As the coronavirus pandemic began in 2020, there was an initial adverse effect on the California housing market. Sales went south, and fears of a housing market crash percolated. Recent data suggest, however, that the market has recovered in most parts of California.
Just take a look at these statistics from Mashvisor from September.
- Median Property Price: $843,751 (up 5.5% from August)
- Price per Square Foot: $465
- California Homes for Sale: 36,098 (down 31% from August)
- Average Days on Market: 71
- Price to Rent Ratio: 25
- Traditional Rental Income: $2,842 (up 5.1% from August)
- Traditional Cash on Cash Return: 2.2% (up 43% from August)
These numbers indicate good tidings for the California real estate market. After all, housing prices are going up, investors are getting increased rental revenue, and return on investment (ROI) is improving monthly.
Concurrently, California is in a seller’s market. The inventory is shrinking, and how long a house is for sale is going down. This trend is occurring throughout most of California. But how long will it last, and what else is in store for California in 2021?
With the coronavirus pandemic getting worse, wildfires, a new presidential administration, and who knows what else, California’s future looks particularly uncertain. For this reason, it’s necessary to consider these scenarios with both positive and negative assumptions.
California Home Prices Will Continue Rising
In addition to prices rising from August to September, the California Association of Realtors (CAR) reported that the median price of homes passed the $700k mark for the first time, growing 6.1% from July to August. This is up 14.5% since August 2019.
This growth, driven by low inventory and growing demand, will lead to home prices rising in 2021. Zillow predicts an increase of 5% by August 2021.
This is despite how coronavirus has changed the home shopping and buying process. The industry in California may be more prepared for dealing with coronavirus’s new reality, thanks to over eight months of practice.
Although, it makes sense to expect that areas affected by wildfires will experience a price drop.
Either way, the amount of time people are spending at home due to remote working, a trend that will likely carry over once the pandemic is finally over. This will increase home prices, assuming that the more you use something, the more valuable it becomes.
Low Mortgage Rates May Offset Higher Cost
Record-low mortgage rates also drive part of the price increase in homes. So while house prices are expected to increase, Fannie Mae predicts that mortgages rates may go down more in 2021. Fannie may expects annual rates of 3.2% by the end of 2020 and for rates to dip to 2l9% in 2021.
The California Real Estate Market Will See Home Sales Go Up
With prices climbing, mortgage rates falling, and coronavirus making a swift return, buyers may want to quickly buy new properties, fearing that the situation will turn for the worse. And with California’s eviction moratorium coming to an end on February 1, 2021, and no government stimulus coming in the foreseeable near future, the worsening coronavirus pandemic may also lead to an increase in depressed properties.
Low Inventory May See a Gradual Increase
C.A.R measures how many months it takes to sell all the houses on the market. This measurement bases the current sales prices on a metric called an unsold inventory index (UII). The UII dropped to 2.1 months in August, with the Southern California housing market experiencing the most significant negative trend (down 52.4% since the same time last year).
Wildfires played a significant part in this. And while there are fire prevention tips for landlords, there’s much less that a landlord can do about the pandemic, which is mostly to blame for slowdowns in general construction and home sales. Baby Boomers were expected to contribute a significant increase of homes to the real estate market, a phenomenon known as the silver tsunami, but this too may be delayed by the coronavirus pandemic, especially given that Baby Boomers are at greater risk of becoming infected.
The Seller’s Market is Here to Stay in California
When you put all the previous predictions together, they add up to a seller’s market that’s here to stay through 2021. It’s important to note that people’s relationship with the coronavirus pandemic has changed since it started, despite it significantly worsening.
California’s real estate professionals have adapted to the conditions of the virus, making it possible to conduct sales almost exclusively remotely. Additionally, as reported by The New York Times, several reputable sources such as the CDC and Pew Research have shown that mask-wearing is widely practiced across the United States.
Finally, while it’s a tragedy that appropriate mitigating steps have not been taken to deal with the pandemic, it’s forced many people to be more accepting of the risk of engaging in commonplace activities ranging from grocery to house shopping,
Home Insurance in California Will Get Pricier
While once the second-cheapest state for home insurance, wildfires will drive home insurance costs to go up. Many insurance companies have responded to the increase in claims filed by decreasing coverage and following through on non-renewals. Regulators will undoubtedly fight cost increases and reduced coverage, but that won’t change the trend of homeowners facing increased prices or having to find new policies.
Don’t Expect the California Housing Market to Crash in 2021
High demand in the face of rising prices and inventory shortages will keep the California real estate market from crashing. Remember, California’s pandemic experience has been among the worst in the country, and still, the housing market has survived.
2021 Will See Suburban and Rural Towns Gain Popularity
San Francisco and Bay Area living have been pricey for a while, so it stands to reason that many will look for more affordable housing elsewhere. Given the rise in remote working and many urban activities going dark during the pandemic, there’s also less keeping many people from making the move.
Sacramento is looking like a particularly tasty place to invest. Just look at these numbers from Mashviser:
- Median Property Price: $437,135
- Price per Square Foot: $280
- Price to Rent Ratio: 24
- Traditional Rental Income: $1,518
- Traditional Cash on Cash Return: 2.1%
However, some of the suburban and rural areas people move to may be out of state, so consider some of the hottest real estate markets of 2020 as the benefactors of your investment dollars. Also, keep in mind the states without property taxes in 2021.
Some of the Hottest California Real Estate Investment Opportunities of 2021
Here are some of the most promising areas in California based on Mashviser’s data.
- Median Property Price: $334,307
- Price per Square Foot: $182
- Price to Rent Ratio: 18
- Traditional Rental Income: $1,526
- Traditional Cash on Cash Return: 3.1%
#2. Cathedral City
- Median Property Price: $401,543
- Price per Square Foot: $223
- Price to Rent Ratio: 17
- Traditional Rental Income: $1,930
- Traditional Cash on Cash Return: 3%
- Median Property Price: $383,462
- Price per Square Foot: $181
- Price to Rent Ratio: 19
- Traditional Rental Income: $1,645
- Traditional Cash on Cash Return: 2.9%
- Median Property Price: $341,754
- Price per Square Foot: $215
- Price to Rent Ratio: 21
- Traditional Rental Income: $1,388
- Traditional Cash on Cash Return: 2.9%
#5. Chula Vista
- Median Property Price: $572,649
- Price per Square Foot: $361
- Price to Rent Ratio: 18
- Traditional Rental Income: $2,591
- Traditional Cash on Cash Return: 2.8%
A Not So Rosy Future
Many of CAR’s predictions are made with the assumption that the coronavirus pandemic will not worsen and that there won’t be an increase in distressed properties. Unfortunately, as collected by CNBC, the current consensus among epidemiologists is that the US is likely about to enter the most challenging part of the pandemic. And while the New York Times notes progress on a vaccine, ProPublica reports that most states are not prepared to distribute it.
CAR’s forecast shifts to a 9.8% drop in house sales and a 16.4% drop in median house prices in a worst-case scenario. This assumes a rise in foreclosures, no economic growth, and no federal stimulus plans. Irrespective of what happens, the mortgage rates will remain low, and CAR does not expect the economy to make a full recovery next year. However, prices for the top 20% of earners will likely continue to grow since this demographic is expected to continue to avoid the worst of the pandemic.
In the worst-case scenario, CAR expects bank-owned properties to go as high as 30%, as opposed to 5% in the rosier future. Although this is another investment opportunity for investors, particularly those practicing the buy, rehab, rent, refinance, repeat (BRRR) investment strategy.
Some factors that may contribute to the housing market not living up to the best predictions include:
The question of what record-breaking unemployment could mean for real estate investors is a big one. When people don’t have jobs, they’re more interested in holding on to what they already have rather than making a significant change, so it’s reasonable not to expect a substantial uptick in sales if unemployment goes up. Especially with the absence of government assistance.
With high unemployment comes high delinquency rates. When this happens, banks are more hesitant to lend due to increased losses. Delinquency is going down now, but if unemployment returns along with a worsening pandemic, expect stricter lending criteria.
People Saving More
As you can see in the chart below, people saved more money once the pandemic hit. They became laxer with their funds during the late spring, summer, and early fall, but these behaviors may return if the pandemic enters a worst-case scenario. For many, this practice will lead to more money to spend when conditions improve due to increased savings, rather than more frugal budgets due to depleted funds.
While the California real estate market is primarily affected by the pandemic and how the government handles it, demand for homes, low inventory, and low mortgage rates will keep the market from crashing. Additionally, real estate will remain a more stable environment for investors to park their money relative to the more volatile stock market. Finally, distressed properties will be an opportunity for growth for real estate investors.