Real Estate Investment in California- Beneficial or Detrimental?.
California is a massive state with diversified geography, from mountains to beaches and a diverse economy, including entertainment, technology, agriculture, manufacturing, health, and finance. Therefore, this Golden State is always bustling with people, with an ever-increasing population, lack of affordable housing, and a high living cost.
You might be well aware that real estate in California is expensive. California’s typical home value stood at $624,977 in January 2021, showing an increase of 10.5% increase in prices from last year. Therefore, a vast majority of the residents in California are living on rent since affording a house is extremely expensive in the state.
Overview of California
After the pandemic outbreak, California had a GDP of about $2.74 trillion out of the total $18.6 trillion GDP of the United States. The state of California alone contributed to about 14.7 percent of the total economy. Therefore, California has the largest economy in the United States and is also known to be the fifth-largest economy worldwide. Silicon Valley, Hollywood, the aerospace industry, and the tourism industry are the main contributors to the GDP and the employment rate in California. As of now, the labor force in California is nearly 18 million people.
After the coronavirus outbreak, the employment rates had plunged below the rates of the Great Depression. As people get back to regular routines, the unemployment rates are slowly beginning to fall. The rate of unemployment stood at 9% in December 2020.
The overall economy of California seems suitable. However, it is essential for realtors to understand the real estate market in California after the pandemic to be able to make sound decisions.
Real Estate Market in California 2020
California housing market has recovered since the coronavirus outbreak; however, the real estate market’s growth is meager compared to the last year. The residential sector in real estate of California has shown a renewed interest with changed homebuyers’ choices. It has widened the imbalance between housing supply and demand, creating a more competitive market than ever before.
The sweeping changes in consumer preferences are a result of remote working. Therefore, housing demand for buyers in California is slowly evolving. Some buyers have shifted into larger homes for more space. At the same time, others have shifted to the suburbs to avoid contracting the virus. Even the low mortgage rates have intrigued buyers to invest in houses instead of renting apartments or condos.
Many buyers have shown interest in purchasing second homes or vacation homes, increasing the share of their total sales to the highest level in four years. The preference change is due to the flexibility of working from home and not worrying about commuting to work. Hence, buyers could relocate from metropolitan areas to resort communities with more space and a healthier lifestyle.
Post-June 2020, the houses available for sale received multiple offers due to high market competition. California Association of Realtors (CAR) states that nearly two-thirds of homes sold in 2020 received multiple offers, averaging 4.8 offers per home. In comparison, in 2019, less than half of homes sold received multiple offers, with an average of 3.9 offers for each home. The high level of competition in the market is evident since a more significant share of the property in real estate was sold higher than its asking price this year. Around 35.5% of homebuyers paid more than what home sellers asked for in 2020, while the same rate was 26.7% in 2019.
It is also a good time for sellers in the real estate market of California. According to CAR’s annual housing market survey, home sellers could make a net gain of $210,000 from their sales, which is 63.8% more than the purchase price. The gain on property is dependent on the duration of ownership. Therefore, sellers living in the house for five years earned 16.5% profit, while those who lived for longer earned a 100% profit on their sales
California Real Estate Market Trends 2020
Let’s find out about the unique market trends in California:
Low Affordability
California is famous for an unaffordable place to live because of its high cost of living. The average wage rate of the state is $62,356, which is closer to the median price range in California. Therefore, residents are generally living off at rent.
Lack of Inventory
California’s real estate market has a low inventory due to seller uncertainty. Sellers are unsure of what they will get in return; hence, they are unwilling to list their homes. CAR’s unsold inventory index remained extremely low, at 1.5 months, in January. Except for the Bay Area, housing inventory continued to tighten up across the state in all major regions, declining more than 45% in January.
High Rental Demand
Since the housing market is expensive in California, a large demographic of people are forced to live in rented houses. Moreover, the higher percentage of millennials in California has shaped the societal mores, which is more inclined towards renting rather than owning a house. Additionally, the lower inventory causes the demand to increase in the real estate market.
Urban Flight
The behavior of buyers has changed since the pandemic hit. People are moving out of big cities and choosing to live in suburbs or smaller towns. There are several reasons for the change in preferences. It includes the ease of working from home, flexible work hours, desire for outdoor space, and a bigger house.
Investment Consideration in California Real Estate
Any investor wanting to succeed in the real estate market of California should thoroughly research and study the current trends and future predictions. The rental property you’re investing in should be sound and yield a good investment return. Below, we give a picture of how California’s market is performing before we go on to suggesting the best places in California for investment purposes.
Strong Job Market
California is the hub for 54 of the 500 fortune companies. Organizations such as Google, Apple, Disney, Oracle, Intel, and many others are located in California. It also serves as a global center for high technology global companies. Moreover, the Hollywood district in California is famous for making movies and television shows. Therefore, there are employment opportunities, which attract people to California. These people look to have a living space either on rent or to buy it. In return, the investors get a chance to enhance the likelihood of cash flow.
Low Property Taxes
Though property taxes are not the lowest in the country, California provides favorable property tax rates that help control investors’ expenses and improve cash flow.
High demand for Rentals
California offers golden state jobs, great weather, fantastic entertainment, and outdoor activities. Therefore, the demand for rentals has outpaced availability, leading to growth in various markets of California. Hence, investing in this golden state will result in increasing rental rates for property owners.
Increasing Housing Value
California provides a combination of job growth, lifestyle, and culture, which is sought by many. There is always an influx of people coming in for jobs and other purposes. Many tend to stay back longer and purchase property for living, hence, increasing the overall housing value in California. Beginner real estate investors might think it’s best to avoid investing in California. However, it is more beneficial to invest in residential property in the state at the moment. The main sign of a healthy housing market is increasing house prices, resulting in an upward growth in home value for the upcoming years.
Low-Interest Rates
Interest rates have been reduced to stimulate growth during this period of decline. Therefore, reducing the borrowing or mortgage cost. Consequently, providing homeowners with a favorable environment for investment.
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Why Invest in California?
Even though California has the reputation of a pricey state in the US, it still offers a variety of opportunities for investors that are in search of single-family living.
It serves as an excellent opportunity for investors to capture returns from California’s real estate market’s rising home values. California Association of Realtors has observed high-sale trends in November, increasing by 5% from October 2020. The year-over-year, double-digit sales gain was the fourth consecutive and the largest yearly gain since May 2009.
The state of California has also broken the benchmark of $700,000 for the past three months. The median home price has dipped 1.7% on a month-to-month basis to $699,000 in November compared to October’s $711,300. Meanwhile, house prices continued to gain on a year-over-year basis, with the statewide median price surging by 18.5% from $589,770 recorded last November. The double-digit increase from last year was the fourth in a row and the highest 12-month gain since February 2014. The gain was also higher than the six-month average of 9.7% observed between May 2020 and October 2020.Â
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Best Places to Invest in Real Estate in California
California is a huge state; therefore, its real estate market will vary greatly. Such as the proximity to big metros like LA and San Francisco that come with a higher price tag.
The best places to invest in the real estate of California depend on three factors:
- Affordability
- Job Growth
- Population growth
We are going to discuss some places in California which are substantial housing markets for investors.
Los Angeles County
People in Los Angeles use most of their housing income on housing costs, and the median prices of homes are also high. This information is worth nothing for realtors because with fewer people able to afford their own homes, the demand for rental units will increase, and the rise in rental rates will be long-term. Other than this, Los Angeles is a popular tourist destination. With the ease of lockdown, more tourists will approach vacation rental through Airbnb and similar services. Therefore, Los Angeles County tops the list of the best places to invest in the real estate of California.
San Bernardino County
San Bernardine County’s housing market has shown an upward trend in terms of price, demand, and closed sales. There is an added pressure of tight inventory in this trending real estate market. Which, in turn, influences prices and demands. However, numerous efforts were made to address the housing affordability issues and backing affordable housing programs. Renting rates still tend to increase, limiting the ability of a wage earner to save up for the down payment of their own house. The least expensive rental housing area is Riverside-San Bernardino metro in Southern California, but rent rates still exceed those in similar cities. Rental housing is in demand in this region. Hence this is good news for rental property owners and should start investing.
Sacramento County
Sacramento is California’s capital, with an affordable area, a strong job market, and good population growth. Arden-Arcade is located in this county and Roseville, one of the largest cities in the metro area.
It’s expected that house value in this region will continue to grow over the next three years. Hence, buying a property in Sacramento or its surrounding markets could offer great returns to investors.
Final thought
All the pointers above suggest that California’s housing market will be more robust in the coming years. The state’s economic portfolio is diverse enough to surpass these economic setbacks caused due to coronavirus outbreak. The best strategy would be to diversify your investment portfolio with foreclosures that can be acquired at a lower price and turned into income-generating properties. (Insert website) is the largest real estate online marketplace for luxury purchasing. Please browse through our website to gain more information about our services.
Erik Brown
DRE: 01958545
Compass
9454 Wilshire Blvd, Beverly Hills, CA 90212
