The California real estate market has done everything it can to set itself apart from the rest of the country. Median home prices have increased exponentially over the course of 2021, equity has returned where it was once thought gone forever, yet demand remains stronger than ever. Perhaps even more importantly, economic indicators suggest more people are willing and able to buy homes today, despite historically high acquisition costs. For all intents and purposes, real estate in California is firing on all but one cylinder: inventory.
The distinct lack of available housing is the primary reason home prices are so high. It is reasonable to assume prices will continue to rise until more inventory is brought to the market, which could be years away. In the meantime, investors have started emphasizing long-term exit strategies, not the least of which include building or adding to rental property portfolios. If for nothing else, new indicators created in the wake of the pandemic favor buy-and-hold strategies over their short-term counterparts.
The Top California Real Estate Markets
California's most popular real estate markets include, but are not limited to:
Real estate market trends in California have elevated the state to a level few others could ever hope to achieve. Nearly every economic and fundamental indicator, for that matter, is better off today than even a few short years ago.
The California housing market is a byproduct of several fundamental indicators, not the least of which include:
Median Home Value: $819,630 (+30.9% year over year)
Existing Home Sales: 436,020 (+28.3% year over year)
Months Of Inventory: 1.7 (-37.0% year over year)
Median Days On Market: 8 (-57.9% year over year)
Median Rent: $1,861
Price-To-Rent Ratio: 36.70
Unemployment Rate: 7.7%
Median Household Income: $75,235
California Median Home Prices
California's home prices have found themselves to be the beneficiary of what many are calling a “perfect storm.” Thanks, in large part, to the unique combination of historically high demand and an inherent lack of inventory, the market has tilted heavily in favor of sellers and increased prices by as much as 30.9% over the last 12 months. As a result, the median home value in California now sits at an impressive $819,630, according to the California Realtors Association. However, it is worth noting that recent appreciation rates are not the result of a brief fad but rather a continuing trend. If for nothing else, housing prices look to be gaining sustainable momentum, at least for the foreseeable future.
In the next year alone, prices are expected to increase more than the previous year. With less than two months of available inventory, supply and demand constraints will serve as the primary catalysts for higher prices. There’s no doubt about it: California is absolutely a seller’s market. Homes are selling faster and for more money with each passing year and should continue to do so until more inventory is introduced into the market.
For what it’s worth, most markets in California are already unaffordable for the average buyer. According to the California Association of Realtors, the “unaffordability” rate is resting comfortably somewhere in the neighborhood of 75%. On top of that, 24/7 Wall Street suggests that 16 out of 25 least-affordable counties in the country are located within California’s borders.
Over the course of 2021, many California residents have taken advantage of new work-from-policies and traded their expensive California living situations for more affordable alternatives in other states. Many homeowners, for that matter, have moved to states like Idaho, where prices are more forgiving. The exodus has eased inventory constraints, albeit minimally. However, if the trend continues, lower demand could actually help bring prices back down to earth.
California Median Rent Prices
California’s home prices share a distinct correlation with every single housing indicator, and rent prices are certainly no exception. You can very easily attribute California’s higher rental prices to the state’s above-average home values. If for nothing else, higher home values are preventing a large population of prospective buyers from actually committing to a purchase, if not pricing them out of the market altogether. In other words, there’s a large contingent of people that want to buy but can’t, which lends itself to another issue: the same supply and demand crisis facing would-be buyers is impacting renters. Since more people are priced out of the buying market, we see more renters than average competing over fewer available properties. As a result, landlords have found themselves in a position of power in California and increased their asking rates.
According to Apartment List, the median rent price in California is $1,861. The difference between individual unit sizes can be broken down as follows:
1 Bedroom: $1,556
2 Bedroom: $1,891
3 Bedroom: $2,226
4 Bedroom: $2,639
Comparatively, the national average rent price is $1,219 (less than the cost to rent a studio apartment in California). The difference is noticeable, and data suggests the discrepancy will only grow for the foreseeable future.
As I already alluded to, more people are forced to rent because they can’t afford to buy, but there are also very few units to rent on the market. Therefore, landlords are in a position of power and can request higher rates. California real estate investors should take note. As it turns out, now is a great time to consider buy and hold exit strategies. While it makes it more difficult to acquire properties, it’s more than likely that you’ll be able to rent out an asset to recoup some of the money lost on the acquisition.
California Foreclosure Trends & Statistics
According to Attom Data Solutions’ Q1 2021 U.S. Foreclosure Market Report, a total of 33,699 U.S. properties received a foreclosure filing (default notices, scheduled auctions, or bank repossessions) in the first quarter of this year. According to the latest research, nationwide foreclosures are up 9.0% from the last quarter of 2020 but down 78.0% from this time last year.
“The foreclosure moratorium on government-backed loans has virtually stopped foreclosure activity over the past year,” said Rick Sharga, executive vice president of RealtyTrac, an ATTOM Data Solutions company. “But mortgage servicers have been able to begin foreclosure actions on vacant and abandoned properties, which benefits neighborhoods and communities. So it’s likely that these foreclosures are causing the slight uptick we’ve seen over the past few months.”
As it turns out, California was one of the largest contributors to the latest increase in foreclosures. According to the report, "those states that saw the greatest quarterly increase in foreclosure starts and had 500 or more foreclosure starts in Q1 2021, included California (up 36 percent); Ohio (up 25 percent); North Carolina (up 15 percent); Virginia (up 11 percent); and South Carolina (up 10 percent)."
When it comes to foreclosures that resulted in repossessions, only Florida and Illinois saw more in the first quarter of this year. "Those states that had the greatest number of REOs in Q1 2021 were Florida (945 REOs); Illinois (610 REOs); California (414 REOs); Texas (370 REOs); and Arizona (330 REOs)," according to the report.
Foreclosures in The Golden State appear to be outpacing most of the country, and it's fair to assume the California real estate market will continue to see an influx of foreclosures. As forbearance programs run out, more homeowners are likely to file for foreclosure over the course of 2021. As a result, real estate investors in California should position themselves to help distressed homeowners. Done correctly, California real estate investors may be able to simultaneously helps distressed homeowners avoid bankruptcy and acquire their next deal.
California Real Estate Investing
California real estate investing has separated itself from almost every other state across the country. Home prices in The Golden State are so high that they have altered the very exit strategy most investors sought solace in over the course of the latest recovery. Where rehabbing and wholesaling once prevailed, California now boasts a market more favorable to buy and hold investors. That’s not to say there aren’t opportunities to execute a profitable flip, but, instead, that buy and hold strategies are more in line with today’s market metrics. Homes are too expensive up and down the California real estate market, and profit margins are getting thinner and thinner as home values appreciate.
Buy and hold rental properties offer investors the ability to offset today’s high prices with equally impressive rental rates. Given the right property with a proper cash flow, there’s no reason to avoid the high prices that have become synonymous with real estate in California. In as little as a few years, rent checks could easily make the acquisition well worth the price; be sure to pay special considerations to the real estate market trends in California and to adjust your strategy accordingly.
In addition to higher rental rates, real estate investors in California should be able to take advantage of historically low borrowing costs. Since the onset of the pandemic, interest rates have remained low to catalyze the market. Today, the average rate on a 30-year (fixed-rate) mortgage is about 2.88%, making borrowing money more affordable than it has been in years. The lower rates may simultaneously help offset today's higher prices and increase monthly cash flow from rental properties placed in operation. Consequently, if borrowers can lower their monthly mortgage obligations, they can pocket more of the money they earn in rent.
Those interested in investing in California real estate should note today’s expensive trends and familiarize themselves with an important concept: it is possible to invest in any market, regardless of whether it’s up or down. While those outside looking in may assume home prices in California are too steep to produce any attractive profit margins, they need to look at things from an alternative perspective. Yes, the higher prices in California make it harder to find viable spreads, but the key is to alter your exit strategy following what the market suggests.
When prices are high, as they are in the California real estate market at the moment, investors should pay special considerations to buy and hold strategies. Instead of rehabbing and flipping a property immediately, consider buying a property and renting it out. That way, you may offset today’s higher prices with the rent collected every month. With rent prices as high as they are, a carefully thought out buy and hold strategy could pay huge dividends over the course of several years. What’s more, you could choose to rehab and sell the property later down the road if the market deems as much.
California Housing Market Predictions
Predicting the housing market without any degree of error is a fool’s errand, even in a state as “predictable” as California; there’s always going to be at least a slight margin of error. Still, some of today’s educated guesses look more sustainable than others. Having said that, here are some of the California housing market predictions I feel are more likely to pan out:
Home value appreciation will continue to outpace the national average: Over the last year, median home values in California have appreciated at a rate faster than the national average, 30.9% and 15.0%, respectively. However, over the next 12 months, it shouldn’t surprise anyone to see California home values appreciate at a similar pace. With less than two months of inventory and more people able to build up their savings accounts over the pandemic, fierce competition is inevitable. As more people are willing to pay today's higher prices, values will only increase.
Supply and demand will continue to shape the real estate landscape: Supply has yet to satiate the demand for real estate in California, and it doesn’t look like it will anytime soon. Sure, builders are doing their best to introduce new properties to the market, but they won’t be ready for a while. Until new inventory hits the market, expect demand and prices to rise simultaneously.
Despite being a seller’s market, homeowners will remain content and not pursue a sale: California homeowners know full-well that they could sell their homes for a nice profit, but I am willing to bet few will consider doing so. Despite the amount of equity most homeowners are working with, most appear more interested in keeping their homes than joining the ranks of competitive buyers. They know that if they sell, they will face the same supply and demand issues troubling everyone else.
If homeowners decide to sell, they’ll look to buy in another state: I remain convinced most California homeowners won’t sell, but I am growing more intrigued by the idea of a California exodus. As I already alluded to, the California real estate market is too expensive and competitive. It makes perfect sense that those who do sell decide to look for a home in another state, preferably with fewer taxes, less competition, and lower prices.
California housing market projections are anything but set in stone, but they can give great insight into what may transpire. At the very least, they are a good tool to use for minding due diligence. Only those that can anticipate where the market is heading will stand a better chance at realizing success.
Real estate in California has stood atop a pedestal for quite some time. Still, the recovery from the latest recession has solidified The Golden State as one of the country’s hottest housing markets. At the very least, real estate in California is firing on all cylinders; at its pinnacle, it's the healthiest housing market in the country. If you are entertaining the idea of breaking into the real estate industry, you could do a lot worse than California. Better yet, California real estate trends could work considerably in your favor if you choose to listen to the right ones.
Have you been considering investing in California real estate? Are you just looking for a reason to start investing in one of the hottest markets in the country? Please feel free to let us know your thoughts on the matter in the comments below.
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