According to the American Housing Council, the average home price in the United States has risen by more than 200% since 2000. Many potential homebuyers are wondering if they’ll be priced out of the housing market forever. To make matters worse, recent data from the U.S. Bureau of Economic Analysis shows that inflation in California is currently on the rise — with a Consumer Price Index (CPI) of 2%. In fact, California is one of nine states where prices have increased at an above-average rate during this period.
In California, things have gone a bit haywire. In fact, housing is so unaffordable for many residents that some are calling it a crisis. For example, the median sale price of homes in California increased from $305,000 in 2011 to over $615,000 in 2017—a 136% increase in just six years! During this same period, nationwide home prices only rose by 33%. With all this information in mind, you may be wondering: Is it even possible to buy a house in California right now? And how much will that process cost you? Do you need to buy soon before prices increase further?
In this article, we’ll examine these questions and more as we explore some of the facts about inflation and house prices in California.
What is Inflation and How Does It Generally Affect Home Prices?
First and foremost, inflation is the general rise in prices of commodities and services that happens when there is an excess of money in circulation. This excess money drives up the prices of goods and services, thus increasing the overall price level of an economy. When it comes to housing, the relationship between CPI and home prices is not that complex. For instance, consider an economy with only $20 as the total money supply and five identical houses throughout the economy. Each house would be priced at $4 (assuming there are no other goods in the economy). Suppose the central bank decides to print more money, increasing the total money supply to $40. Each house would now cost $8. In this simple illustration, increasing the money supply creates inflation and an increase in price of each house.
Why Are House Prices So High in California?
A big part of the reason that house prices are so high in California is due to the fact that housing construction has been below the norm for many years. No one knows this better than the state’s real estate agents. According to the California Association of Realtors, the construction of new homes has been below the state’s long-term average since the year 2000. As a result, there has been a significant shortage in the number of new homes available for sale. This shortage, combined with increased demand, has led to higher prices for existing homes.
A lot of things contribute to the state’s housing deficit. The lack of arable land, however, is still the most significant obstacle. While California is a massive state—the third largest in the United States in terms of land area—the largest part of its acres are hills and mountains that spread across a harsh desert. Almost every part of the usable land has been taken up, and this is especially true as you go nearer the coast.
Another notable factor contributing to the high prices of houses in California is the rising demand for housing in urban parts of the state. Asides the fact that there is not enough housing, many California residents are rushing into urban areas. For example, the Bay Area, which includes San Francisco, Oakland, and their nearest suburbs, is one of fastest-growing areas in California. While the Bay Area used to contribute to only 4% of California’s growth between 2000 and 2007, it is now responsible for about 20% of the state’s growth.
Housing Price Trends in California
The housing market in California is one of the most competitive markets in the U.S. The latest report by Zillow, a real estate company, claims that the median home value in California is $543,400. The housing price trend in California is a complicated issue. It’s not just a matter of supply and demand. There are many other factors at play, such as the increasing population, the limited land availability, and the changing demographics.
In the past few years, California has seen some of the highest home price increases in the country. In 2017 alone, home prices increased by 11% from 2016-2017 which is a significant jump from previous years (Zillow). Housing prices in California are still on a rise. The median home price in the state is currently around $500,000 which is 3.2% higher than the average of the last 5 years. This means that it costs now more than ever to purchase a home in California. The median list price to sale price ratio stands at 98% which means that for every 100 listings on Zillow, 98 are asking for more than they are worth and 2 are asking for less than they are worth.
With these numbers and trends, it’s almost certain that house prices in California will keep going higher. Unless the house supply deficit will be met somehow soon, the ideal time to buy a house in California still remains NOW (once you have the money for it).
In short, house prices are high in California because the demand for real estate is high.
The state is one of the most desirable places to live in the world, and many people want to live in California. Unfortunately, supply lags demand; there are not enough homes to meet the needs of the population in California right now. Because of this, the price of housing will probably remain high for the foreseeable future. If you’re a first-time homebuyer in California, it’s important to understand that buying a house is likely to be more expensive than ever before. That’s because the state’s high demand and low supply have resulted in high prices. Fortunately, there are few things you can do to combat high prices and ensure you find a great house at a price you can afford. You can research price trends in your area, shop around for the best deals, and get pre-approved for a mortgage before you even start your search for a house.
