Two years ago, Mike Saavedra moved to Southern California, equipped with a new high-paying healthcare job and a plan. The former Arizona resident would rent by the beach while becoming familiar with neighborhoods where he may want to purchase a house.
But a few months after starting his search, the Manhattan Beach renter cut it off. It was, he decided, the wrong time to buy.
“I definitely think home prices are slightly overinflated,” Saavedra, 48, said. And he thinks there’s a good chance they’ll fall. “I would kind of like to wait and see if that happens.”
After nearly seven years of sometimes fevered price hikes, the Southern California housing market has slowed markedly in recent months. Sales have fallen from year-ago levels and price appreciation has shrunk.
In Los Angeles and Orange counties, year-over-year price increases peaked at 8.2% in April and have declined every month since. In October, home prices in those counties rose 5.5% over the previous year, according to the latest available data from the closely watched S&P CoreLogic Case-Shiller index.
A big factor, according to experts, is that many would-be buyers are increasingly priced out. But real estate agents also say a growing number of people who could buy, like Saavedra, have decided they don’t want to pull the trigger at the top.
If prices aren’t rising as much, or at all, it takes some of the edge off the psychology that has helped drive home-buying in Southern California for decades. Many renters exist in a constant state of anxiety that the home-equity gravy train will soon pass them by. That might drive them to stretch to make a down payment or to buy a suboptimal property.
In Los Angeles, people are particularly prone to “suspend disbelief” about what a home is truly worth, said Yale University professor Robert J. Shiller, a Nobel Prize-winning economist who has studied buyer psychology and co-founded the Case-Shiller index. That makes the area vulnerable to booms and busts: “You justify it: This is Los Angeles — the most glamorous city in the world.”
Buyer hesitancy is fed in part by uncertainty on Wall Street and in Washington, as well as memories of last decade’s brutal housing collapse, when as many as 10 million Americans lost their homes and prices plunged in the L.A. area by nearly 30% in one year.
A belief that the price slowdown will lead to a price drop could become a self-fulfilling prophecy, experts said.
“It’s a feedback loop,” said Shiller. “Excitement can’t last forever — and that’s what drives a boom.”
Shiller said the frothiness during this housing expansion is far less than the go-go days of last decade. But prices still could have overshot, he said. And several surveys confirm that would-be buyers have turned more pessimistic, even if they don’t think the sky is falling.
In Fannie Mae’s December home-buying sentiment survey, only 52% of respondents nationwide said now was a good time to buy a home — a low for a survey that started in 2010. The 14% share of people who think prices will decline in the next 12 months was the highest since 2012, when the market was just beginning to recover.
An ongoing Shiller survey of recent Orange County home buyers, started in 2003, also shows an increasingly dour outlook. The share of people who associate buying a home with “a great deal of risk” has climbed to its highest level since the survey began, according to Anne Thompson, an MIT research analyst who helps conduct the study.
At the same time, local buyers are expecting even less price appreciation over a 10-year period than they were at the height of the downturn.
“There has been this anticipation of another 2008” among some home shoppers, said Mark Cianciulli, a Los Angeles real estate agent. “They are expecting that to happen again, or they are at least suspecting a less severe version.”
Many who are struggling to afford a home in California would welcome a significant price drop, if it wasn’t accompanied by an economic collapse. But experts say such a prospect is unlikely, given that homes don’t appear to be in oversupply. The state has a well-documented housing shortage.
In California, an average of 91,000 homes were built per year during the current housing upswing, according to data from the Construction Industry Research Board. That compares with a yearly average of 158,000 during the boom of the late 1990s to mid-2000s. In the 1980s housing expansion, construction averaged 267,000 units a year.
Other factors argue against a crash. The California economy is still posting robust job growth, despite the shadow of a trade war with China, which has become a big market for goods produced in the state. Whereas last decade’s housing boom and bust were driven by questionable lending, loan standards are much tighter today. And as much as prices have risen, the jump hasn’t been as sharp as it was in the early to mid-2000s.
“We don’t have a debt problem. We don’t have an overbuilding problem. We don’t have an economic problem — prices are not going to fall,” said Christopher Thornberg, founding partner of Beacon Economics, who called last decade’s housing crash.
Of course, predictions are always a fraught business. And while the vast majority of economists don’t expect a recession in 2019, some are nonetheless pessimistic. David Rosenberg, chief economist with Gluskin Sheff + Associates Inc., cited uncertainty, slowing growth overseas and the effects of tighter monetary policy by the Fed in predicting a downbeat 2019.
“The message here is to brace yourself for a rough year,” he said. “If it’s not a recession outright, it will be very close.”
Saavedra said that during his brief home search, he was surprised to discover how little there was to buy on his six-figure paycheck, compared with where he last owned a home in Arizona. He also thinks uncertainty, higher mortgage rates and other factors will increasingly weigh on the market.
If he was convinced prices would keep shooting upward, Saavedra said, he might stretch and tap into stocks or savings for a home in one of the South Bay beach cities, where the median price ranges from the low $1- million level to more than $2 million. Or buy something in a more affordable community, even if it wasn’t his first choice.