There's something unusual happening with California’s home values right now
Interest rates have been in a holding pattern around the 7% range, and property values are not dropping. In fact, they are increasing in some areas. Why, and more importantly, do we think this will continue to be the pattern into the second half of the year? Let’s look at some of the data.
Predicting that home values will drop due to soaring interest rates seems reasonable, but the opposite is happening in the Golden State. And they aren't just holding steady; they're going up. Why is California's market defying gravity when higher borrowing costs typically cool down home appreciation? There are some unique factors keeping the state’s property values up that we’ve never experienced as the cost of borrowing ticks up.
Buyers expected increased housing costs to add pressure to home values, potentially bringing prices down. ‘If enough buyers can’t afford to borrow, homes won’t sell, forcing sellers to lower prices’. Right? Unfortunately, this hasn't been the case. There are still plenty of buyers.
Higher interest rates haven’t decreased the pool of buyers in a state with, among other factors, decades of pent-up demand (people want to buy but don't have a home to buy) and an undersupply of homes. After 2009, new home construction stopped entirely in California. During this time, homeowners were defaulting on mortgages. 40% of our homes on the market were in default, grinding new construction to a halt. Even before 2009, California hadn’t built enough homes to meet the housing demand for decades. This long-term undersupply of residential construction created a bottleneck that squeezed the housing market, resulting in supply issues.
Add in the impact of 2020 when the state, the country, and the world was facing one unprecedented crisis after another. Each crisis negatively impacted residential construction in some way, further compounding the supply issue. Pandemic-related job losses made it tougher to build homes, while building material shortages made it more expensive to build what homes they could. We’re just now starting to see builders coming back.
An unexpected impact of the high rates on home prices comes from a simple reluctance to move. Homeowners who might have sold their homes to upgrade for a growing family or downsize as empty nesters are choosing to stay put, further limiting the supply of homes for sale. Typically people sell every 7 to 10 years – but not anymore. It’s an understandable reluctance as the financial burden of a new, more expensive mortgage doesn’t make sense. Even if you’re downsizing, because of the high cost of money, you may not be saving any money. If a homeowner has the option, the decision to stay put, with their current low mortgage rate, is easy.
It’s not as if no homes are being sold in our current market. I’m having one of my best years so far… No matter what the market conditions are, people will always need to move. Some need to sell and relocate for jobs or sell due to divorce, sickness, death or a change in their finances. This group of sellers are moving due to life circumstances, regardless of current home values or interest rates. When that happens, I’m here to help you.
In our region, the relationship between interest rates, housing supply, and home values is complex and full of unexpected twists and turns. Despite high interest rates, home values are holding steady, if not increasing, thanks to low supply. Remember, the market is always evolving. External economic factors, policy changes, or shifts in consumer sentiment could all play a role in reshaping the current landscape. Staying informed is key to navigating the housing market for both buyers and sellers; especially if you’re planning to make a move in 2024.
If you have questions, I have answers. Let’s talk – call me anytime!
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