residents as we head into the spring.

The bottom line is that home sales and prices could very well decline in many local housing markets across the state, later this year. But a statewide real estate “crash,” similar to the one that occurred in 2007, seems unlikely at this time.

A lot depends on how long the situation lasts, and how widespread the “lockdown” measures become in the months ahead.

How Home Prices Held Up in Previous Recessions

If the California housing market does crash, deteriorate or decline later in 2020, it would mark a sharp reversal from recent trends. With the notable exception of Silicon Valley, most cities in the state have experienced steady home-price growth over the past few years.

That’s largely the result of supply-and-demand imbalances. In many of California’s real estate markets, there is currently a shortage of inventory relative to the demand from buyers. That puts upward pressure on prices.

But will home prices in California drop in 2020, due to the ongoing coronavirus pandemic and economic slowdown? History has some useful insights on that subject. As it turns out, home values in the Golden State held strong during four of the last five recessions. The same goes for the nation as a whole.

The chart below shows the house price index for the state of California going all the way back to 1990. It’s based on data provided by the Federal Housing Finance Agency. As you can see, home values in the state have been rising steadily since early 2012 (when they hit bottom following the last recession).

California home price trends

You’ll also notice that house prices in California kept rising through the 2001 recession (the middle of the three gray bars). Home values in the state also rose through the 1980 economic recession, and they only dipped slightly during the 1982 and 1990 recessions.

The wider gray bar to the right represents the Great Recession. In that scenario, the housing market crash brought on the recession — instead of the other way around. That was a unique case from a historical standpoint. And we probably won’t see a repeat of that anytime soon, if ever.

Whether or not home prices drop this time around will partly depend on how long the stay-at-home orders are kept in place. In addition to restricting movement and slowing the economy, those government orders are also costing Americans jobs. 

If those restrictions are eased after two or three months, home values might whether the storm. If they’re kept in place (and possibly broadened) into the second half of 2020, home values in some California cities could start to dip. But that would be temporary. The supply-and-demand situation in the state will continue to put upward pressure on prices, once the health crisis subsides.

House Values Have Risen Since 2012

The real estate information company Zillow has a similar chart documenting the ongoing rise of California home prices. See below.

California prices through April 2020
Chart: Median home values in California. | Source: Zillow.com

As of early April 2020, the median house price in the state was around $571,875. That was about 4% higher than the same month last year.

In early April of 2020, the research team at Zillow wrote: “California home values have gone up 3.9% over the past year and Zillow predicts they will rise 4.9% within the next year.”

Other forecasters have predicted that prices will level off during the second half of 2020, and begin rising again in 2021.

Real Estate Deals, Mortgage Loans Still Happening

The real estate business is considered “essential” under California’s stay-at-home guidelines. Home sales are still occurring, though at a much lower rate than before the crisis.

The process has changed as well. Much of the paperwork is handled remotely and digitally, to prevent the need for fact-to-face interaction. Open houses are out, but individual home tours are still occurring. Agents are increasingly turning to virtual tours, as a way to show properties via the web.

Real estate listing agents in California have modified their procedures for showing homes. Among other things, they’re opening all doors and closets so that buyers can walk through without touching anything. They’re also placing hand sanitizer by the front door, and other measures designed to protect public health.

The mortgage industry appears to be adapting as well. We spoke to some California-based mortgage lenders about their businesses, and how they have changed over the past few weeks. Many have adjusted their business models to accommodate clients in a time of social distancing.

Mike Trejo of Bridgepoint Funding, for example, said his company can handle the entire mortgage process digitally. He said they were moving toward a paperless process already, before the crisis set in, and that those preparations have allowed him to continue originating loans.

Disclaimer: This report contains housing-related forecasts and predictions. Such projections are the equivalent of an educated guess and should be treated as such. The Home Buying Institute makes no assertions about future housing or economic conditions.