A California cooling effect could put a freeze on nationwide appreciation and a sustained housing recovery, according to the latest report from Clear Capital.

Since 2012, the churn of California price appreciation has buoyed the West, and helped support nationwide appreciation. But data through September 2015 reports cooling price appreciation across the state.

Affordability in high-priced California markets is out-of-reach. Typically, price increases are driven by increases in demand. A look at the San Francisco housing between 2011 and 2015 shows a spike in prices has not been the result of increases in overall transactions.

Rather, Clear Capital says, the tight supply is pushing prices on an upward trajectory placing the market even further out of reach for new buyers. In slower growth markets like Los Angeles, a mortgage payment requires upwards of 70% of a potential first-time home buyer’s income, certainly quelling demand.

“The strong continued growth in the Midwest, South and West, in particular the California Bay Area, suggests strong consumer and investor confidence has been seemingly unaffected by talk of looming interest rate hikes by the Fed,” says Alex Villacorta, vice president of research and analytics at Clear Capital. “However, if and when interest rates do rise, likely occurring by the end of 2015, it will be timed with a decrease in real estate market activity typical through the fall and winter seasons.

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(Source: Clear Capital) 

“This unfortunate pairing will most likely cause a slowdown in price growth for most markets, which already seems to be in motion across much of the country. In bubble markets like San Francisco, San Jose and Los Angeles, growth has been unsustainably high in the last year fueled in large part by the white-hot rental market and low inventory environment,” he says. “In fact, current prices in San Francisco County are far beyond any historic level on a real basis and are doing so with some of the lowest level of activity this county has seen.”

Even the San Jose MSA’s appreciation, which began experiencing dramatic bubble-like growth in 2013, is beginning to slow down with quarterly growth of 2.5%—less than half of the 5.8% quarterly growth seen two years ago. 

“Given the current obstacles to enter these markets, a rate hike is likely to have a negative impact, specifically making it more expensive for first-time home buyers to engage. In addition to high home prices, these markets also suffer from high rents, which prevent potential home buyers from saving for down payments,” Villacorta says. “With the barrier to entry too high, a younger segment of potential home buyers may start to turn their sites eastward—to the Midwest and South, where affordability continues to be within reach.”