How “real” are California’s home price gains? – Orange County Register
“Bubble Watch” explores trends that may indicate upcoming economic and/or real estate market problems.
Buzz: It’s time for a “real” debate: How long can California home price appreciation outpace rising inflation?
Source: My trusty spreadsheet looked at “real” house price appreciation – that is, gains in property values minus increases in the cost of living. This is a five-year incremental review from 1977, comparing changes in a California federal home price index and the consumer price index while taking a look at the Mortgage rate fluctuations (average Freddie Mac 30-year fixed rate).
It’s funny what the spike in the cost of living and the resulting spike in mortgage rates can do to the housing chatter.
Talk of favorable demographics and tough inventory shortages has seemingly been replaced by hopeful banter about real estate’s reputation as an inflation hedge.
Between 2017 and 2021, California homeowners enjoyed an average real gain of 5.6% per year, or an annual appreciation of 8.3% minus an inflation rate of 2.7%. But during this period, however, mortgage rates fell to less than 3%.
Let’s go back almost half a century to see the “real” history of Californian housing…
1977-1981: The build-up to the monumental spike in mortgage rates of this era has been hot for housing. The market saw a 10.2% annualized real house price appreciation as average annual gains of 21.2% outpaced extraordinary inflation rates of 11.1%. Loan rates rose to 16.6% from 8.9%.
1982-1986: Expensive mortgages and high inflation have had a delayed effect on real house prices depreciation 0.4% per year. Price gains of 5.5% were overshadowed by inflation of 5.9%. Cheaper money didn’t help much, with rates falling to 10.2%.
1987-1991: The housing boom of the late 1980s in California resulted in real house price appreciation of 7.5% per year – prices up 12.3% against inflation rates of 4.8 %. Mortgages fell to 9.3%.
1992-1996: Too many people forget the bad economy of the mid-1990s. Real house prices fell at an annual rate of 6.2% – 2.5% annual losses compounded by inflation rates of 3.7%. Mortgages fell to 7.8%.
1997-2001: A rebound with a real appreciation in house prices of 5.8% per year. Prices increased by 8.8% against inflation rates of 3%. Mortgages fell to 7%.
2002-2006: The rebound turned into a big bubble with a real house price appreciation of 15.5% — prices increased by 18.7% against inflation of 3.2%. Mortgages fell to 6.4%.
2007-2011: The bubble burst in the Great Recession. Price declines of 7.9% per year and inflation rates of 2.9% resulted in a real depreciation of 10.8% during this period. Mortgages fell to 4.5%.
2012-2016: Finally, the rebound has been maintained, causing real house prices to appreciate by 4.6% per year, or gains of 6.5% against 1.9% inflation. Mortgages fell to 3.7%. This set the stage for the strange pandemic-era housing market.
On a scale of zero bubble (no bubble here) to five bubble (five alarm warning)… FOUR BUBBLES!
Since 1977, home appreciation in California has exceeded increases in the cost of living two-thirds of the time. The average year saw real house price appreciation of 2.7%, or gains of 6.2% minus inflation rates of 3.5%.
This balance sheet is not a guarantee. Still, it offers some comfort to people betting on the inflation-hedge powers of real estate after perhaps overpaying during the recent home-buying spree.
Look, inflation is usually the byproduct of an overheated economy. Hot economic cycles typically generate lots of jobs and big paychecks. These opportunities help in making high mortgage payments.
But remember, inflation also has a bad habit of driving up mortgage rates. The 30-year average rate is already nearly double its January 2021 low of 2.65%.
And consider the average 4.7% increase in the cost of living last year, which exceeded 3% in mortgage rates. Inflation last exceeded financing costs in 1979.
Jonathan Lansner is a business columnist for the Southern California News Group. He can be contacted at [email protected]