California Housing: Price Declines Were Easily Foreseen

Redfin graph confirms the price decline from 2022.

Nine months ago your humble blogger demonstrated how an increase in the mortgage rate of two percentage points, e.g., from 3% to 5%, would produce a 20% decline in the selling price of a house, e.g., from $1 million to $800,000. No advanced analytic skills were required, just the basic math taught in Finance 101.

Today's Mercury-News: Median price of single-family home in California is 18% off May 2022's high

As the pandemic throttled the nation’s economy in early 2020, the Fed did what it often does in dicey times: helped to prop up the business climate with lowered interest rates.

However, the Fed gave housing an additional nudge by doubling its ownership of mortgage bonds to $2.8 trillion – as it clearly feared another housing crash.

These actions pushed mortgage rates to a historic low of 2.6% by early 2021 – and the Fed kept rates below 3% for roughly a year. That stimulus, plus federal aid for the broad economy, was too much good stuff. Home prices, for example, jumped 53% in two years.

Meanwhile, all this stimulus ballooned to inflation rates to highs not seen in four decades. You know, back in the early 1980s when the S&Ls sunk.

This bubble’s pop came in early 2022 when the Fed’s pump ended. The central bank sharply reversed its interest rate policies hoping to chill an overheated economy. Mortgage rates swiftly doubled, icing homebuying.

We're close to the end of the Fed rate hikes, because the weakness in the banking system won't tolerate more increases.

(Image from Tax Foundation)

Does this mean that California real estate has hit bottom and prices will turn upward? IMHO, no. The exodus of people, business, and capital from California is a trend that will last for years and should put a damper on prices.

This isn't rocket science: interest rates, though powerful, aren't the only factor driving real estate. Buy properties in states experiencing population growth, and avoid those that are declining.