The Week Ahead – California Housing

Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

After more than a decade of flying into LAX and braving the traffic of the second busiest airport in the country, my wife’s parents have decided to buy a house in the Los Angeles area to be closer to their grandchildren. The problem is that prices have appreciated so much, they cannot get past the sticker shock. However, after years of blistering appreciation, there are signs that things may be coming off the boil. According to CNBC, “Approximately 14% of all listings in June saw a price cut, that's up from a recent low of 11.7% at the end of 2016. In addition, home price growth is slowing in nearly half of the 35 largest U.S. metropolitan markets.”

Clearly, rising mortgage rates and affordability are behind the change. I also believe that the recent change to tax law, making it nearly impossible to deduct property taxes, is having a meaningful effect.

That being said, the coastal cities of California are different. It’s always been, and probably always will be expensive to live here. While it is true, people fed up with high taxes and high cost of housing are leaving the golden state. We lost 138,000 people due to domestic migration in 2017 to states such as Arizona, Texas and Nevada. Successful cities aren’t seeing home prices drop due to higher income families taking their vacancies. Another factor propping up prices is zoning restrictions artificially keeping demand higher than supply. Historically, we have not seen a crash in home prices without a recession, and with the economy firing on all cylinders (particularly in the California job market), it is unlikely my in-laws will see any price declines in the next few years.

It would be difficult for the economy to continue to grow without the housing market as a tailwind. According to the National Association of Home Builders, housing accounts for as much as 18% of our Gross Domestic Product (GDP). We get a slew of housing data out this week, so it will be interesting how this trend plays out.

Data deck for September 17 – September 21: