Logan Kane, an analyst and writer with Seeking Alpha, a crowd-sourced content service for financial markets, zeroed in on the California housing market in one of his recent articles.

Kane connects record low mortgage interest rates with the epic boom in California housing prices. Without those low interest rates, California, in Kane’s view, would not have experienced out-of-the-park home prices.

Even having the benefit of extremely low interest rates up until this year, California households have the highest debt levels, 71%, in the US.   The average total mortgage debt in this country equals 3.5 X homeowner income totals, according to New York Fed Data, and California household debt levels are higher than that.   Hawaiian households are the only ones close to carrying the amount of debt Californians hold.

Now that mortgage interest rates are beginning to rise, Kane believes that new buyers coming into the California housing market will be “…unable to qualify for the mortgages they need to buy and that housing demand will fall precipitously.”

“If buyers become unable to pay for their down payments from their own check books, are those new buyers getting those homes because a lender is being creative?” Kane asks. If so, lenders will have less and less flexibility to “…get people into houses…” as interest rates continue to rise. The bottom line? California home price and sales will drop.

Have we seen any of this before? Kane says, yes. He suggests that consumers and analysts go back to 2007 to see price and sales declines in many of California’s markets. Even in San Francisco, “we’re seeing a rush of price cuts” in luxury homes despite the balance of San Francisco’s markets continuing to escalate at break-neck speeds this summer.

(Just for the record, “The luxury home segment is more seasonal than the general market, with market activity really plunging during the summer and winter holidays…” according to Patrick Carlisle with Paragon Financial Services in San Francisco.)

Kane points to two culprits in California’s present-day housing market. One is affordability (escalating prices coupled with escalating interest rates) and the mismatch of market supply and buyer demand.   Developers are building luxury condominiums; buyers are wanting affordable single-family units.

Does Kane have an answer?  Not so m much.  He says, “Prices won’t come down until buyers are completely tapped due to higher rates. Watch 30-year fixed rates, this year now at 4.81% and last year at just less than 4%. Watch APM rates…if and when these approach 6%, it’s a mess…again.”

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