California Housing Market Remains Strong, Headed For "Soft Landing"

Much like recent predictions of the Florida real estate market’s fate, the California housing market is cooling but will not experience a meltdown, according to an analysis prepared by a prominent state economist. The forecast, based on data from the California Association of Realtors and the Office of Federal Housing Enterprise Oversight, concludes that the housing market will remain strong but is headed for a “soft landing.”

Keitaro Matsuda, senior economist for Union Bank of California, states that while the California real estate market retains momentum, especially in inland communities, there are signs that the boom has peaked. Unsold inventory of single-family detached homes in the state grew from November 2004 to November 2005, while price appreciation has slowed.

Appreciation rates lessened in 2005 compared to 2004 for many communities in California, after some of the state’s markets experienced extraordinary price appreciations over the past year. Appreciation rates ranging from 45.9 percent (Atwater) to 79.5 percent (Delano) are on the high end, but by no means rare.

Meanwhile, markets that were touched by the boom earlier, such as the San Francisco Bay Area, Orange County, and San Diego, have slowed to modest annual increases of less than 10 percent. This changing of the guard in home price appreciation is narrowing the affordability gap between the coast and inland areas. Appreciation is finally normalizing in other markets that also experienced major booms, such as with Nevada, Hawaii and Arizona real estate.

“Home prices gained much upward momentum in heretofore subdued markets, including Arizona, Oregon, Washington, Idaho, and Utah in recent quarters. If anything, the housing booms both across the United States and in California are not ending, but spreading more broadly,” the report states.

Job growth has been fairly strong in California, the nation’s richest and most populous state, with employment increasing 1.3 percent in the state. The construction industry alone added 66,000 jobs in 2005, accounting for more than one-third of total jobs gained during the period. The Central Valley experienced the fastest employment growth, while new job creation slowed in the Inland Empire and Orange County.

The analysis concludes that the California housing market “bears little resemblance to the ‘bubble bursting’ scenario” as described by many industry analysts for months. The California market has proved to be more stable and resilient than previously thought, with home sales likely to decrease in 2006, but prices to remain steady. Analysts agree the state’s housing market is more like a “balloon” than a fragile real estate bubble waiting to burst.

“This balloon is not quite as full and buoyant as before, but is also less likely to burst from too much internal pressure. So we’re likely to witness a continued slowdown of the residential real estate market, but not a meltdown. Instead of a loud pop that so many analysts have warned us about, what we will hear in 2006 is the barely audible hiss of a deflating balloon,” Matsuda stated.