California bungalow
George Gutenberg/Getty Images

In the California real estate market the “b” word is on the minds of many: bubble. With reports of sharp declines in home sales, shrinking inventory and rising home prices, it might be an understatement to call California’s situation a puzzle, and one that may have implications for the entire country.

June marked the slowest home sales month for California in four years. The state saw an almost 10 percent year-over-year drop in transactions, according to a report by CoreLogic. This number stood in sharp contrast to the record-breaking cost of new and existing houses. The median price, across the state, rose to an all-time high of $500,000.

California’s trends might be exacerbated, but they’re not out of line with what’s going on in the rest of the country, says Eric Sussman, adjunct professor in accounting and real estate at UCLA Anderson.

The tax bill changes limiting home equity loan interest and property tax deductions, lack of affordable housing supply, wage stagnation and higher interest rates are all problems California shares with the rest of the country, Sussman points out.

However, California is unique in many ways, which means it might not be the most accurate barometer for judging the rest of the housing market.

“California is California. People are always going to want to come here. We’ve got 40 million people. We’re the fifth-largest economy in the world. Global capital is going to come here. In that way, we’re different,” Sussman says.

Prices are up, sales down and unemployment is low

Like California, national median home prices are at an all-time high, hitting $276,900 in June. This is a 5.2 percent increase from a year earlier, according to the National Association of Realtors, or NAR. Existing national home sales were sluggish, falling 2.2 percent in June from a year ago.

Meanwhile, the economy is strong. The national unemployment rate has fallen to 4 percent, which is the same on the state level for California. One problem is wages aren’t keeping pace, says Sussman.

“The real wage growth is squat. It’s been persistent for some time. You’ve got wage growth running, nominally, at 2.5 percent and inflation running at 2.5 percent so you’re treading water,” says Sussman. “Those are national trends, they’re just magnified in California.”

California is getting more expensive all the time, wages aren’t keeping pace

In California, price parity is higher than most of the country, according to a report by Money. The results were gathered by calculating the Census Bureau’s median income from the 2015 American Community Survey using the regional price parity method.

This method shows how much cash will buy in any given area. For example, in California the median income was $64,500 but the actual value was $56,878 when you factored in cost of living.

Although California is typically more expensive than the rest of the country, it does share the wage growth problem that the U.S, as a whole, is facing, says Danielle Hale, chief economist at Realtor.com.

“Affordability is really important in the housing market. From an economic theory perspective, when unemployment is as low as it is right now we tend to see wages start to pick up,” says Hale.

“This is a question that’s been puzzling economists: Why aren’t wages growing faster? It’s hovered just under 3 percent. As mortgage rates start to move up we might see affordability become a problem nationwide.”

Even the frenzied Silicon Valley market has mellowed

One place where home sales were legendary for their risky offers, stripped of contingencies to woo sellers with full dance cards, is Silicon Valley. Inventory is fattening and sales are slowing.

“At our peak, in my area, if you listed a home you could count on getting 15 to 20 offers. We’re still in a market where we’re getting multiple offers, but things are changing,” says Robert Whitelaw, broker/owner of Whitelaw & Sons Real Estate Services in Morgan Hill, California.

“One, not just anything will get multiple offers. If you have a crappy house, the odds are it’s going to take you longer to sell. And that wasn’t always the case. You could sell absolute crap really quickly. The other part of it is you’re getting less offers, maybe four or five.”

Lack of construction and too much focus on the high-end market are two major problems, says Whitelaw.

Housing starts dropped by 12 percent nationwide in June, according to a joint report by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development last month.

In California, single family residential construction is rising, up 16 percent in June from last year. But these gains aren’t enough to meet demand. In 2005, there were 150,000 single family residential construction starts compared with 58,000 in 2017, a 61 percent drop.

“We have seen increases in construction but not at what we need. At 2007 it was at a high point. We’re not even at 30 percent of normal construction levels,” says Whitelaw.

“I got an email from a builder recently. It was the oddest email, it read: ‘Now affordable housing at the low $1.3 millions.’ The construction folks seemed to have played out their hand when it comes to high-end construction. The really sad thing is that, in the really high-priced homes, the folks that bought them are likely going to have to sell for less than they paid for them.”

In the last recession, California’s home prices were gut-punched, taking a 42 percent hit in home values from the peak of the recession to the bottom, according to a report by CoreLogic. Since the worst days, California home prices have risen by 78 percent, just 2 percent higher than the pre-recession peak.

Nobody can predict whether history will repeat itself, but today’s buyers might want to prepare themselves to stay in their homes for many years to come.

Learn more: 4 signs you paid too much for that house