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Economic Trends Affecting The Real Estate Market

California has been showing impressive recovery from the Great Recession, with many signs indicating the state is well on its way out of the red. Along with the good, however, are a few negative trends that can significantly impact the housing market.

Here’s a look at some of the most recent trends affecting California real estate:

Strong employment, weak wages

As of December, 2016, California has achieved over 16.7 million jobs – more than the 15.6 million jobs recorded before the Great Recession. The state is undergoing strong economic expansion that’s seen to continue at a steady pace. This augurs well for the real estate market, which, in California, is an almost 50/50 split between owners and renters.

However, wages are not increasing at the same rate as employment. While the demand for more workers is seen to improve wage rates, this can be temporarily offset by the increase in the number of people joining the workforce. Given these factors, California is expected to make a full recovery in employment only by 2018 or 2019.

Economic factors favor renting over home ownership

As of 2015, household occupancy in California has risen 12% from 2000. Unlike pre-recession, however, the increase in the number of renters is outpacing the increase in the number of homeowners. There are 17% more households renting today compared to only 6% more who are buying a home.

Slow wage growth, high home prices, and foreclosure experiences are cited as the main reasons for the slow rise in homeownership.

About 2/3 of new renters are occupying single-family homes, while the other 1/3 are moving into multi-family residences. This trend is seen as a result of the rash of foreclosures after the recession, leaving many single-family homes available to rent. As the market normalizes and people can once again afford to buy homes, the trend is expected to reverse, with more renters moving into multi-family properties.

Another factor that’s driving up renting is the entry of recent college graduates – collectively known as Generation Y or millennials – into the workplace. These individuals between the ages of 25 and 34 are leaving the nest for the first time and generally prefer renting over buying – a trend that’s seen to continue indefinitely.

Only about 35% of Gen Y today are homeowners, though that number is expected to change soon. As they entered the job market during or just right after the recession, they needed a longer time to save enough for a home down payment. Additionally, many millennials have witnessed or have been part of family foreclosures, leaving them warier of home buying than previous generations.

Consumer sentiment falls but remains positive

Consumer sentiment in California falls in the last quarter of 2016 but remains positive, continuing a series of rising trends since 2008. Consumer sentiment is measured two ways: expectations on future economic conditions, and plans on buying big-ticket items, such as a home or a car.

The trend for both figures has been going up since 2008, breaching the 100 index that indicates a perfect balance of negative and positive responses. In the 4th quarter of 2016, the indices have gone down, but are still generally positive.

Consumer sentiment is important because it gives a good indication of how buyers will likely decide when it comes to buying a high-priced item, including a home.