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Experts’ Insights: California Real Estate Outlook 2020

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Experts’ Insights: California Real Estate Outlook 2020
6 min. read

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Despite a forecast pointing to slowing economic growth, California’s economy in 2020 is still likely to outperform the nation’s economic trajectory. Moreover, UCLA economists expect real personal income to grow by 2.1% in the following months and average unemployment rates to reach 4.3%, a little higher than in October 2019 (3.9%), when they reached the lowest level since 1976.

But if growing wages and decreasing mortgage interest rates draw people to the Golden State, construction rates and soaring housing prices push them out. It’s especially the lower- and middle-income residents who are affected.

To find out more about California’s housing market and where it’s expected to go in 2020, we talked to experts from the California State University from Long Beach, Los Angeles, and Fullerton. Check out their insights below.

 

Laura Gonzalez
Associate Professor of Finance
California State University, Long Beach

In your opinion, what does the real estate market have in store for California in 2020?

If the Fed were to run monetary policy from a desert island with just one macroeconomic indicator, that would be the Purchasing Managers’ Index (PMI). PMI is the earliest of the monthly macroeconomic indicators and a forward measure of confidence in the manufacturing sector. We are currently at around 50, the borderline with economic contraction. However, the Fed is unlikely to cut interest rates until almost Thanksgiving, not to be accused of interfering with elections.

In general, and although the stock market keeps benefiting from tax reductions, the largest market is the bond market, which has been showing an inverted yield curve. This means that investors are expecting a downturn or economic contraction at some point in 2020 that will lead to a post-election fall in interest rates. What will trigger the contraction? There are several possibilities, such as fallouts from coronavirus until May or Brexit putting downward pressure on financial markets. Overall, the origin does not need to be in the US. For example, research results have been showing for some years that US banks are well-capitalized but EU banks are not.

Would you recommend buying or renting in the largest cities in California this year?

In general, it is not advisable to buy a property unless there is confidence about being able to keep it for at least 5 years. As we head towards a recession, the holding period to break-even when buying is likely to increase to at least 7 years.

When markets start turning bearish, the Fed lowers interest rates, which attracts home buyers. However, prices are not expected to decrease significantly given that supply is not likely to increase. Furthermore, the changes in tax policy are not encouraging home-ownership. Thus, it is likely that many proactive savers will continue being indifferent about buying vs. renting in the relatively pricey largest cities in California.

 

Daniel C. Lee
Professor of Real Estate
Department of Finance, Law and Real Estate
California State University, Los Angeles

In your opinion, what does the real estate market have in store for California in 2020?

California’s real estate market has gone up continuously since 2011. The real estate market depends on three large factors: population growth, income and job growth, and the mortgage interest rate. For California, all three factors have worked in favor of a very robust housing market. The unemployment rate is below the national average of under 4%, mortgage interest rates are historically low, and the job/income growth has also been phenomenal, led by high tech industries. This trend is likely to continue into 2020.

Southern California’s housing market was a magnet for Asian investors until China imposed a restriction on foreign cash outflow in 2017. Since then, the influx of Asian money into real estate noticeably slowed down. This is one factor contributing to a slowdown in the appreciation rate of the housing market especially in big cities with large Asian population. It includes Arcadia and San Marino near Los Angeles.

Would you recommend buying or renting in the largest cities in California this year?

The buying vs. renting decision depends largely on how long you plan to stay in the same location. Real estate transaction costs are so high that unless one stays in the same house for at least several years, buying makes no financial sense. On the other hand, if one plans to stay in the same location for a while, purchasing is not a bad option even at the current, seemingly elevated price level.

There is a caveat though. The new tax code limits the amount of local tax deductible from the federal tax return at $10,000. This provision renders house ownership in large cities in California much more expensive than before.

 

Jia Xie
Assistant Professor of Finance
California State University, Fullerton

In your opinion, what does the real estate market have in store for California in 2020?

While the mortgage rates are expected to go even lower in 2020, the population growth will still remain low, due to people moving out to other states with lower housing costs. The supply and demand of housing in California is going to be more balanced in 2020, and buyers will have more choices and negotiation power. With that being said, due to uncertainties in the economy, the presidential election and the trade war, there might be more motivated sellers in the market, causing some negative distortions in the market. But, in general, the housing market in California will still be balanced.

In Orange County, I expect houses below $1 million to still face a strong demand, with multiple potential buyers biding on a single house. On the other hand, houses above $1 million, especially those above $2 million, are expected to stay longer on the market and these sellers should be more flexible on price and other terms of the sale.

Would you recommend buying or renting in the largest cities in California this year?

If you expect to stay in a place for more than five years, buying is recommended. If you expect to move in less than five years, then renting is a better option. I do not think there are housing bubbles in large cities such as New York and Los Angeles as of now. The markets are healthy and balanced, in general.

 

Staying or leaving? Buying or renting? These are the dilemmas Californians have been struggling with for the past years, and that show no signs of clarifying in 2020. And with factors that add volatility to the market, like the trade wars and the impact of Brexit, the future might bring extra challenges for residents and legislators alike.

2 Comments

  • […] Source: Experts Insights: California Real Estate Outlook 2020 […]

  • George Kaloorian says:

    The opinions and observations of the commentators reflect their beliefs and political leanings. This reader, however, disagrees with them and comes to the following conclusions:

    1. Academics, especially those in California, have a negative view of the current policies rolled out of Washington. Well-known economists like Paul Krugman of NYU (and the panelists here) have been longing for an economic meltdown similar to 2008 and are profoundly saddened by the buoyancy and robustness of US economy since 2016. Unless we elect a socialist or communist in 2020, the economy is likely to remain strong.
    2. Tax cuts boosted the purchase power of American people and corporations. Money that was invested in foreign lands with more favorable tax incentives started to flow back to the US soil, thanks to the policies of the current administration. Housing is primarily fueled by the confidence of the American people and not by international players. American people benefited by the backflow of money since more of them got jobs, kept their jobs and got raises.

    3. While it is difficult to speculate how far home prices will climb, housing in California will continue to be a more desirable and dependable investment. House, after all, is first a dwelling and secondarily an investment. The doom and gloom prognosticators often neglect this reality.

    4. Sacramento has done its best to discourage corporations from doing business in California. According to a new study by Spectrum Local Solutions, companies are leaving California due to its “difficult business climate,” which only continues to worsen. The study claims that 660 different California-based companies have already moved their more than 765 facilities to other states. Northrop, Toyota, Beckman Coulter, Lockheed Martin, Fidelity National Financial, Lennox Health Products, Flour Corporation…The list goes on and on. Nevertheless, there is innovation happening in the state and the favorable air temperature continue to attract economic activity in California.

    In short, if you are starting out, there is no downside in scraping up your resources and investing in a house that you can afford. Tighten the belt for a while; California will not disappoint you. And, while you are doing this, support the election of positive, knowledgeable, selfless, action-oriented, sure-footed people to high offices.

    Also, vigorously reject any attempts to negate the benefits of Proposition 13 that has helped the population of California for at least one generation.

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