Mobility Magazine of Worldwide ERC, December 2015
By Craig Gilbert, CRP, SRA, RAC Founding Member
Southern California consists of eight counties, from Santa Barbara in the north to San Diego in the south, and from the Pacific Ocean on the west to Nevada and Arizona on the east. This report focuses on the five most prominent counties: Los Angeles, Orange, San Diego, Riverside, and San Bernardino. These are also the five most populous counties in the state, with a total combined population of almost 21 million.
Housing prices increased throughout Southern California from approximately 1997 through mid-2006. The market peaked at varying times geographically and by price range. This peak was followed by a steep decline in prices. The credit crisis of 2008 and lack of credit for potential homebuyers, together with a weakened economic base during the Great Recession, led to a high number of foreclosures and short sales. The Inland Empire (Riverside and San Bernardino counties) was among the hardest hit and experienced the greatest percentage of decline in prices. No areas of Southern California were completely immune from economic problems. Some of the older, lower-priced, lower-income coastal areas also experienced significant price depreciation compared to more affluent areas nearby. Housing prices bottomed between 2009 and 2011, differing by geographic location and price range. The coastal and higher-income areas fared better than the Inland Empire and the lower-income and lower-priced areas. The coastal areas had a lower percentage of decline and recovered more quickly. This was related primarily to employment growth and stability. All counties experienced price appreciation from 2012–13 to 2015. Current prices are still below previous market peak prices, and none of the counties in Southern California has yet achieved median prices equal to or higher than previous market highs.
The annual percentage of change in median housing prices for all counties peaked from 2013 to 2014, with annual increases between 10.3 percent in Orange County and 19.2 percent in San Bernardino County. However, although housing prices have continued to appreciate, the rate of appreciation has decelerated significantly in all counties, from 0.5 percent in San Diego County to 7.8 percent in San Bernardino County for the most recent period.
The California Association of Realtors has been computing a housing affordability index (HAI) for all counties since 1991. The HAI, which represents the percentage of households that can afford to purchase the median-priced home based on traditional assumptions, is a function of median price, income, down payment, mortgage rates, and current underwriting standards.
The least affordable period for all areas (2005–2007) was just before the market peaked. The indices ranged from 8 percent in San Diego County to 19 percent in San Bernardino County. The most affordable period for all areas (2011–2012) occurred just as housing prices bottomed. The indices ranged from 39 percent in Orange County to 78 percent in San Bernardino County. The indices have subsequently decreased significantly and currently range from 21 percent in Orange County to 56 percent in San Bernardino County. All areas have been in a transition from more affordable to less affordable, which is primarily a function of price appreciation.
The most significant economic factor has been a substantial improvement in the economic base. There have been positive changes in both employment and unemployment over the past five years, according to the U.S. Department of Labor. Total number of employed in these five Southern California counties increased by 11 percent. The unemployment rates have declined by approximately 50 percent as employment simultaneously increased. The official unemployment rate in the Los Angeles–Orange County metro area declined from 12.3 percent to 6.4 percent, in the Inland Empire from 13.8 percent to 6.8 percent, and San Diego from 11.1 percent to 5.1 percent.
Household income, however, has been relatively stagnant in most areas, with some exceptions. This factor is quite significant with regard to direction and magnitude of future housing prices. A number of corporations in California have been moving to lower-cost areas of the U.S. or offshoring work, in part due to unaffordable housing and the high cost of living and doing business in the state. Toyota Motor Co., for example, is in the process of moving its U.S. headquarters from Torrance (Los Angeles County) to Plano, Texas, along with about 3,000 medium- to high-value-added marketing and finance jobs.
Mortgage rates were at historic lows around the fourth quarter of 2012 (about 3.3 percent), increased slightly through the third quarter of 2013 (about 4.5 percent), decreased through the second quarter of 2015 (about 3.7 percent), and have subsequently increased slightly to about 4.0 percent. Rates will likely remain within 50 basis points of current levels for the near future. This is a favorable factor for buyers and sellers. The favorable year-round climate also has historically contributed to housing demand and desirability of Southern California.
Housing at or near the median price, and those not more than about 20 percent above the median, will likely continue to appreciate in the foreseeable future in most areas. Higher-priced properties, primarily about 25 percent or more above median, are likely to remain stable at best, with a more probable decrease in price due to current and impending oversupply.
The rate of price appreciation has recently decelerated due to a decline in affordability, especially in the higher-priced areas. Housing inventory of 2.5 months (San Diego) suggests a slightly undersupplied market. Housing supply and demand are more balanced in Los Angeles, Orange, and Riverside counties, at 3.3 to 3.9 months’ supply. San Bernardino appears to be moving from a balanced to an oversupplied market at 4.4 months’ inventory. The availability of mortgage financing is a significant factor in the mortgage market. Underwriting standards are quite tight to avoid the pitfalls that led to the 2008 credit crisis.
Craig Gilbert, CRP, SRA, is a professional appraiser and real estate consultant based in Huntington Beach, California, and a co-founder of RAC (Relocation Appraisers and Consultants). He can be reached at +1 714 847 8087 or firstname.lastname@example.org.