The real estate correction is now showing up where it matters for the press, in home prices. Inventory has been growing and sales have been declining putting pressure on sellers. For the first time in seven years home prices have declined on a year-over-year basis in three important counties in SoCal: L.A., O.C., and San Diego. This will now put a pause on the FOMO rhetoric that if you don’t buy this year, prices will surge once again next year. Of course, more people are priced out of the California housing market because household incomes simply do not support current prices without aggressive mortgages or policies that artificially keep rates low. So now that the trend is shifting and the correction is here, how deep will this go?

Prices starting to meet reality

The market is definitely shifting so it will be interesting to see how the psychology shifts:

“(OC Regsiter) March’s price and sales declines occurred even though the economy remains strong and despite recent drops in mortgage rates, said Jordan Levine, a CAR senior economist.

Low mortgage rates may yet reignite demand during this year’s spring homebuying season, when sales typically are at their highest, he said. “It’s tough out there,” Levine said, “but there’s no reason (for sellers or their agents) to panic.”

It is interesting how little is mentioned about prices tracking income gains or inflation as was the norm pre-housing bubble days (aka 2000 and before). There is now this dependency on the Federal Reserve in terms of engineering low interest rates. This is problematic because the Fed should use monetary policy to keep the economy healthy, not to keep a real estate bubble inflated. By the way, mortgage rates have been historically low for well over a decade now so we are already in “low” territory. Take a look at this chart tracking the rate of a 30-year fixed rate mortgage (the Adderall for the modern day home buyer):

From 2000 to 2010 the rate had a range between 5 and 6 percent. This is when the housing bubble grew to epic proportions. From 2010 to the present, rates are hovering between 3 and 4 percent. What you need to take away from the chart is that a low rate environment isn’t necessarily what is normal and looking at history, we are already near a record low level. Point being, I’m not sure how much low rates can do to reinvigorate the housing market when they are already very low.

It should come as no surprise that the markets that are cooling down the fastest are in the west:

And most of the cooling areas are in California. All of this is expected. Things have gotten out of control. But with real estate the trend is your friend. The trend now is neutral to cold. And things just don’t turn around quickly in housing. So the question now becomes, how deep this correction will go? In California, there has been a major shift to renting households and many will vote accordingly. Even if Millennials do end up buying homes, so much of their after-tax income is going to go to paying the mortgage that there will be a hit to the economy in terms of where this disposable income would otherwise go instead of servicing a mega balance on a 30-year fixed rate mortgage.

California housing prices were due for a correction. Now that we have our first year-over-year decline in seven years, the question is how low will it go?

Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog to get updated housing commentary, analysis, and information.