Bubble Watch: Will rising mortgage rates crash Southern California’s housing market?
“Bubble Watch” digs into trends that may indicate economic and/or housing market troubles ahead.
Buzz: California housing market is at risk as mortgage rates rise near eight-year highs.
Source: California Association of Realtors
Trend reported: The trade group claims in its annual forecast that rising mortgages rates will cut California house hunters’ buying power and lead to a 3 percent drop in home buying in 2019 as statewide sale prices rise just 3 percent, roughly half the appreciation rate of the previous five years.
Dissection: Real estates professional habitually forget a key reason why interest rates rise, a hot economy that’s creating lots of jobs and, thus, more potential homebuyers who are financially able to pay up for housing.
I filled my trusty spreadsheet with regional federal economic indexes from the St. Louis Fed; home value indexes from the Federal Housing Finance Agency; and an average 30-year fixed-rate mortgage pricing — all back to 1990. When I sorted the data for the 20 quarters with the steepest one-year jumps in mortgage rates vs. other timeframes, I found pricier mortgages came with a surging Southern California’s economy and rising home prices.
In Los Angeles and Orange County, the Fed’s economic benchmark shows local business growth averaging 3.7 percent a year in these fastest rate-rising eras. That’s triple the average growth of 1.2 percent seen in the 20 quarters when rates fell the most. And since 1990, L.A.-O.C. economic growth by this measure averaged 2.6 percent.
The same is true for the Inland Empire. Economic expansion ran 5.7 percent a year when rates were jumping vs. 2.6 percent when rates were slashed vs. 3.8 percent average in 1990-2016.
It’s that economic oomph that pushes up home prices even as rates rise.
In these big rate-hike periods, Los Angeles County home values rose at an 8 percent annualized rate vs. only 0.39 percent in biggest rate cut periods and a 4.39 percent average since ’90.
In Orange County, home prices rose 8.81 percent in the biggest rate-hike periods vs. 0.25 percent in sharp rate-cut environments vs. 4 percent-a-year since ’90.
Same for Riverside and San Bernardino counties: 8.25 percent-a-year appreciation when rates soared vs. 1.18 percent amid big rate cuts vs. a 4.45 percent average pace since ’90.
Note: The real estate industry should be far more worried about an overall regional economic slowdown. Those two Southern California business growth yardsticks were at seven-year lows when last measured for June 2018. Remember housing’s three key ingredients for success: Jobs. Jobs. Jobs.
How bubbly? On a scale of zero bubbles (no bubble here) to five bubbles (five-alarm warning) … these patterns rate THREE BUBBLES. Not because pricier mortgages are zapping the finances of some potential homebuyers. It’s because nervous local bosses are cooling their growth plans and hiring less. That’s creating fewer potential homeowners.
How the St. Louis Fed sees 66 regional economies performing …