Growth Expected in 2018 but Challenges Remain

California home sales had a decent year in 2017 with sales edging out 2016 by 1.4 percent. The housing market continued to be supported by solid fundamentals as the economy continued to improve. While the demand side of the housing market remains upbeat, the supply side continues to be tight, resulting in more upward pressure on home prices.  The statewide median price has been increasing steadily on a year-over-year basis throughout last year, pushing the 2017 annual median price to $537,860, a 6.9 percent increase from the prior year.

With the passage of the Tax Cuts and Jobs Act and a possible economic stimulus on infrastructure spending in 2018, the economy is expected to grow moderately this year.  The labor market, despite showing some signs of fatigue, should remain solid and will elevate consumer spending to a higher level for the rest of the year.  The supply shortage in the labor market, nevertheless, will continue to have a negative effect on job growth.  As such, job gains will continue to moderate as the economy operates near the full employment level.  Wage growth, on the other hand, should gain more traction this year and will lead to acceleration in inflation in 2018.

With the economy expected to grow at a faster pace and the labor market remaining solid, housing demand should stay strong in 2018.

The question is where the supply will be coming from.  This issue will not be resolved overnight and the California Association of REALTORS® (C.A.R.) expects a tight supply condition this year, as the demographic shift, the effect of tax reform, and concerns over property taxes/capital gains tax liability continue to prevent homeowners from listing their properties.  The likelihood of multiple interest rate hikes and the widely anticpated increase in inflation will also play a role and could slow down the home sales momentum as well.  As such, C.A.R. projects that existing home sales in California will only increase by 0.3 percent in 2018.

Home prices are also expected to increase, as the imbalance between supply and demand continues to exert upward pressure on prices. Housing affordability will be negatively impacted as a result, and could be a force to counterbalance the price appreciation created by the market competition.  The tug of war between the two forces will elevate the statewide median home price to a higher level, but will keep price appreciations under control.

C.A.R. predicts that the statewide median home price will be up a moderate 3.2 percent in 2018. While the housing market in California is not expected to have a robust year in both sales and price in 2018, it should continue to have a decent performance this year.


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