It’s been nearly a year since we last posted and we missed you all, and the California housing market has been anything but dull. The landscape has shifted significantly, influenced by a confluence of economic pressures, demographic trends, and policy decisions. As we delve into the current state of California real estate, we’ll examine key factors driving these changes and provide a detailed analysis supported by recent data and trends.

It was only a matter of time that the housing market hit a giant wall of apathy and the level of denial is deep out there. People are starting to understand the cost of easy money policy which has created an insane level of moral hazard and rent seeking behavior. I’ve been following the FTX story and that is a picture perfect example of the market – tech as a religion, nonsense charity, easy money return chasing, and shiny new object syndrome with no real work being done. The day of reckoning is here and with mortgage rates at 8 percent, those million dollar crap shacks are no longer looking tasty. This is the new normal and we were in an artificial market for such a long time, that people do not realize that an 8 percent mortgage is actually affordable relative to historical norms. Let us look at the market overall.

The housing market is facing conflicting headwinds like a dog being asked to “come here” from both owners at opposite sides of the room and reading through the countless market indicators can drive you dizzy like 3am at an EDM concert. But the reality is, the market had grown accustomed to record low mortgages rates like a crackhead looking for their next hit and a flood of money during the pandemic and now, we are dealing with the usual reckoning. It is rather amazing how Taco Tuesday baby boomers fell deeply in love with the Fed in a codependent relationship, either with eyes wide open or naively, in terms of favorable policies that enriched their lifestyle of rent seeking behavior. Just browse social media and you’ll see all the 2^nd home buyers and AirBnB “investors” that are suddenly starting to understand the true cost of capital. Who pays for renting an AirBnB or any rental for that matter? People that need to generate income in the real economy. And the real economy is flashing massive red signs of capitulation. The credit markets are stalling out, the student debt jubilee was stalled, and the easy money from the government from PPP to stimulus checks is now reversing. And because of all of this, people are going to learn a quick lesson of the perils of artificially low rates that went on too long. There are five indicators telling us something in terms of where things will be going. The punchbowl at the party has run dry my friends and the hangover is just beginning.   

The housing market is entering a massive slowdown and only the naïve and delusional will ignore the red warning signs. First, there is this odd narrative that housing continues to excel and thrive in the current market. “Inventory is low therefore the market is hot” or “7% interest rates can’t stop the equity train baby!” This seems to be the mentality at this point. But the reality is, $2.3 trillion in housing wealth was wiped out in 2022, the most since the Great Recession in 2008. $2.3 trillion is a lot of equity that has gone up in smoke but somehow, the delusional housing brigade continues to beat on the “real estate never goes down” tagline. Keep in mind why real estate prices shot up. First, we had dangerously artificially low interest rates brought on by the Fed during the pandemic. Those rates were never “healthy” and with inflation raging out of control, the Fed has had to slam on the breaks. The idea of the free lunch is strong in a lot of people. Second, people were confined to their homes for two-years and many thought remote work was here to stay. That is absolutely not the case as companies bring people back either full-time, 4-days a week, or 3-days a week. In other words, being stuck at home is over and 2022 cleared out a ton of inflated equity.