California Home Prices Expected to Climb 28% This Year, Just 6% in 2014

The California Association of Realtors released its “2014 California Housing Market Forecast” today, which revealed that home prices are on fire in the Golden State.

However, despite mind-blowing gains projected for 2013, next year is expected to be a bit of a different story.

The median home price in California is slated to rise to $408,600 this year, a whopping 28% gain from the $319,300 price tag seen in 2012.

You can partially thank the changing composition of home sales, with only one in five recent sales distressed, compared to one in three a year ago.

With higher prices come fewer short sales and foreclosures. Investors have also had quite the appetite for much of the year.

But it looks as if 2013 is an anomaly, with home prices only forecast to rise six percent in 2014, which historically still isn’t too shabby.

Median Home Price Will Rise to $432,800 in 2014

Assuming property values rise according to forecast, the median home price for 2014 will be $432,800.

That’s more than 57% above the bottom seen during the latest housing crisis, when prices hit $275,000 back in 2009.

At the same time, home prices are roughly 23% off their bubble highs of $560,300 seen in 2007.

So if prices do eventually get back to those levels, there’s still quite a bit of upside left, even for those who buy next year. And for those unfortunate souls who purchased during the bubble years.

But C.A.R. Vice President and Chief Economist Leslie Appleton-Young expects many previously underwater homeowners to list their properties next year, which will ease inventory constraints, while also keeping price gains in check.

It’s pretty much been a seller’s market all year, with most properties receiving multiple bids in a matter of days, often accompanied by all-cash offers over list price.

However, that will change thanks to higher home prices, higher mortgage rates, less investor participation, and more inventory.

I don’t know if we’ll be able to call it a buyer’s market just yet, but it will certainly begin to shift that way over time.

30-Year Fixed Rates Seen Rising Above Five Percent

Speaking of rates, C.A.R. expects the 30-year fixed mortgage to rise to 5.3% in 2014, up from 4.1% this year and 3.7% in 2012.

For the record, it averaged 6.3% when home prices peaked in 2006, meaning affordability will remain much better than it once was, even if prices climb back to those previous bubble highs.

The out-of-favor 1-year ARM is expected to rise to 3.1% from 2.7% this year.

All said, the future is looking pretty bright for existing homeowners and those still looking for a home, assuming nothing unexpected gets in the way.

Unfortunately, there are quite a few unknowns at the moment, including the ongoing government shutdown, which is already slowing down the mortgage market, along with the looming debt ceiling.

Next year, new lending standards will go live, such as the Qualified Mortgage definition.

Additionally, housing policy changes related to the mortgage interest deduction and the conforming loan limit could be a factor as well. There’s also the uncertainty related to the Fed unwinding its mortgage purchases.

So still plenty to worry about, but perhaps we haven’t seen the last of the home price gains just yet.