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Why CA Is So “Hot;” Median Home Prices

expensive two story red brick house with brick driveway surrounded by treesMEDIAN HOME PRICES

If the CA housing market was not appreciating at all, but every buyer suddenly decided they would only buy 4,000 square foot, $1 million homes in 2021 after only buying 2,000 square foot, $500,000 homes in 2020, the median home price would double.

And this would lead many people to mistakenly believe that housing prices have increased, when it really just means that people are buying bigger and more expensive homes.

If demand for larger homes suddenly increased markedly, we could even see median home prices increase in the face of a declining market.

I touched on this recently but am hitting it again because I saw the below blurb in Leonard Steinberg’s Compass Blog over the weekend.

FLEEING California? Hardly! California housing had the hottest real estate month in 17 years! Homebuyers gobbled up houses at a 484,730 annual pace in January, up 22.5% in a year, the third consecutive gain above 20%. The statewide median price paid was $699,890, up 21.7% in a year and the biggest gain since February 2014. If that’s not overheated to you, consider this: The last time sales and prices jumped more than 20% in the same month was August 2003.

I love Leonard’s blog so this is certainly no slight on him, but I do want to discuss the comment briefly because there is so much to unpack.

  1. Median Home Prices. I met my new neighbor last week; he is in tech and he just bought the house next door to me because he has a young family, and he can now work remotely. The house is twice the size and price of his last home, and I have seen this story repeat dozens of times now over the last six months. This is no doubt a major factor behind the increase in median prices and, as pointed out above, it is not always an indication of appreciation.
  2. CA’s Demise Overstated. While the above statement is slightly misleading, it still illuminates the fact that CA’s demise was overstated, as much of the economy and housing demand remain very strong.
  3. Equivalent to 2003 = Good News? The comment compares median price growth to 2003 which could be good news, given that we still had five years to go in 2003 before we saw a major correction.
  4. Demographics & Limited Inventory Again. Even though median price analyses can be misleading, CA home prices on average, adjusted for size, are still increasing very quickly (at about 9% in 2020 per Zillow). This appreciation is no doubt spurred partially by the very limited inventory in CA (because it is so difficult and expensive to build new homes) and also by the onslaught of millennials flooding into the housing market for the first time as a result of the “baby boomlet” that took place 30+ years ago. This may be the strongest influence on appreciation right now.
  5. Fed Policy/Asset Appreciation. This too is a factor, and it is something I blogged about in June (Asset Inflation). Housing prices are also spurred by Fed policy. Whenever there is this much cash flooding the market as a result of Fed and Fiscal Policy via QE, stimulus and interest-rate suppression in general, we often see asset prices (both stocks and real estate) appreciate quickly.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167

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