Bubble watch: How ‘real’ are California home-price gains?
Discussions of favorable demographics and challenging inventory shortages have seemingly been replaced with hopeful banter about real estate's reputation as an inflation hedge.
“Bubble Watch” digs into trends that may indicate economic and/or housing market troubles ahead.
Buzz: It’s time for a “real” debate: How long can California home-price appreciation top the surging inflation rate?
Source: My trusty spreadsheet looked at “real” home-price appreciation — that’s gains in real estate values minus increases in the cost of living. It’s a review in five-year chunks dating to 1977, comparing changes in a federal California home-price index and the Consumer Price Index while peeking at swings in mortgage rates (Freddie Mac’s average 30-year fixed rate).
The Trend
Funny what a soaring cost of living and the resulting surge in mortgage rates can do to housing chatter.
Discussions of favorable demographics and challenging inventory shortages have seemingly been replaced with hopeful banter about real estate’s reputation as an inflation hedge.
Between 2017 and 2021, California homeowners enjoyed an average 5.6% real gain a year — 8.3% annual appreciation minus 2.7% inflation rates. But in this period, however, mortgage rates decreased to below 3%.
The Dissection
Let’s go back nearly a half-century to see California housing’s “real” history …
1977-1981: The build-up to the monumental mortgage-rate spike of this era was a hot one for housing. The market saw a 10.2% annualized real home-price appreciation as yearly gains averaging 21.2% outpaced extraordinary 11.1% inflation rates. Loan rates soared to 16.6% from 8.9%.
1982-1986: Pricey mortgages and high inflation took a delayed toll with real home-price depreciation of 0.4% a year. The 5.5% price gains were overshadowed by 5.9% inflation. Cheaper money didn’t help much, with rates down to 10.2%.
1987-1991: California’s late 1980s housing boom translated to 7.5% real home-price appreciation a year — prices up 12.3% vs. 4.8% inflation rates. Mortgages decreased to 9.3%.
1992-1996: Too many people forget the ugly economy of the mid-1990s. Real home prices fell at a 6.2% annual rate — 2.5% annual losses compounded by 3.7% inflation rates. Mortgages decreased to 7.8%.
1997-2001: A rebound with 5.8% real home-price appreciation a year. Prices rose 8.8% vs. 3% inflation rates. Mortgages decreased to 7%.
2002-2006: The rebound blossomed into the grand bubble with 15.5% real home-price appreciation — prices were up 18.7% vs. 3.2% inflation. Mortgages dipped to 6.4%.
2007-2011: The bubble burst into the Great Recession. Price losses of 7.9% a year plus 2.9% inflation rates added up to 10.8% real depreciation in this period. Mortgages decreased to 4.5%.
2012-2016: Finally, the rebound stuck, resulting in 4.6% real home-price appreciation a year — gains of 6.5% vs. 1.9% inflation. Mortgages decreased to 3.7%. This set the stage for the pandemic era’s odd housing market.
How bubbly?
On a scale of zero bubbles (no bubble here) to five bubbles (five-alarm warning) … FOUR BUBBLES!
Since 1977, California home appreciation has topped cost-of-living hikes two-thirds of the time. The average year had 2.7% real home-price appreciation — 6.2% gains minus 3.5% inflation rates.
That track record isn’t any guarantee. Yet it offers some comfort to folks betting on real estate’s inflation-protection powers after they possibly overpaid in housing’s recent buying binge.
Look, inflation is typically the byproduct of an overheated economy. Hot business cycles usually generate plenty of jobs and fat paychecks. Those opportunities help make lofty mortgages payments.
But, remember, inflation also has a bad habit of pushing up mortgage rates. The 30-year average rate is already almost double its January 2021 bottom of 2.65%.
And consider last year’s 4.7% average increase in the cost of living topped 3% mortgage rates. Inflation last topped financing costs in 1979.
Jonathan Lansner is business columnist for the Southern California News Group. He can be reached at jlansner@scng.com