California housing seen cooling further going into 2020: UCLA forecast

  • While job growth and the California economy remain strong, weakness is apparent in the state's housing market and it is likely to cool further going into 2020, says the latest UCLA Anderson Forecast.
  • The housing slowdown could put a damper on Democratic Gov. Gavin Newsom's plans to step up the pace of new homes built to help ease the state's housing shortage.
  • The director of the forecast says home prices are falling in many major markets of the Golden State, calling the decline "widespread and substantial."
Contractors work on townhouses under construction at the PulteGroup Metro housing development in Milpitas, California.
David Paul Morris | Bloomberg | Getty Images
Contractors work on townhouses under construction at the PulteGroup Metro housing development in Milpitas, California.

LOS ANGELES — While job growth and the California economy remain strong, weakness is apparent in the state's housing market and it is likely to cool further going into 2020, according to the latest UCLA Anderson Forecast, released Wednesday.

"The housing markets are softening in California, and it's not just the tony neighborhoods of San Francisco, Silicon Valley and West LA," said Jerry Nickelsburg, an adjunct professor at UCLA and director of the Anderson School of Management's forecast. "This is a statewide phenomenon."

The economist said anticipated demand for housing throughout the state has been lacking despite the strength of the state's overall economy and positive trends in the job market.

Nickelsburg said the slowdown in the state's housing market also has implications for the California economy going forward. In addition, the housing slowdown could put a damper on Democratic Gov. Gavin Newsom's plans to step up the pace of new homes built to help ease the state's housing shortage.

"With our national forecast for slowing economic growth, continued discussion on when the next recession will be, and the Fed indicating that the peak of the interest rate cycle could be near, we now expect weaker housing markets into 2020," Nickelsburg wrote in the forecast report. "As a consequence, our forecast for housing starts in 2019 and 2020 has been revised downward, with a recovery in building beginning in 2021."

While the housing market is slowing, the state's job growth remains strong, according to the forecast. It said California's average unemployment rate is expected to rise to an average of 4.5 percent in 2019 with slower national economic growth, and then at a pace of 4.3 percent in 2020 and 2021.

California added the highest number of construction jobs nationally between January 2018 and 2019, according to the Associated General Contractors of America. The state added 28,500 jobs, or an increase of 3.4 percent during the period.

Meantime, Nickelsburg said home prices are falling in many major markets of the Golden State, calling the decline "widespread and substantial."

The economist said the impact of the cooling is even being felt in the Central Valley of California, where home sales have fallen by more than 10 percent.

In Southern California and the San Francisco Bay Area, home sales fell to an 11-year low in January, according to CoreLogic. The analytics provider reported sales have fallen on a year-over-year basis in the Bay Area the past eight consecutive months, while in Southern California sales have fallen on a year-over-year basis in the last six consecutive months.

At the same time, the nation's most populous state continues to suffer from a chronic housing shortage.

"Home prices are falling in California as is the level of building," Nickelsburg wrote. He said one possible explanation is "higher mortgage interest rates are depressing prices but not the underlying demand."

Another possibility behind the housing slowdown is prices are "so expensive that everyone (well a lot of everyone) is leaving," the economist added.

Newsom, who assumed the governorship in January, this week announced an updated plan to ease the state's "housing cost crisis." The Democrat proposed a $1.75 billion housing package, including $1 billion in loans and tax incentives to spur low-, mixed- and middle-income housing production.

The governor wants to build 3.5 million new housing units in the state by 2025, or an average of about 500,000 a year. But there were only about 120,000 new homes built in 2018.

Newsom is pressing cities and counties to meet those ambitious housing expansion targets. Some of the steps are controversial, such as threatening to take away transportation funds from cities that fail to meet targets.