Rising Interest Rates Driving A Housing Market ‘Pause’ in California’s Major Metros; But No Significant Market Correction in Sight, Says Leading Forecast

Job Growth Continues Its Slowdown Across State’s Regions; Consumer Spending Well Above Trend In All Metros

The housing markets in California’s major metropolitan regions continue to show signs of slowing although a leading forecast says significant price declines are still nowhere in sight. Beacon Economics does not have a housing ‘correction’ in its current forecast and, according to an analysis the firm released today, expects nominal prices in the state’s metro areas to trend sideways into 2023.

“There is a big difference between a housing pause and a housing bust,” said Taner Osman, Research Manager at Beacon Economics and one of the report authors. “While price growth has slowed considerably, and even dropped in some markets, there are few signs of structural weakness in the housing market that would suggest a major correction, and it’s likely that prices will start to pick up when interest rates begin to decline.”

Across regions, weakness in the housing market is being driven by a slowdown in sales, which in turn, is being driven by rising interest rates. According to the analysis, even after accounting for local inflation, the real cost of owning a home in California’s major metros has risen between 23.1% and 25% since the start of the year.

These mounting carrying costs caused home sales to fall substantially during the first half of 2022 across major market segments in Los Angeles (12.1% decline in existing home sales, 19.3% decline in new home sales), San Francisco (11.4% decline in existing home sales, 22.6% decline in new home sales), the South Bay/San Jose (24.2% decline in existing home sales, 38.9% decline in new home sales), San Diego (16% decline in existing home sales, 25.9% decline in new home sales), and the East Bay/Oakland (19.8% decline in existing home sales, 22.6% decline in new home sales).

“A market response to changes in interest rates is normal and the slowing pace of sales is part of that process,” said Osman. Notably, over the same period (first half of 2022), home prices increased between 10.6% and 20.7% in these metro areas.

The new outlook also examines employment in the state’s major metros and (as reported last quarter) forecasts job growth to continue slowing as the available labor pool dwindles. Of the metro areas studied, only San Diego has surpassed its pre-pandemic employment level although the other regions are close and expected to reach that mark in 2023. Moreover, the unemployment rates in all regions except Los Angeles continue to be abnormally low from a historical standpoint. At 5%, Los Angeles’s rate is approaching pre-pandemic levels and at the lower end of what is typical for the area.

Consumer spending in each metro area has rebounded substantially over their historic trend. However, the new outlook estimates that taxable sales remain lower than they would have been if the pandemic had never occurred in both San Francisco and the East Bay/Oakland.