California’s Housing Market
- Housing construction and prices are highly cyclical in California.
The current housing bust is especially severe, but booms and busts have characterized housing prices and construction in California for decades. This is partly because California has long been at the forefront of population growth and change in the United States, and the state’s housing market is especially vulnerable when growth slows.
- Housing construction has fallen to record lows.
The past three years saw the lowest level of new home construction in California in at least four decades. In 2005, 209,000 permits for new housing units were issued; starting in 2008, the number of permits issued fell below 50,000 per year.
- Between 1996 and 2006, median housing values in California increased more than threefold.
In 1996, the median home value in California was just over $150,000; by 2006, it had risen to over $500,000. Places that were expensive became even more expensive (median values reached $737,500 in the state’s most expensive metropolitan area, San Jose). And inexpensive places became expensive: median values increased about fourfold in the metro areas of Riverside–San Bernardino Merced, and Stockton (see table).
- Since their 2006 peak, housing values have declined dramatically.
Statewide, median values have declined by more than 40% to their lowest level in eight-plus years, reaching $295,300 by December 2011. Most of the decline occurred between mid-2006 and mid-2009. The largest declines have occurred in some of the same inland metros that had experienced the biggest run-up in values, including Merced (69% decline), Modesto (65% decline) and Stockton (65% decline).
- Foreclosure rates remain high.
Foreclosure rates have declined but remain high. More than 40% of homes sold in California in the third quarter of 2011 were either bank owned or in some stage of foreclosure. Moreover, large numbers of Californians are “underwater” (owing more on their houses than they are worth). According to CoreLogic, 30% of California homeowners who have a mortgage were underwater in the third quarter of 2011, the sixth-highest percentage in the nation (after Nevada, Arizona, Florida, Michigan, and Georgia).
- Affordability has become widespread, but homeownership rates have declined.
Low interest rates and declines in prices have led to high rates of affordability in many California metropolitan areas. Affordability levels are especially high in the state’s inland regions, with more than 80% of households able to afford an entry-level home. Even in the most expensive Bay Area counties (Marin, San Mateo, San Francisco, and Santa Clara), high incomes coupled with low interest rates mean that about half of households can afford an entry-level home. Even so, loans have become more difficult to obtain, and the homeownership rate in California has fallen from 60% of all occupied households in 2006 to 56% in 2011; it remains far lower than the rate in the rest of the nation (67% in 2011).
- Rents have gone up and vacancies remain relatively low.
California’s rental market has not seen the booms or busts that characterize the homeownership market. While the housing market was in decline from 2006 to 2011, rents increased throughout the state. Rents increased by more than 10% in the Bay Area and Orange County, and by more than 20% in the metropolitan areas of Los Angeles, San Diego, Riverside–San Bernardino, and Fresno. Only in the Sacramento metropolitan area were rents up by less than 10%. Vacancy rates in California (7.5% in 2010) remain well below those in the rest of the nation (10.2%).
- Demography is on our side.
Housing demand should rise over the next decade, as the children of the baby boomers reach the prime ages for starting families and establishing households: the number of Californians in their late 20s and early 30s will increase by about 25%.
Sources: Construction: U.S. Census Bureau. Median housing values: Zillow. Foreclosures: RealtyTrac, CoreLogic. Affordability: NAHB/Wells Fargo, California Association of Realtors. Rents: U.S. Department of Housing and Urban Development. Vacancy rates: U.S. Census Bureau. Population projections: California Department of Finance.
Note: All dollar figures are in nominal terms.