When the housing market collapsed in the late 2000s, home prices plummeted across California. Now they’re rising again. In fact, house values in some California real estate markets are higher today than they were in 2000.
Three cities in particular have seen tremendous gains over the last few years. According to a recent report, the housing markets in Los Angeles, San Francisco and San Diego have seen the biggest home-price increases since 2000.
L.A., San Diego, San Francisco Housing Markets Lead the Way
On September 29, the latest release of the S&P/Case-Shiller Home Price Index was published. In addition to the usual home price updates, this report offered an interesting bit of historical hindsight. According to their data, the biggest increases in house values have occurred in the western half of the country, and in California in particular.
To quote the report: “The three cities with the largest cumulative price increases since January 2000 are all in California: Los Angeles (138%), San Francisco (116%) and San Diego (115%).”
Of course, this probably comes as no surprise to those who actually live in California. Home buyers, in particular, have been feeling the squeeze of rising prices lately. Buyers in many cities across the Golden State now find themselves priced out of the market and having to downsize their expectations.
The Rise and Fall of California Real Estate Prices
So why have property values risen so fast, and so far, in the Los Angeles, San Diego and San Francisco real estate markets? What makes these cities unique from the rest of the country?
The most obvious answer is that prices in these cities had more room to rise. During the housing crisis, home values in California’s major metro areas fell further and faster than cities elsewhere across the country. (And you could put Phoenix and Las Vegas into that club as well.)
California, Nevada and Arizona are the so-called Sand States that were hit hardest by the housing collapse. And since prices had further to climb in those states, they began to outpace the nation when the economy started to rebound.
We reported on this trend back in 2013 (see: “Prices Rising Fastest in Sand States“).
So it’s really no surprise that these three real estate markets have seen the biggest gains in property values since 2000. Home prices in San Diego, Los Angeles and San Francisco dropped well below their peaks during the bust, so they had a lot of room to rise.
But there are other reasons why prices have risen so far in these markets, and they both start with the letter “I” — investors and inventory.
Investor Frenzy Creates Inventory Shortage
When prices began to bottom out in California’s real estate markets, investors swooped in to snatch up bargain properties. It was the usual investment strategy of “buy low and sell high.” And there were plenty of bargains to be found in those days. Investors bought so many homes that there was soon an inventory shortage. When “regular” home buyers started entering the market, there weren’t very many houses available.
(Blast from the past: Here’s a story we did on the inventory shortage in San Diego, back in 2012.)
In short, high investment activity led to low housing inventory, pushing the supply-and-demand balance way out of whack. As the economy improved, job gains brought more buyers into the market. But inventory was limited, so buyers had to compete fiercely with one another. This led to multiple-offer scenarios, bidding wars, offers well above the asking price, and other hallmarks of a classic sellers’ market.
And now here we are approaching the end of 2015, and the biggest home-price gains are still occurring in the western half of the country. We expect to see more of this next year. In fact, it was one of our top-five predictions for the U.S. housing market in 2016.