What’ll California’s Real Estate Do in 2016?

2016 is poised to be a pretty decent year for California’s real estate market. The new year is expected to bring some improvements to the market in the Golden State, but this improvement might have a cap on it, considering the continued high cost for housing and a continued shortage of inventory.

The housing market in California managed to bounce back following two back-to-back years of sales decline, while the median home price statewide continued to increase at a more moderate rate compared to last year.

According to the California Association of Realtors, current home sales are expected to get a boost in 2016 by over 6% more than what was expected in 2015. That means there would be about 433,000 existing home sales in the 2016 forecast.

California’s hot neighborhoods are not exactly known for cheap listing prices, but they should hold back somewhat in the coming year. Right now, the median home price in the state is approximately $476,000, and is expected is rise to $491,300 within the next couple weeks. And within a couple of years, this price point is expected to hit the $500,000 mark.

Yet despite these price increases, the rate of home price appreciation is expected to grow at the slowest rate in 5 years.

California’s unemployment rate should be reduced to 5.5% in 2016 from 6.3%, as per California Association of Realtors forecasts. And projections of an average interest rate for a 30-year, fixed mortgage dictate only a slight increase to 4.5%. Factors like these should help generate a much stronger demand across the state.

Affordability will continue to be an issue as the rate of income growth won’t be climbing as fast as home prices into the new year. While the percentage of California households that are able to afford a home reached 31% this year, this number is expected to drop 4 percentage points in 2016.

Of course, California’s real estate market across the state is as diverse as it gets, which means any of these changes will be realized more in some centers over others. But in areas where housing inventory is really limited, the growth of sales could also be capped because of fierce competition out there.

On the flip side, less expensive regions will experience less demand, and will therefore stay strong as job opportunities and improved transportation accompany the more affordable housing. 

Another interesting scenario that we will likely be seeing in California in 2016 is the shift in housing location interest. While the coastal line of California is still highly sought after, there may be a trend emerging in 2016 towards more demand for inland housing locations.

As strong as the market in California remains, there still lingers some major challenges on the horizon, including global economic hardships, volatility in the financial market, and the expectation of the Fed to finally hike interest rates the year. Time will tell how well California will fare amidst these continued market hurdles.