Most of the homes sold within the San Francisco Bay Area have ended up selling…
Will the California housing market crash in 2020 or 2021? Given the current public-health and economic issues plaguing the nation, that has become a prominent question among home buyers and homeowners.
The short answer is no. It seems highly unlikely that the California real estate market will “crash” in 2020, or even suffer from a major price collapse. Many economists and analysts seem to agree on this subject.
Below, we will look at five key reasons why the California housing market probably won’t crash anytime soon.
5 Factors Preventing a Housing Crash in California
Low mortgage rates. Tight supply conditions. Steady demand from home buyers. A fully functioning real estate and mortgage industry. Those are just a few of the reasons why we won’t see a California housing market crash in 2020. Let’s take a closer look at them.
1. Record-low mortgage rates are boosting demand.
A couple of weeks ago, the average rate for a 30-year fixed mortgage loan fell below 3% for the first time in history. And that’s going back 50 years!
Rates have ticked upward a bit since then, but they remain at historically low levels. And some industry forecasters have predicted that 30-year mortgage rates could once again dip below 3% in the coming weeks – and perhaps even linger there for a while.
This is partly the result of economic stimulus actions taken by the Federal Reserve. Fed officials are holding the federal funds rate near zero in an attempt to boost the U.S. economy in this time of crisis. Indirectly, that has led to record low mortgage rates in 2020.
On July 23, the research team at Freddie Mac wrote:
While housing demand continues to rebound, the month-long swoon in economic activity has caused the 10-year Treasury benchmark to drop. In the short-term, this means the demand will continue on the back of near record low mortgage rates.
Homeowners and home buyers have taken notice. Refinancing levels have increased in response to these low rates, and demand among home buyers has risen as well (see item #3 below). That’s just one of the reasons why we won’t see a major California housing market crash in 2020 or 2021.
2. Tight supply conditions are preventing price erosion.
In most California cities, there is currently a significant imbalance between supply and demand. The short version is this: There just aren’t enough homes listed for sale to satisfy the demand from buyers.
Even now, in the middle of a pandemic, most cities across the state have limited housing supply relative to the number of buyers.
According to a report published in July by the California Association of Realtors:
Housing supply continued to trend downward on a year-over-year basis, with active listings falling more than 25 percent for the seventh consecutive month. A sizable year-over-year drop in active listings of 43 percent … led to a decline in C.A.R.’s Unsold Inventory Index (UII) in June.
Translation: There are fewer homes on the market in California today, as of July 2020, than in previous months. And that’s helping to sustain prices.
Economics 101 tells us that when demand exceeds supply, it puts upward pressure on prices. This is true whether you’re talking about smart phones, crude oil, or houses. Supply and demand imbalances have a direct impact on prices. And that’s another factor that is helping to prevent a California housing market crash in 2020.
3. There is strong demand among buyers, despite COVID-19.
When the coronavirus (COVID-19) pandemic began a few months ago, some expected the housing market to grind to a halt. Many analysts thought home buyers would retreat en masse, leading to a sharp drop in sales.
But that didn’t happen. Correction — it happened at first. But once we got through April and into May, the market started to ramp up again as buyers returned in droves.
According to the Mortgage Bankers Association, purchase loan applications (among home buyers) rose 19% during the week ending July 17, compared to the same week last year.
According to Nancy Vanden Houten, lead U.S. economist at Oxford Economics: “Firm underlying demand and limited supply will continue to keep a floor under home prices, even during a slow recovery in the economy.”
Clearly, the coronavirus pandemic has shaken the nation’s economy and real estate industry. But it hasn’t scared home buyers out of the market. And that’s reason number three why a California housing crash is highly unlikely this year or next.
4. The housing market was strong going into the pandemic.
There’s a big difference between our current real estate slowdown and the housing bubble collapse that started around 2007. This time around, the nation’s housing market was much more stable going into the crisis.
Mortgage default and foreclosure rates were much lower in early 2020 than they were in the mid-2000s. Borrowers were better qualified than in the past. And the real estate market wasn’t overbuilt, overpriced and overheated, like it was in the early to mid-2000s.
As a result of all these factors, the housing market in California and nationwide has held up surprisingly well during the pandemic. Better than expected, actually. Many news headlines have repeated this theme, in recent weeks. (Here’s one example, published on Politico last week.)
Because of its pre-pandemic strength and stability, the California real estate market is unlikely to “crash,” collapse or crumble anytime soon.
5. The real estate and mortgage industries have adapted well.
This is something we’ve written about before, so there’s no need to belabor the point here. Suffice to say the real estate and mortgage industries have done a good job adapting to the coronavirus pandemic and resulting shutdowns.
Thankfully, real estate, mortgage and closing companies are considered essential businesses under California public health guidelines. That means the real estate industry can continue to move forward in spite of COVID-19, albeit with some modifications and precautions.
In closing, we leave you with this quote from Logan Mohtashami, the lead data analysis for HousingWire:
“Now, we are entering Act 4 in 2020 for housing, and it’s time to let go of this crash thesis. The reality is this: it wasn’t going to happen in 2020 even with a pandemic virus.”