Will California Home Prices Drop During a 2020 Recession?

Will home prices in California drop during a 2020 recession? No one can say for sure. But history has some interesting insights, and they might surprise you.

These are uncertain times we find ourselves in. The ongoing public-health crisis has shaken financial markets and caused a global recession. In such times, homeowners and prospective home buyers tend to have a lot of questions about the real estate market. Today, we’re going to address one of the most common questions of all:

Will California home prices drop during 2020, due to the coronavirus pandemic and economic recession?

Let’s start with some hindsight, by looking at California home-price trends during the past few economic recessions.

Chart: California House Prices in Previous Recessions

The chart below shows the California House Price Index from the 1970s through the end of 2019. It was created by the Federal Reserve Bank of St. Louis, using data provided by the Federal Housing Finance Agency.

This chart shows that home prices in California have either held steady or risen through four of the last five recessions. In other words, house values tend to move independently of the broader economy.

View a related analysis for the Bay Area.

During the 2001 recession, which was brought on by the bursting of the dot-com bubble, home prices in California actually continued to rise. You can see that in the chart above.

The Great Recession of 2008 – 2009 was a different story, and a different sequence of events. In that scenario, the “crashing” of an overbuilt and overvalued housing market caused the recession. That’s the largest of the vertical gray bars, over on the right. At that point in history, California home prices were falling well before the recession officially began.

Some people associate economic recessions with declining home prices, as if they two are interlinked. But history shows that’s not always the case. And that’s why it is difficult to answer what seems like a simple question: Will California home prices drop or slow down in 2020, due to a recession?

Forecasters Predict Fewer Home Sales, But…

In a report issued on March 20, the California Association of REALTORS® (C.A.R.) said it has recently downgraded its outlook for home sales and prices in the state. This is a result of the ongoing pandemic, and the stay-at-home orders it has mandated.

According to C.A.R. Senior Vice President and Chief Economist Leslie Appleton-Young: “The housing market condition is expected to deteriorate accordingly in the near term, with both sales and prices being downgraded from our original 2020 housing forecast in the coming months.”

Another recent report, from the property valuation company Veros Real Estate Solutions, predicted a “softening” of home prices nationwide over the short term. This would be followed by a “rebound” period once the COVID-19 pandemic subsides.

Eric Fox, Veros’s Vice President of Statistical and Economic Modeling, offered a long-range housing market outlook extending into 2021. He said the group expects our current health and economic issues to cause a “mild forecast depreciation on average for the next quarter with a return to normal appreciation rates later in the year and into 2021.”

The housing research team at Zillow is still offering a positive forecast for California home prices through 2020. As of mid-April, their website stated the following:

“California home values have gone up 3.9% over the past year and Zillow predicts they will rise 4.9% within the next year.”

Of course, that prediction could be revised as the situation continues to unfold. But the point is, we don’t know for certain if home prices in California will drop later in 2020 due to the coronavirus or recession.

In a sense, we are navigating our way through uncharted waters. Not since the Spanish Flu has a disease slowed our nation’s economy to a crawl in this fashion. And things are so different today, it’s hard to compare those two pandemics.

But if you step back and take a wider view, using history as a guide, it’s easy to see how California home prices might weather the storm. Cities across the Golden State might only experience a temporary slowdown in home-price appreciation, followed by a resumed upward climb once the health crisis eases.

A ‘Recovery’ Starting Later This Year?

In a report published earlier this week, the housing research team at Freddie Mac said they expect to see a recovery starting in the second half of 2020.

Sam Khater, the group’s chief economist, said the following:

Although the uncertainty of the crisis means forecasts of economic activity are more unclear than usual, we expect that most of the economic damage from the virus will be contained to the first half of the year. Going forward, we should see a recovery starting in the second half of 2020…

Along those same lines, researches from Goldman Sachs recently said they “do not currently expect the strain on housing to be of a similar magnitude seen in the last downturn.”

There’s still a lot of we don’t know at this point. It’s a unique situation we find ourselves in. But history shows that home prices in California and nationwide don’t always drop during a recession. And even if prices do dip slightly in some markets across the state, we could see a return to normalcy later this year.