What Will Happen to California Median Home Prices in 2013?

By December 11, 2012Housing Market

Bruce Norris, principal of The Norris Group, an active investor, and real estate educator with over 30 years experience predicts that California homeowners could see a 20 percent increase in median home prices during the next year.

According to Mr. Norris, “My best guess is that California will have significant price inflation. Prices could escalate so strongly that we will think we are in 2004 instead of 2013.”

While Mr. Norris backs up his predictions with strong logic, we believe California median home prices will likely rise at a more subdued 5% to 8% pace, due to several additional factors:

• A critical driver to price increases is affordability and returns on investment. In 2012, in many regions of California, house payments, even after taxes and insurance, were lower than rents. Prices appreciated much faster in these regions, compared to regions where payments approached or even surpassed rents. Regional differences in price appreciation could dampen median price increases.

• Rapid price increases will crowd out first time homebuyers reducing demand. As bidding wars push prices beyond those supported by recent sales, getting purchase prices to appraise will continue to be a challenge. In 2012, many buyers had the resources to bring cash to the table to overcome this issue. Not all buyers have this ability, which will make this market especially difficult for first-time buyers.

• GDP growth and employment growth contribute to real estate demand and price increases. Regardless of what Congress decides to do about the “fiscal cliff”, the U.S. economy will be hit with an estimated $260 billion in Obama-care tax increases. Tax increases will likely depress GDP and employment growth, reducing disposable income, household formation, and housing demand limiting price increases.

Not only do we believe that price increases will be more subdued than Mr. Norris’ more optimistic forecast, we also believe the volume of sales will likely fall due to the decline in demand.

Care to weigh in? What do you think?

6 Comments

  • Ichabod says:

    Decline in demand, um, not so sure. Still will have super low mortgage rates and investors looking for some place to make a buck. My concern is continued low inventory. Foreclosures fewer and slower, equity sellers still sitting waiting for further price gains, lots of people locked into homes they can pay the loan on but can’t refinance or short sale (because no hardship). Also, do you have support for the $260 Billion increase in taxes, which you imply will happen in 2013. The only place I find that number is that the CBO estimates the fiscal impact would be “a net increase in federal deficits of $260 billion” through 2019. One, that’s a pretty minor increase in the deficit over the period given the deficit we have and two, they didn’t say a tax increase of $260 Billion.

    • Madeline Schnapp says:

      The five largest tax increases contained in Obamacare are:

      1. The Obamacare 3.8% Surtax on Investment Income estimated at $123 billion levied on households making at least $250K.
      2. The Obamacare Medicare Payroll Tax Hike estimated at $87 billion levied on households making at least $250K.
      3. Obamacare Medical Device Tax estimated at $20 billion.
      4. Obamacare $2,500 cap on Flexible Spending Accounts, estimated to cost taxpayers $15 billion.
      5. The Obamacare increase in threshold for Medical Itemized Deductions, estimate at $15 billion.

      The above tax increases have completely fallen under the radar because of the focus on the expiring Bush tax cuts and the “fiscal cliff”, but they are definitely coming to a wallet near you!

      • Ichabod says:

        OK, I’ll check out those items, thank you. But, remember, the two biggest numbers, the 3.8% surtax and increase in the payroll tax only apply only to the top 2% of US taxpayers, since that’s the percentage with AGI above $250K (single >$200K), and both numbers, $123 Billion and and $87 Billion are estimates over a 10 year period, so the impact in 2013 will be far less.

        If you’re in the 2%, great, and more power to you, but I’m sure not, nor are most potential home buyers, considering using a front end ratio of 31% of monthly adjusted gross income of $250K for a couple would allow them a monthly PITI payment of $6458, which would buy them a lot of house when the median home price in the US is less than $180K, and the loan payment on a $144K loan for that property at 3.5% is about $650 a month.

        So, I really fail to see how taxes that do not directly impact 98% of the people in the country and might total $20 Billion next year in a $15 Trillion economy are going to kill demand in the housing market in 2013.

        My worry is still inventory. In my office here in high priced Orange County, California, we had two new listings last week that generated 70 and 100 offers, respectively. Demand has not fallen as it usually does in the winter because there are so many frustrated buyers who have not been able to purchase.

      • ccooke411 says:

        I am with you Ichabod. Here in SD county we have far more buyers than sellers as well and very few of them will be impacted by the OBamacare tax hike. Double digit number of offers are coming in with prices being bid up 5-10% over list with no end in site. I am not sure we will hit the numbers Bruce is predicting, but I don’t see how we won’t be in the 10+% range here in SD in 2013. ;~)

  • Dan says:

    Obama tax will take right out of most people’s paychecks. it will be a big shock to most. It will further chip away at consumer confident. it could have an huge effect on rents and first time buyer demands.

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