31 May Breakdown of CAR’s 2018 California Economic & Market Forecast Presentation
The California Association of Realtors came out with their 2018 California Economic and Market Forecast this month presented by Leslie Appleton-Young, Chief Economist of CAR. The report mostly covers data they have received and compiled up until the end of 2017.
The report starts out with nice break down of trends, most notably the median home price of $502k in 2016 and $525k in 2017, a 4.3% increase.
CAR is setting the expectation
- that the US economy will continue to expand along with the job growth
- interest rates continuing to rise
- home buyers continuing to have a tough time affording a home
- baby boomers not moving
- Millennials actually starting to leave home and renting/buying
- continue lack of supply
- owner occupied units turning into rentals
Consumers are continuing to drive the economy, consumer confidence is still growing since 2009 and has exceeded its peak of 2007, S&P 500 is mirroring consumer confidence since is 2009 dip to sub 1,000 to records highs of 2,500.
Mortgage rates have continue a three bump trend, with a sharp increase in 2011 only to decrease until it bumped up again in 2013 followed by another more mellow decrease with another bump in 2017, followed by another decrease.
Unemployment in California is 5.4%, with the highest in Bakersfield (9%), Fresno, Stockton, Modesto not far behind. Los Angeles is in the middle at 5.4%, San Diego at 4.7% and San Francisco at 3.3%. There is a net of about 1M jobs gained since 2010 loss. However all isn’t positive in the jobs arena with the trend slowly decreasing since 2015 in both California and the US. Southern California trend of jobs has decreased by 1.1%, with the Bay Area second highest of 1.4%, Central Valley at 1.7% and North Central the highest at 3.7% decrease in jobs from 2016 to 2017. Construction has been leading the way in job growth with Education, Health Care, Leisure/Hospitality following behind.
This report does give us a a Commercial Real Estate specific outlook with signs of decline in most of the segments:
- office getting some growth from job growth though the trend is moving downward which will eventually affect vacancy and rents
- retail continuing to decline affected by e-commerce, namely Amazon Prime which is used by 46% US households according to the report
- industrial shows continued high demand which is complimented by ecommerce growth, though supply is an issue which will drive down cap rates and increase rents
- multifamily is continuing to grow as housing demand is still higher than supply though rents are leveling off a supply trickles onto the market (and I must think that rent affordability is beginning to cap out which the report does not mention)
Certain levels of uncertainty are brought up in this report
- Tax Reform – includes changes that will increase cost of homeownership; majority of the crowds think prices will remain flat and sales will come down. The Individual Tax Reform Proposal doubles the standard deduction and repeals state and local tax deductions which will increase the cost of owning a home. If cost of homeownership increases, fewer sales should result which would reduce home values further reducing homeowners willingness to sell and thus tightening the housing supply even further in California. Tax incentives decreased sharply by $6,500 on average.
Housing market trends show a slight uptick in single family sales with historic peaks of 1978, 1988, 2004-2005. The August 2016 sales were 422,190 vs a 427,630 in August 2017, 1.3% year over year increase.
The Median home price continues to increase in California from $245k in 2009, to $450k in 2013, $500k in 2015, $527k in 2016 and $565k in 2017. The last peak was $594k in 2007. We are still 4.9% below this peak as of Aug 2017; with San Diego specifically 2.8% below the $622k peak in Ma7 2006 and $605k as of August 2017.
Inventory continues to move it’s way downward and active listings declining 26 straight months with the supply declining most in the lower end of the spectrum of home prices at $199k and under with the $200k market in second, $300k in 3rd and $500k in 4th; $750k supply begins to level off then starts in increase again in the $1-$3m range. $3M supply is fairly healthy with less buyers and competition in that sub-market.
The turnover rate is low for longterm homeowners mostly due to capital gains penalties, wanting to keep their low property taxes, they most likely have a great low rate on their current mortgage and the big question of, if I sold, where would I go?
Housing affordability in California is 29%, Los Angeles 28%, San Diego 26% and San Francisco leading the way as the most unaffordable at 12%. Kern and Sutter being some of the most affordable in the 50% plus range. We saw housing affordability peak in Q1 of 2012 and decline ever since.
New Jobs vs New Permits in 2010-2015 show Los Angeles with the greatest disparity of 381,000 jobs versus 88,000 permits and San Diego at 140,000 jobs vs 40,000 permits.
The Generation Xers are leading the way with buying 40% of the homes, Millennials in second with 31%, Baby Boomers 24% and the Silent Generation (72 and older) buying 4%.
In 2017, 6 out of 10 deals had multiple offers; 62% of the deals in LA/OC/SD had multiple offers with 33% of the sales going above ask and sitting 14 days on the market. The $751-$1M market had the most competition with 73% multiple offer status, second being $500-$750k at 71% and $300-$500k at 67%. First time home buyers were most often in the multiple offer range along with bidding over asking more than repeat buyers.
International buying dropped to the lowest activity in 9 years, with just 3% in 2017. International buyers seeking mostly Southern California, taking 71% of the pie, 20% buying in the Bay Area. Although Chinese buying activity has dropped since 2016, they still made up the majority of the buyers in 2017 at 31%, 6% Mexican and 9% Indian.
Since 2014, the share of cash buyers remained in the 20-23% range.
Also seeing more flippers in the market from 20% in 2016 and 24% in 2017.
Sellers have increasingly been moving out of California since 2007’s peak of 29% and 28% for 2017.
2017 Southern California home sales are up 4.8% year to year with the median price being $528k which is a 6.7% increase year to year, 20 days on the market, $301/ft and selling for 98.9% to list price. Ventura has seen the most decline in sales at -12%, Santa Barbara with 13% increase, LA 4%, OC 2% and SD at 3%. Not to mention San Bernardino and Riverside at 6%.
2017 Southern California home median prices in San Diego up 7% at $605k; up 10% in LA at $575k; down the most in Santa Barbara -19% and $631k.
What does the street say about 2018? 72% think affordability will get worse, 64% think interest rates will rise and home prices will increase mostly due to a lack of inventory and affordability.
A few other factors contributing to a potential decline in housing include housing affordability, huge California Pension Funds, Boomers not prepared for retirement, student loan debt with Millennials, Institutional Investors buying up Single Family Homes and Tax Reform.
Eric von Bluecher
Beachbreak Investments Inc
12780 High Bluff Dr #130, San Diego, CA 92130