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Proprietary Data Insights Top California Headquartered Stock Searches This Month
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Do You Love Or Hate California? Of all the states, California might be the most intriguing. You either love it or hate it. But you can’t live without it. From the latest tech to fruits and vegetables to entertainment, the Golden State exports many of life’s necessities to the rest of America and the world. Today’s installment of The Juice works whether you love or hate California. Because it’s truly feast or famine on the left coast. Particularly on housing, which we’ll get to in a moment. But first… Gas Prices Nationally, the average price of a gallon of gas stands at $3.91. While up from $3.74 last month and $3.27 a year ago, the increase is nothing compared to what’s happening in CA.
To make meaning from that, consider the cost to fill up the 14-gallon tank on a typical sedan.
It costs nearly $27 more today than it did last year to gas up a run of the mill car in California. Nationally, it’s closer to a $9 difference. Nothing but famine. Next, we look to housing, where an interesting scenario could play out in California over the next few years. A scenario of feast or famine, depending on your perspective. |
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Housing |
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California Could Crash |
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Key Takeaways:
In that chart from the real estate journal firsttuesday, there’s more famine for California. This time on housing. Long story short, the analysis predicts housing prices in California will revert to the mean within the next few years. This implies a 40% drop from May 2022 levels, decreasing the value of a $1 million home to a paltry $600,000. According to firsttuesday, this shouldn’t come as a shock. It’s merely history repeating itself: After the bliss of a decade of climbing home values, this level of decline may sound absurd. But for a recent example, just cast your vision back a little further to the aftermath of the Millennium Boom. From their peak in 2006 to their bottom in 2009, average California home values contracted a whopping 45%. While rising interest rates have contributed to the recent decline in home prices, firsttuesday argues – using this history as a guide – real estate’s headed south irrespective of interest rates and related factors, such as government intervention in the economy. As The Juice explained last month, a 20% national decline in housing prices wouldn’t even bring us close to the wreckage we experienced in 2008, thanks to record amounts of home equity and a majority of homeowners locked into sub-5% and sub-4% mortgage interest rates. A 40% decline. As the graph shows, that would put us in a position far more frightening than what came from the 2008 crash. One Person’s Famine Is Another Person’s Feast However, it’s not all bad news. If you’re one of the many people priced out of today’s housing market, this could be welcome news. Especially in California. A few weeks ago, The Juice detailed the stark reality. Recent relatively small drops in housing prices in expensive markets, such as Los Angeles, do little, if anything for affordability, particularly with interest rates so high: Take Black Knight’s estimate of a 4.3% decrease in prices in LA and that $1.1 million properly now costs $1.053 million. We’ll say the seller is antsy and lowers the asking price to a psychologically alluring $999,999. Assuming this doesn’t trigger a bidding war, with 10% down you’d be on the hook for a $900,000 loan. At a 5% interest rate, your monthly payment would be $4,831. However, as of the end of August, interest rates are back up to 6%. This takes your monthly payment to $5,393, which is actually higher than it was before this recent cooldown. Now, with interest rates closer to 7% (again!) the monthly payment on that $900,000 loan becomes $5,988. However, if that $1 million home we used in our hypothetical becomes $600,000, your 10% down payment drops to $60,000. Your subsequent 30-year loan of $540,000 generates a monthly payment of $3,593, even at a 7% interest rate. Even though that’s a hefty monthly payment (you still need to make close to $150,000 a year to comfortably afford that housing payment), it opens the doors of affordability to more aspiring homeowners presently priced out of the market. If interest rates cool off in the next few years to, say, 4%, the monthly payment on that $600,000 home drops to a truly affordable and super enticing $2,578.
The Bottom Line: We’re merely outlining a cycle here. Housing prices are dropping and will likely continue to drop nationally and in California. As more people compete for more affordable homes at bargain prices, they’ll contribute to another up-cycle. Likely one that results in the bidding wars and price appreciation we’ve become accustomed to, especially in California. A virtuous cycle for some. A vicious one for others. Feast or famine indeed. |
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