Is Coastal California housing looking frothy?

House prices are high in Coastal California causing sales to wane and many to question whether or not we pushed prices up too high.

kool_aid_man_wavingIn previous real estate cycles, when house prices began to rise, people became excited about participating in the real estate market, and the buying activity would sometimes become frenzied. This desire for real estate was enabled by lenders providing alternative financing products, products that later proved disastrous.

In this cycle both potential buyers and lenders behave differently. At this point in previous cycles, affordability products proliferated, and house prices rose rapidly. With affordability products effectively banned this cycle, the only thing pushing house prices higher is record low mortgage rates. As prices rise, the buyer pool gets thinner and thinner, so despite an improving job market, people aren’t buying more homes this year than last.

If mortgage rates are at record lows and if more people are going back to work, why aren’t more homes selling?

Are prices too high?


Prices are high. Numerous articles over the last year or two reported on new peak prices across most of Coastal California. Our markets respond the best to record low mortgage rates. The added affordability actually improved the rating of the Orange County housing market. Despite the high prices, if you translate that into a mortgage and a cost of ownership, it’s still cheaper to own than to rent in many areas.


Prices and rents are both rising together and both at approximately the same rate. It is classic textbook housing market behavior — albeit juiced by low rates.

Low rates push rental parity almost straight up, which is why the high prices look undervalued.


Resale home price appreciation and rental rate growth are both within historic norms.


The low cost of ownership drives the high rating.


Coastal California is very expensive, but unfortunately, so are the rents. The two costs are in balance with a slight edge toward home ownership.

The Most and Least Affordable Places to Buy Your First Home

By Wei Lu, Victoria Stilwell, and Christopher Cannon, July 28, 2016

Being a first-time homebuyer often comes with a lot of advice. Make sure you can afford your mortgage. Pick a real estate agent who knows the market. Scrape together a good-sized down payment.

We’ve got one more to add to the list: Don’t buy out West.

Bloomberg News analyzed the 100 largest U.S. metropolitan areas to determine the least and most affordable places for people between ages 25 and 44, a proxy for those in their prime home-buying years. We ranked places by the difference between the median household income for that age group and the estimated minimum earnings needed to purchase a single-family home in the region as of 2015.

Affordability Gap

There were six locations that registered an affordability gap—where the minimum salary needed to afford the mortgage outstripped actual income. Urban Honolulu took the top spot, with the following five regions all located in California.


It won’t surprise many of us to find that California dominates the list of the most expensive places to live.

Swaths of the Midwest offer first-timers the best deal, the Bloomberg Housing Affordability Index shows. In the region of Des Moines, Iowa, the estimated monthly mortgage is just $613, implying an annual income of just over $22,000 needed to make payments. That compares with the area’s median household income of about $72,200 last year, making it the most affordable for a would-be buyer.

I grew up where housing was affordable. In the Midwest homeownership rates are very high because it’s so much cheaper than renting that only those with the greatest need for mobility would consider renting. Apparently, there is plenty of housing available to meet the needs of those who live there.coastal_california

Pittsburgh and Baltimore also ranked among the most reasonable, followed by the regions near Minneapolis; Kansas City, Missouri; and Omaha, Nebraska—three other Midwestern cities.

“We really see this vastly different story about the prospects for homeownership if you’re a young household,” said Ralph McLaughlin, chief economist at real-estate search engine Trulia. The outlook is “really great if you’re in the middle part of the country, and not-so-great if you’re on the western or eastern extremes.”

It’s the same even within the state of California. If you live and work in the east half of the state, you generally enjoy abundant and inexpensive housing of high quality. If you live in the western half of California, you endure scarce and expensive housing of diminishing quality.

Tight supply is one of the primary culprits behind affordability problems in certain U.S. regions. Inventories of available homes across the nation are tight, and entry-level properties especially are in short supply.

In areas such as California, “really it’s a combination of strong job growth and little new housing supply” that’s led to an affordability crunch, McLaughlin said. “If you want to find a home it’s going to be difficult, and even if you do find one, it’s going to be expensive.”

That about sums up California.dude_you_paid_too_much

Looking more broadly, there are still several economic forces working in first-time buyers’ favor. Borrowing costs are declining, joblessness is improving and household formation is finally starting to rise, which could set the stage for first-time buyers to jump into the market.

Eventually, the market is bound to improve. The media reports the 9-year highs in everything real estate, but they make less of the fact that the last 10 years witnessed 7 of the worst years in housing market history for both sales and prices. The market still sucks by most historical benchmarks. There is plenty of room for improvement, certainly on the sales volume side.

“If you’re in the Midwest, it’s almost a no-brainer in those markets—you wouldn’t have to be in your home for longer than about two or three years for it to be a better deal than renting,” he said. “If you’re in parts of the costly coasts, maybe think twice.”

Always good advice.


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