California home market loses $100B, what’s that mean for potential buyers?
California’s total housing market value has dropped $106 billion in the last year, according to numbers from Zillow. It comes at the same time the sales pace has dropped to a low not seen since the 2008 housing market crisis.
California housing market valuation
The new numbers show the California market is now valued at $10.8 trillion overall.
“It’s volume, not pricing,” Jeannine Savory, real estate agent and managing director at The Agency, told Straight Arrow News on Wednesday. “The number of transactions that we’re seeing, we haven’t seen this low of a sales volume since 1994 we’re essentially just doing a lot less transactions, meaning less buyers and less sellers are entering into contract and closing transactions.”
While California’s total valuation went down, the rest of the country went up by $862 billion. However, other major real estate market states also dropped, including Florida and Texas.
While those numbers may not impact home prices and sales, Savory said it can be a way to look at the impact on the overall economy.
“I think real estate is a huge driver of our economy, and we are going to start seeing the effect of this beyond the housing market,” Savory said. “Every transaction generates over 20 industries, as far as escrow, title, movers, lenders. Each one of those industries is compromised when you see this, this amount of volume taken out of the economy.”
Home affordability
Even with that drop, trying to buy a home in California is an uphill battle.
Housing affordability is just 15%, meaning only 15 out of every 100 people in the state can afford a median-priced home.
“Affordability is an issue all over the country,” Matt Battiata, CEO of the Battiata Real Estate Group, said to Straight Arrow News. “It’s definitely an issue in California, but I don’t think there’s a metropolitan area in the country, no matter where you live, where, especially first-time buyers, don’t feel that the market is very unaffordable and that homes are too expensive.”
The average price of a home in California now sits at more than $761,000.
“I think that we’ve hit an affordability crisis,” Savory said. “It’s just not attainable for buyers. The average income in California does not support the price of housing, and sellers are disincentivized to sell.”
What’s causing the problem?
Part of the affordability issue is that sellers have incentive to hold onto their properties.
“We have all these homeowners who would love to sell their homes, but they’ve got very low interest rates on their current mortgage, and so they’re not selling,” Battiata said.
The Federal Reserve dropped interest rates a quarter of a point Wednesday, which real estate agents said will help but at the end of the day, it’s just a quarter of a point.
“We’re not going to see them go back to 3%” Savory said. “That won’t fix our issue. It’ll put us right back where we are in the long term, right? That’s not the solution. It’s finding a rate that makes it to where it is affordable, again, maybe that’s in the four to five range, as well as changing the way we tax equity when a seller sells a home.”
The way the U.S. taxes equity hasn’t changed since the Clinton administration.
The 1997 Capital Gains Tax Exclusion allows for $250,000 for single taxpayers and $500,000 for married couples. In California, any capital gain is treated as regular income that’s subject to the nation’s highest progressive income tax.
Average home prices have nearly doubled since then.
“Raise it to at least a million dollars on your primary residence,” Battiata said. “It’s ridiculous that it’s still at 1997 levels. And you know, you would think our current president being a real estate guy, would want to do something like that. But unfortunately, hasn’t happened yet.”
President Donald Trump has floated the idea of removing all capital gains taxes from home sales but has not yet put that plan into action.
Fixing the problem
Both experts we spoke with said lowering interest rates will help but there’s more to be done.
“The government has to step in and incentivize developers to create affordable housing,” Battiata said. “And then another part of that is, the traditional way that homes are built is just too expensive.”
That’s especially true in California, where the average cost to build a home runs around $400 per square foot. That means building a 2,000 square foot house would cost $800,000.
The cost is making it tough on first time homebuyers. A recent study by the National Association of Realtors showed only 18% of first-time buyers believe now is a good time to buy.
“This is not the market to even try to buy in,” Savory said. “It just doesn’t make sense. I would wait, and that’s what we’re seeing. That’s what they’re doing. They’re waiting until it makes sense. I bought my first home when I was 22 in San Diego on just an average income. That is not an option, and there’s no point in people going broke to be a homeowner.”
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Ella Rae Greene, Editor In Chief
