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As Goes California, So Goes America — And California Isn't Looking Good

Mamta Badkar
california lifting house

REUTERS/Mike Blake

The housing recovery we've seen in the past couple of years has largely been driven by the West Coast.

Home prices in California plunged 42% from their March 2008 peak during the downturn, and then rebounded 36%. 

Prices surged not only because of the extreme drop in prices during the downturn, but also because of "the efficient disposition of distressed homes, low non-distressed inventory, economic recovery, and foreign/second home demand," writes Michelle Meyer, an economist at BofA Merrill Lynch, in a note to clients.

But housing affordability has started to fall. Only one-third of California's households can afford to buy a house, and only 21% in San Francisco can afford to make a purchase now.  

"Prices in the San Francisco metro area have already exceeded the pre-crisis peak and set a new record high," says Meyer.

"This reflects low inventory and a minimal amount of distressed activity — only 4.5% of sales are distressed, and it takes less than 2 months to clear the distressed supply."

California's home price growth is expected to slow in 2014, and California is a leading indicator for the overall housing market.

"This is consistent with our view that national home price appreciation will slow to about 5% this year, from the current run rate of nearly 14% year over year in 2013," says Meyer.

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