As Goes California, So Goes America — And California Isn't Looking Good

Mamta Badkar

The housing recovery we've seen in the past couple of years has largely been driven by the West Coast.

Home prices in California plunged 42% from their March 2008 peak during the downturn, and then rebounded 36%. 

Prices surged not only because of the extreme drop in prices during the downturn, but also because of "the efficient disposition of distressed homes, low non-distressed inventory, economic recovery, and foreign/second home demand," writes Michelle Meyer, an economist at BofA Merrill Lynch, in a note to clients.

But housing affordability has started to fall. Only one-third of California's households can afford to buy a house, and only 21% in San Francisco can afford to make a purchase now.  

"Prices in the San Francisco metro area have already exceeded the pre-crisis peak and set a new record high," says Meyer.

"This reflects low inventory and a minimal amount of distressed activity — only 4.5% of sales are distressed, and it takes less than 2 months to clear the distressed supply."

California's home price growth is expected to slow in 2014, and California is a leading indicator for the overall housing market.

"This is consistent with our view that national home price appreciation will slow to about 5% this year, from the current run rate of nearly 14% year over year in 2013," says Meyer.

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