Like in much of the rest of the country, California real estate has changed quite a bit since March 2022. However, it hasn’t changed as much as it has in other parts of the country. While home sales have dropped, for instance, Sharestates Regional Sales Director for the West Coast Region Nick Roberson says the California real estate marketing is beginning to flatten.
“There’s still a shortage of housing supply,” he said. “I wouldn’t call the market unstable, but the days on market have extended.”
Three months ago, many homes in California’s hottest markets would have sold in days or hours for well over market price. Today, it takes longer because interest rates are going up and people have a wait-and-see mentality regarding prices because the anticipation is that prices will come down. Still, it’s a good market for investors.
Homes Sales Are Low While Rents Are High
In May, home sales dropped to their lowest in two years. And rents in California are higher than anywhere else on the Continental U.S., second only to Hawaii.
According to CoreLogic, home prices are not expected to decline in California like in other places. They will continue to rise, albeit at a slower pace. In other western states, however, home prices are expected to decline. The top markets where home prices are expected to decline include Bremerton-Silverdale, Washington; Bellingham, Washington; Boise City, Idaho; Tacoma-Lakewood, Washington; and Olympia-Tumwater, Washington.
Norada reports that nine out of 10 California counties saw an increase in median home prices from a year ago. Santa Barbara led the way in year-over-year gains at 33.7 percent.
Roberson notes that the markets that were hot three months ago are still hot markets for real estate investors. “We’re seeing a lot of activity in the Central Valley,” he said, “from Sacramento down to Bakersfield.”
Another area where builders are looking for new construction is in the Chowchilla and Joshua Tree area, Roberson said. Three months ago, the funding deals he saw the most were for luxury high-end homes, but now the tide has turned more toward modest, affordable homes in the smaller towns like Chowchilla.
California Real Estate is Still Dictated by Supply and Demand
California is knee-deep in a supply-and-demand tug of war. The sentiment among buyers is that now is a better time to sell a home than to buy a home. In fact, a California Association of Realtors poll shows that 60 percent of survey respondents said it was a good time to sell while only 16 percent said it’s a good time to buy. The tide is turning, however.
In the same survey, 43 percent said it will be easier to find a home in the next 12 months, versus 57 percent who disagree. Survey respondents are also expecting home prices to rise.
Rising interest rates are putting downward pressure on sales. Real estate was already unaffordable for many would-be home buyers. With prices expected to rise some more and interest rates adding on top of the cost of buying a home, this will lead to new opportunities in rentals for many investors.
According to Auction.com, the best places in California for buy-and-hold investment strategies are:
- Los Angeles County
- Orange County
- San Bernardino County
One of the benefits of investing in Los Angeles County is the job market is growing. Five thousand new jobs are added every month. Los Angeles is also a popular vacation destination, so beach houses and short-term rentals are a hot market. In Orange County, unemployment is low and housing inventory is showing a 13 percent year-over-year growth. In San Bernandino, rents are rising at 5 percent per year.
New housing starts in California are 49.9 percent higher in 2022 than in the previous 120 months. That’s following a new record last year since 2006. More than 70 percent of new housing starts this year were single-family homes. Still, the number of new starts and new permits are down from February and March of this year. That indicates that the economy may be slowing down new construction. Even then, new permits went up from 149,000 to 155,800 from May to June as new starts went down from 143,000 to 142,800.
Roberson confirms that ground-up construction is hot right now as his office is seeing a lot of requests from developers. Still, he says fix-and-flips are as hot as ever.
How the California Economy Impacts the Real Estate Market Pivot
California real estate investors should be cautious navigating the pivoting market but search for deals that promise the highest return on investment. It’s a competitive market that is shifting from sellers to buyers. That can be good for those investors who are patient and willing to wait for the right deals.
The latest information on international investors in the California real estate market is that they are sitting out. That means less competition for local investors, and less competition means more opportunities.
According to Bay Area News Group, the number of resident and non-resident foreign buyers has dipped to its lowest in over a decade. There are several reasons for that. Higher real estate prices, rising interest rates, and the pandemic. Because foreigners are more reluctant to travel, that has slowed down foreign investors in the real estate market all over the U.S., but especially in California.
Roberson said he’s getting calls from foreign nationals, but they don’t have cash and it’s difficult for them to get loans. Cash buyers have also pulled back from the market, making it easier for retail buyers to get the home they want.
Rents are expected to continue increasing. In fact, because of inflation, California landlords can raise rents up to 10 percent. According to the Los Angeles Times, the antidote to that increase would be a recession. Landlords don’t want to increase rents during extremely hard times.
The question Roberson gets the most is about interest rates. “They ask, ‘how are the rates today?’” he said. His response: “They’re great.” No one has a time-traveling DeLorean in their garage. “Better take advantage of today’s interest rates because tomorrow you’re going to want a DeLorean.”
For the time being, it looks like the best opportunities for real estate investors are in rentals—single-family and multi-family—with fix-and-flips still a profitable option even if investors must look harder for the right deals. At the end of the day, investors must know their markets well and keep an eye on the factors that are pivoting the market from a seller’s market to a buyer’s market.
“Good investors don’t do too bad in a recessionary environment,” Roberson said. “That’s when they make money. Pick the right properties, perform your cost feasibility studies, and make sure the deal makes sense.”
For more information, contact Nick Roberson.