What the Media Is Getting Wrong about the Housing Market

In a subscriber-only opinion piece following Chapman University's Economic Forecast Update, Orange County Register business columnist Jonathan Lansner joins Panther economists in wondering who can afford to buy a home in Orange County. There's a lot to unpack in Lansner's column, so I watched Chapman's semi-annual economic forecast update and listened intently to Dr. Jim Doti describe his predictions for our near financial future, including real estate. 

Make no mistake: He did warn of an imminent recession, likely to arrive in Q2-Q3 of 2023. And yes, Doti said he projected a 14% decline in SoCal median home prices, as Lansner called out in his headline. 

But here's where it gets interesting: Although a double-digit decline in median home prices would spell a market correction, such a dip wouldn't necessarily dictate that home values will fall commensurately. 

In fact, Doti never made this claim during his presentation.

As we examine what this means, remember that median price does not equal home prices or values. Instead, it indicates the cost of the one in the middle when prices are listed in sequential order. 

Yes, mortgage rates are up. 

Yes, homes are far less affordable than in recent years. 

Yes, we have some outbound migration. But even as Lansner pointed out when he appeared on my radio show and podcast, "This Week with Wendy," the California population is so large that the relatively small percentage of people moving won't make a difference in housing affordability or availability. 

According to reports issued by the Federal Reserve Bank of St. Louis (FRED), periods of rapid interest rate appreciation in the Los Angeles region have not caused median home prices to fall much, if at all. (It seems like FRED isn't a fan of OC as no data is available.) For example, look at 1980-1983, when rates soared from 12.5% into the 18% range.

As you can see, the '90s were rough, and prices languished despite several periods of falling interest rates. As history tells us, assuming these data points interact only as an inverse correlation is incorrect.

These charts confirm the housing recovery, at least in Los Angeles, started in 2013. Using this data as a baseline, let's compare OC home prices since that time. If we put all sales into one bucket, the median price increased 96% from 2013 through 2022 YTD.

Yet, if we only look at detached single-family homes with three bedrooms and 1,600-2,600 square feet, those prices increased 92%. Detached houses with ocean views and private docks increased by 127% during the same period. Real estate is a nuanced phenomenon — even here.

Real estate is not only hyper-local but also driven by consumer sentiment. Emotions, like fear or confidence, can swing the price pendulum wildly. However, the prediction that home sales could fall by 20% seems incorrect, considering at the close of May, we already had 22% fewer homes sold than in the same period last year.

The impact of rate hikes was immediate, and we all felt the collective shudder when home sales slammed to a halt three weeks ago. Because I am sure that rising rates will continue to impede sales, I think we could have closer to 30% fewer sales. Yet, I am not convinced that prices will plummet 14%. 

Doti projected median prices will fall to $891,000 from $1,030,000 in the next 12 months. If buyers decide to sit out the market and wait for prices to lose 14%, they're also risking rates rising from 6% today to 6.75% or more. 

On the other hand, if prices fall 14%, they could save $317 per month. 

But what if the price for the home they want to buy doesn't fall at all? Or what if it only falls 7%? Then they'd pay $30 or more monthly for the same house.

Frankly, a reset would be nice. If it happens, it happens; if anyone plans to speculate on the real estate market by buying a home they plan to sell in a year, they deserve to lose money. Homes are homes, people. They are expensive to buy and sell, so we need to stay put for a while.

If the market softens, it will come back faster than last time — even Doti agrees! If you find a home you love, buy it. And who knows? With SCOTUS overturning Roe v. Wade, California may soon welcome a surge of transplants from states that restrict women's reproductive rights. Things are about to get curiouser and curiouser.