Key highlights from this article:

• Real estate markets across California have begun to cool down in 2019.
• Home-price appreciation has slowed over the past 12 – 18 months.
• Home prices in many cities could plateau, or even drop, in 2020.
• And yes, the Silicon Valley real estate market is crashing.

• A few years ago, California cities were popping up on rankings of the “hottest” housing markets in the country. But that was then, and this is now.
• In 2019, a lot of real estate markets across the state have cooled considerably. Home-price appreciation has slowed, and even reversed in some cities. Price reductions are more common. And homes are sitting on the market longer.
• Some forecasts for California real estate markets predict a continuation of these trends, going into 2020. For the first time in a long while, home buyers need to ask themselves some hard questions: “Is it a good time to buy a home in California? Or should I take a wait-and-see approach?”
• Let’s take a look at what is happening statewide, and then drill down to some of the metro-area real estate markets in California.

 

California Real Estate Market Cooling in 2019

According to a recent report from the California Association of REALTORS® (C.A.R.), home sales in the state “fell below the benchmark 400,000 level in June as sales declined from both the previous month and year.”

In July, the state’s Legislative Analyst’s Office pointed to this trend as well, noting that California home sales dropped in June 2019 compared to the same month last year.

“Nonetheless, sales remain relatively weak, but not as weak as is typically seen before economic downturns,” the report stated.

We can also see evidence of a cooling trend within the California housing market by looking at home prices. According to the latest data published by Zillow, the statewide median home value rose by just 1.3% over the past year or so. That is significantly less than the 5% – 6% annual gains of a few years ago.

The company’s research team also issued a forecast for the California real estate market stretching into 2020. And it doesn’t inspire a lot of confidence. In July 2019, they wrote:

“California home values have gone up 1.3% over the past year and Zillow predicts they will fall -0.1% within the next year.”

Granted, home prices in California (and much of the U.S.) were rising unusually fast for a while there. That was part of a market “correction” that followed the housing crash and Great Recession. So it’s only natural to see a slowdown in price growth. Call it a return to normalcy, if you like.

Still, home buyers in some California real estate markets should pause for reflection. The cold, hard truth is that now might not be a good time to buy in some cities across the state.

If you purchase a house in a market where prices are falling steadily — and there are plenty of those at present — you are buying a depreciating asset. And that’s rarely a wise investment.

San Diego: Will Home Prices Flatline in 2020?

Home prices in San Diego rose by around 1.8% over the past year or so. Zillow’s economists predicted smaller gains over the next 12 months, issuing a forecast for just 0.5% price growth.

Of course, that’s just a forecast. We should treat it as an educated guess. But it’s not surprising. The San Diego real estate market was overheated for several years in a row, posting above-average home price gains. That kind of “fast and furious” growth is usually followed by a cooling period.

Which begs the question: Will 2020 be a good time to buy a home in San Diego? Or will declining house prices give buyers a reason to hesitate?

Like most major cities in California, the San Diego real estate market has clearly cooled down over the past couple of years. And this trend could continue into 2020 as well.

But this market has two things going for it that could continue to put upward pressure on home prices — population growth and tight inventory.

As of later summer, 2019, the San Diego real estate market was still experiencing a shortage of supply. In short, there aren’t enough homes available for sale to satisfy the collective demand from buyers in the area.

Meanwhile, the metro area’s population continues to rise. According to the U.S. Census Bureau, the population of San Diego County grew by 8% from April 2010 to July 2018. The nation as a whole grew by 6% during that same eight-year period. Population growth tends to increase demand for housing, on both the rental and purchase side.

With limited inventory and steady demand, it seems likely that home prices in San Diego will continue to inch upward for the foreseeable future. But that’s far from certain.

Los Angeles: Inventory Growth Gives Buyers More Options

The Los Angeles real estate market also appears to be slowing a bit, in terms of sales and home-price growth. It too received a modest forecast from the team at Zillow. (Again, just an educated guess.)

In July 2019, the company wrote: “Los Angeles home values have gone up 2.0% over the past year and Zillow predicts they will rise 0.5% within the next year.”

As of late summer, the median house price in L.A. was nearing $700,000. That’s within the city itself. In the broader Los Angeles-Long Beach-Anaheim metro area, the median value was around $650,000 as of July 2019.

Inventory growth is the big story within this real estate market. And it might have something to do with the relatively modest forecast issued by Zillow.

According to a report published by Douglas Elliman Real Estate, housing inventory in the greater Los Angeles area increased significantly during the second quarter of 2019 (compared to a year earlier).

To quote that report:

“With lower [home] sales levels, listing inventory expanded year over year for five consecutive quarters as well as cooling the pace of the market. Months of supply, the number of months to sell all listing inventory at the current rate of sales, increased 33.3% to 6.4 months.”

Inventory rose in nearly all parts of the metro area, and for all property types (condos, detached homes, etc.).

Historically, large inventory gains lead to smaller home-price growth down the road. With more properties to choose from, buyers don’t have to compete so fiercely with one another. There’s less urgency, and less reason to make aggressive offers. This tends to ease the upward pressure on home prices.

San Jose: A Housing Market in Decline

We’ve written a lot about the San Jose real estate market lately. It’s a story marked by extremes. Extreme competition. Extreme growth. Extreme prices.

A few years ago, home values in San Jose, California were climbing faster than nearly every other city in the country. The median price for this housing market shot above the $1 million mark and seemed to have no ceiling in sight. Until it hit one.

Home prices in San Jose leveled off in late 2018 and began to drop steadily in early 2019. Now the questions are, how far will they fall? When will this housing market hit bottom? And that’s a hard question to answer as of summer 2019.

The median home value for San Jose dropped by -7% over the past year, according to Zillow. Looking forward, the company predicts “they will fall -8.0% within the next year.” That forecast was issued in July 2019, and therefore extends into the summer of 2020.

It’s hard to make a case for buying a home in the San Jose area right now — or anywhere in Silicon Valley, for that matter. The market is volatile right now, and home prices probably have farther to fall.

San Francisco: An Exception to the Rule?

San Francisco’s real estate market is unique in its physical constraints. There’s hardly anywhere to build in the city, given its historical and geographical nature.

As a result, homes located within the city tend to hold their value well — even at times when surrounding real estate markets are in decline.

According to a recent report from C.A.R., median sale prices declined in eight of the nine Bay Area counties in June, compared to a year earlier. The one exception was San Francisco County, which experienced a gain of 8.8% from June 2018 to June 2019.

Home sales, on the other hand, dropped significantly within San Francisco County during that 12-month period. So even though prices are still moving north, the market appears to be cooling in terms of overall activity.

Disclaimers: This story contains California real estate forecasts and predictions issued by third parties not associated with the Home Buying Institute. We have included them here as an educational service to our readers. Such forecasts are the equivalent of an educated guess and should be treated as such. HBI makes no claims or assertions about future housing conditions.