California Housing Market Losing Momentum

As the focal point of the 2007 bubble burst, it was uncomfortable to see California reemerge as the market with the quickest rise in home prices. While the gains in property values were impressive nationwide, markets throughout the northern part of the state and the LA metro region in particular were monumental. Both Los Angeles and Orange Counties say a rise in prices that were so sharp they left the impression that a second bubble wasn’t entirely out of the question.

However, according to a recent story from the Los Angeles Times, it appears that the momentum in home sales may at least be temporarily slowing. As the report outlines, local buyers are significantly less enthused than during peak buying periods throughout 2013. Broadly speaking, January sales in the six-county Southland region were the lowest recorded since January of the year prior. Home prices dropped a full 3.8% against those in December, a trend that seems largely attributable to the newfound disinterest in home purchases.

Much of this seems tied to the deadening effect of inflated home prices. Genuine buyer interest in and of itself seems persistent, but as the Los Angeles Times report indicates, some buyers are being outright choked from the market. Affordability has been a major consideration for local buyers, with the median home price resting around $380,000 despite the slight decrease in local property values. This sort of “teetering” phenomenon across the southern California housing market is compounded by the fact that many of the recent purchases seem to originate from investors and not prospective residents.

The ultimate effect seems to be a broad exclusion of potential buyers from the California housing market. The ultimate impact of this remains to be seen – it’s feasible that the market could experience potential stability down the line if buyers shy away for too long. Fears of a second bubble was one primary reasons for broad hesitancy in the buyer’s market, and consumer confidence still remains fragile. Anything that only encourages buyer skepticism clouds the future of the local housing market.

Is There a Silver Lining?

Ultimately, yes.

One of the positive consequences of a decrease in purchase momentum is that housing prices may dip enough for certain buyers to return to the table. There’s the potential for a sort of uneven drop-rise pattern in the California housing market where home prices decrease due to purchase slowdown, and increase again once they become affordable to enough interested buyers. While this risks unevenness, it does stave off the likelihood of a bubble in the immediate future.

All this being said, it seems the forecast for the housing market throughout Los Angeles and Orange County hinges on whether or not purchases arrive from prospective residents or from hedge funds and financial orchestrators. It’s easy for economic trends to sustain if they come from more organic motivators (consumer confidence, resident property demand), but if they’re orchestrated by outside forces, then stability could be more likely.
Photo Credit: Thomas Hawk

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.