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Housing market: Will home prices drop in 2023 in California?

A house-price ridge has been overcome in the US and some of the most expensive areas in the country could be getting cheaper, California no exception.

Update:
A house-price ridge has been overcome in the US and some of the most expensive areas in the country could be getting cheaper, California no exception.
MIKE BLAKEREUTERS

The covid-19 pandemic was a great year for homeowners. Prices soared, encouraged by record-low interest rates. This was as true in California compared to any other state, despite having some of the highest average prices in the country even before 2020. According to Zillow, prices peaked at more than $771,000 in July of last year. Staggeringly for buyers, homes have increase by an average price of $210,000 since April 2018.

But a smidge of good news could be coming Californian home-buyers way. The average house price has dropped in the last year, falling 1.7% since April 2022 to stand at $728,134.

Home prices are likely to continue falling. The median cost of existing-homes in the country fell in February for the first time in more than ten years. Prices are expected to fall nationally by 5% with the bulk of the price falls to happen in expensive areas, affecting California greatly.

“We’re estimating about a 5% drop nationally,” says Rick Sharga, executive vice president of market intelligence at ATTOM Data.

A big shake-up could be underway on the Pacific coast. Investment bank Goldman Sachs advised clients in a January letter that four US cities will see a major boom-to-bust comparable to that experienced during the 2008 housing bubble. At that time, across the US home prices tanked around 27% according to the S&P CoreLogic Case-Shiller index leading to the Great Recession.

Two of these cities are in California; strategists from the bank forecast homes in San Jose and San Diego could lose about 25% of their value.

Instability with the FED and inflation likely to affect housing prices

These price reductions are in part a consequence of the higher interest rates encouraged by the Federal Reserve. Consistent rate increases, with another set for May, make it less encouraging to borrow money, a crucial aspect of home buying unless you are very rich.

Less people are buying houses, or are less willing to pay so much knowing their repayments will be larger. This is echoed in data provided by Zillow which shows more than half of homes in California being sold under their listed prices last year as well as existing-home sales being down 22.6% nationally on a year prior.