But California also has a number of challenges, and housing is arguably the most pressing. About 1.3 million renter households in the state, or 22%, are classified as extremely low income, according to the National Low Income Housing Coalition. And the state has a shortage of nearly 1 million homes that are affordable and available for these people, defined as those who earn less than 50% of the area median income.

A report this past December in The Wall Street Journal delved into the regulatory maze that has stalled many affordable housing projects in California and made them more expensive to complete. In San Jose, the cost to build a single unit of low-income housing in 2022 was $983,700, up 24% from the previous year.

San Francisco granted less than half as many housing permits last year as New Braunfels, Texas, which has one-eighth the population of the City by the Bay. And in one extreme example of a project that has been delayed by political battles and financing hurdles, a 49-unit apartment building in Los Angeles is reportedly set to open later this year after the nonprofit developer acquired the land in 2007.

Gov. Gavin Newsom recently signed several pieces of legislation that are expected to benefit developers of mixed-income multifamily projects. One of these bills is designed to streamline the approval process for qualified housing developments in jurisdictions that don’t create enough new supply by removing the need for an environmental study.

California has an estimated $68 billion budget shortfall across its current three-year fiscal forecast that’s tied in part to weaker-than-expected personal income tax revenues. The 25% decline in tax collections during the 2022-2023 fiscal year was “similar to those seen during the Great Recession and dot-com bust,” state legislative analysts wrote.

Still, California’s gross domestic product grew at an annualized rate of 2.9% in third-quarter 2023, close to the U.S. average of 3.5%. As of this past August, California’s nonfarm payroll employment exceeded its pre-pandemic level by 447,600 jobs. Employment gains in sectors like logistics, technology, construction and health care have surpassed job losses in other industries.

Silicon Valley is a hotspot for data center investments. CBRE reported that all of the new data center supply delivered in Silicon Valley during the first six months of last year was preleased. With an inventory of 410.7 megawatts at midyear 2023, Silicon Valley was the nation’s third-largest market for data centers, trailing only Northern Virginia and Dallas-Fort Worth.

The Golden State’s largest office markets continue to struggle. Newmark reported that San Francisco had a vacancy rate of 27.3% and asking rents reached a six-year low point in third-quarter 2023. In Los Angeles, office-using employment dropped by 3% during the first eight months of last year and 44% of all office buildings had vacancy rates of more than 20%. ●

Nowhere has the cooldown in U.S. industrial real estate been more apparent than in California’s Inland Empire, centered around the cities of Riverside and San Bernardino. A midyear 2023 report from Colliers showed that the metro area, which is the country’s largest industrial market, posted negative quarterly net absorption for the first time in more than 13 years.

Third-quarter 2023 data from Cushman & Wakefield showed a negative absorption figure of 1.8 million square feet (msf) from July through September. But absorption during the first nine months of the year remained positive at 1.2 msf. Asking rents in the Inland Empire at the end of Q3 2023 stood at $17.96 per square foot, down from a peak of $18.85 in Q4 2022 but still well above the national average of $9.73 for industrial space.

Cushman & Wakefield also reported five industrial sales valued at more than $25 million in the area during the third quarter. The priciest deal during that time was BentallGreenOak’s $144 million purchase of nine buildings totaling 458,000 square feet in the Chino submarket.

What the Locals Say

The resort markets along the coast — including the Coachella Valley, Palm Springs and Palm Desert — have done phenomenally well. They’ve far surpassed what they were doing in 2019 and have enjoyed record top-line revenues and record net profits. We’re now seeing those markets start to taper off.

On the other end of the spectrum are the downtown hotel markets that are heavily reliant on commercial business, and that’s gone in the opposite direction as people have continued to work from home. You have fewer employees in the downtown market, so that’s definitely impacted guest stays, as well as food and beverage, at those hotels.

We publish a biannual survey, and through the first six months of 2023, individual hotel sales transactions in California were down 53% from where they were in 2022. That is a record decline. We’ve been tracking sales for over 20 years and it’s even surpassed what we saw in the first six months of 2009. And that’s just tied to a huge disconnect between the buyer and seller expectations.

Hotels have not yet seen value declines of 70% to 80% like those seen in office space. But a classic example would be two of the largest hotels in downtown San Francisco. They’re both Hilton products, and in 2016, those hotels appraised for $1.6 billion. The publicly traded REIT that owns them has given the keys back to the lender. The debt is $725 million.

3 Cities to Watch

Irvine

This Orange County city has added a whopping 100,000 residents since 2010 to reach a current population of 314,000. Irvine serves as the home base for fintech firms like Acorns and Cloudvirga, as well as a number of startups in the software, digital media and real estate sectors. Three Nobel Prize-winning researchers hail from the University of California at Irvine, which has a highly diverse group of students and faculty.

Oakland

After losing its pro football and basketball teams in recent years, Oakland received another economic blow this past November when the Athletics baseball team announced its pending relocation to Las Vegas. Affordable housing is a key issue in the East Bay hub. Brooklyn Basin, a major redevelopment project that would build 3,700 new homes on the site of a former shipping dock, is still many years away from completion.

Sacramento

From agriculture and health care to education and clean energy, the California state capital has a diverse economy that produces more than $160 billion per year in goods and services. Colliers reported that the $773 million in commercial real estate sales across the metro area in first-half 2023 was down 63% year over year. Industrial and multifamily deals accounted for a respective 39% and 24% of this six-month sales volume.

Sources: Allen Matkins, Built in LA, CalMatters, CBRE, Colliers, Cushman & Wakefield, Executech, Forbes Advisor, KQED, National Low Income Housing Coalition, Newmark, SFist, The New York Times, The Wall Street Journal, UCLA Anderson School of Management, University of California at Irvine, Visit California, Wisevoter

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A homebuyer with a monthly budget of $3,000 has gained nearly $40,000 in purchasing power since rates hit their recent Zenith, the Seattle-based real estate brokerage reported. In October, when 30-year mortgage interest rates averaged 7.8%, a $3,000 monthly budget would have bought a $416,000 property. With the current rate hovering around 6.7%, the same budget will buy a $453,000 home.

Put another way, assuming the current 6.7% rate, the monthly mortgage payment on a typical home, valued at approximately $363,000, is $2,545. With an interest rate of 7.8%, the monthly payment swells to $2,713. That’s nearly $200 of relief in just three months.

Even with mortgage rates around three points higher than the lows they slid to during the height of the pandemic housing boom, homebuyers are definitely noting the rate cut and coming to terms with the new norm.

“Bidding wars are picking up as mortgage rates decline and inventory stays low,” said Shoshana Godwin, a Redfin agent in Seattle. “I’ve seen a few homes get 15-plus offers recently, and one got more than 30.”

“Late last year, many listings sat on the market as buyers sat on the sidelines, hoping for rates to drop,” she continued. “Now, buyers are snapping up homes because even though rates haven’t plummeted, people are realizing that the longer they wait to buy a home, the more competition they’re likely to face.”

“Trying to time the market around mortgage rates is probably a waste of energy, as affordability is unlikely to change meaningfully in the next several months,” echoed Daryl Fairweather, chief economist at Redfin. “Instead, buyers should consider their own personal and financial circumstances: What matters most is whether the home meets your needs long term and whether you can afford it. Timing the market mattered in 2021, when we were in a golden window of record-low rates — but that window is closed.”

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Its beauty encompasses ski-ready slopes, alpine lakes, sandy beaches and glittering skyscrapers. And it’s a cultural center, where stars are born and trends are set. But for the average Californian, the cost of living is too high. Only 15% of households could afford a median-priced home as of third-quarter 2023, according to the California Association of Realtors. Consequently, California has the second-lowest homeownership rate among all states, trailing only New York.

More construction is desperately needed, but zoning issues, expensive fees, high material costs and scarce land make it difficult for developers. New zoning rules and approval processes have been implemented since Gov. Gavin Newsom took office in 2019, but most changes focus on multifamily buildings in an attempt to ease the state’s rental affordability crisis.

The number of new homes built reached a 15-year high point in 2022, but demand still isn’t being met. State officials say 180,000 new units per year are needed, with about 123,000 built in 2022. About half of those were single-family homes. The state wasn’t on track to meet that number in 2023. From January through November, 53,000 permits were authorized for new single-family homes.

Californians are getting creative to achieve homeownership, despite the challenges and a more expensive mortgage market. Many buyers are choosing to put down more money, with help from family or local downpayment assistance programs. Those who can are paying in cash or buying down interest rates. And many are choosing to “house hack.”

House hacking came to prominence several years ago, and renting out extra bedrooms to help pay the mortgage has become a relatively common practice. But Californians are leading the charge on a different kind of house hacking: the construction of accessory dwelling units, or ADUs.

Zoning changes in 2017 made it much easier to add ADUs to single-family lots in California, and construction of these units grew from 1,100 in 2016 to 20,600 in 2022 — or nearly 17% of all units built that year. ADUs are faster and less expensive to build than traditional homes.

These units can be financed with home equity loans and cash-out refinances. In October 2023, the Federal Housing Administration (FHA) property rehab financing program was updated to allow more ADUs to qualify. Additionally, FHA underwriting will now recognize both existing and anticipated rental income from ADUs to qualify borrowers. California even has a grant program to help lower-income homeowners build ADUs.

This trend may not solve the housing crisis in California, but ADUs can help homeowners afford their mortgage while raising their property value. Even if they’re not being rented, ADUs are a good option for homeowners looking to create multigenerational housing for family members without sacrificing privacy or space in their home. ●

Home sales in California, which slowed significantly in the second half of 2022, rebounded slightly in the second and third quarters of 2023 before falling again. According to the California Association of Realtors (CAR), the seasonally adjusted annual rate of existing single-family home sales in the state totaled 223,940 in November. This was the lowest rate recorded since the Great Recession and represented a 5.8% year-over-year decrease.

Bolstered by a lack of supply, median home prices rose last year. In January 2023, the median price was $751,330, the lowest since first-quarter 2021, according to CAR data. Prices wobbled but rose throughout the year to reach $822,200 in November.

Despite overall growth in home prices, California’s most expensive markets saw the most dramatic declines in the nation, according to a SmartAsset analysis of Zillow data. The Bay Area cities of Dublin, San Francisco, Palo Alto and Fremont were the four cities most impacted, with home values dropping by an estimated 13% to 15% during the year ending in May 2023.

What the Locals Say

The Greater Sacramento market has definitely slowed down in the past year, but it’s still a healthy market, in my opinion. We have a lack of resale homes on the market, but there’s a lot of new home construction in the area. Unlike the Bay Area, we have more land availability, so we have more developers who are taking some of the agricultural lands and expanding out. Our boundaries are pushing out, and we’ve got a lot of opportunity and a lot of growth.

Right now, I would say the majority of homes being purchased are new construction. They have more inventory and there’s more building going on. On the resale side, I would say it’s slowed down, but it’s still a very hot market. If homes are priced right, they’re selling in 10 to 15 days. The market is still strong, but new home construction is stronger than resale.

I’m seeing people from the Bay Area and other states that are wanting to move out of those locations. They want larger homes, larger yards, more community. We have that affordability compared to a lot of major cities in the United States. We have the ability to be outdoors all year round, with accessibility to Lake Tahoe, the Bay Area, San Francisco and Southern California. It’s a lot safer than a lot of other cities, and you have community support and that small-town feel.

3 Cities to Watch

ANAHEIM

Due to its status as an entertainment destination, Anaheim has an economy that differs from many of its Southern California neighbors. Disneyland generates billions of dollars each year for the regional economy. This once-affordable Orange County market saw a 14.2% increase in median home sales prices during the year ending in September 2023, the biggest uptick in the nation. The metro area’s median price is now $1.1 million, while the median price in the city is $875,000.

CHULA VISTA

The San Diego metro area is pricey, with households in nearly every city and suburb paying more than half of their income on major homeownership expenses. The exception is Chula Vista, the bayside city that’s south of San Diego and just north of the Mexican border. On average, homeowners here allocate 48% of their income to mortgage and real estate tax payments, with a median asking price of $725,000 and a median household income of $96,200.

BERKELEY

The Bay Area has seen home values tumble in the past year after prices shot up 36% from 2020 to 2022. Berkeley is no stranger to this phenomenon as the city’s estimated average home value fell by more than 11%, or $183,000, during the year ending in May 2023. But the highly desirable suburb, home to the University of California at Berkeley, was slightly more insulated than some of its more expensive neighbors, which saw prices plummet by as much as 15%.

Sources: Bankrate, California Association of Realtors, California Department of Finance, CalMatters, Forbes, John Burns Research and Consulting, KSWB-TV, Los Angeles Times, Office of Gov. Gavin Newsom, Orange County Register, San Francisco Chronicle, SmartAsset, The Real Deal, The Sacramento Bee

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