Close

Blog

Teháma: Carmel, California’s landmark sustainable community envisioned by Clint Eastwood

Only a few coveted homesites in Teháma are up for grabs, and they’re listed exclusively by Compass. Teháma, the coveted private residential community secluded in the hills above the village of Carmel-by-the Sea and envisioned by Clint Eastwood as a model for sustainable development, is bringing to market its final collection of homesites. Teháma has …

Continue reading “Teháma: Carmel, California’s landmark sustainable community envisioned by Clint Eastwood”

Read More

Compass SoCal February 2019 Real Estate Market Update

While overall median home prices trended 5 percent lower in February year-over-year, about half of communities saw increases and the other half saw declines. However, most of the prices are still above January 2018 levels as pricing started surging in February and posted a 13 percent jump compared to February 2017. Malibu and surrounding areas …

Continue reading “Compass SoCal February 2019 Real Estate Market Update”

Read More

Plenty of open jobs in California while employment growth slows as anticipated

Following a delay in data release due to the government shutdown, the latest numbers from the state Employment Development Department (EDD) show California added 3,000 jobs in January, bringing the annual growth to 246,400 jobs. That represents a 1.4 percent increase from the year before, compared with the 1.9 percent growth recorded nationwide. In the …

Continue reading “Plenty of open jobs in California while employment growth slows as anticipated”

Read More

Home as a work of art: Get inspired by these exhibits

If life imitates art, then these California exhibits just may inspire you to turn your home into a canvas for creative expression. California crafty We love Ikea: It’s cheap and convenient. But sometimes your home is screaming for something unique and local. California Visionaries: Seminal Studio Craft, a landmark new exhibit at the Craft In …

Continue reading “Home as a work of art: Get inspired by these exhibits”

Read More

Stephen Udoff named Malibu Realtor of the Year

Compass real estate leader Stephen Udoff has been named Malibu’s Realtor of the Year. The  honor recognizes exceptional service, dedication and diligence in serving the members of the Malibu Association of Realtors and the Malibu community.  Stephen  acquired his first investment property at 21 and was named Rookie of the Year by Who’s Who in …

Continue reading “Stephen Udoff named Malibu Realtor of the Year”

Read More

Compass California honors International Women’s Day

Real estate: career runway for women Few fields today offer more avenues for advancement than residential real estate. According to NAR, a full 63 percent of Realtors® are women. (When the organization was founded in 1908,  membership was all-male – a situation that changed little until the ‘50s.) In honor of Women’s History Month, here’s …

Continue reading “Compass California honors International Women’s Day”

Read More

Home of the Week: A grand Monterey Colonial estate

Ideally located near the Huntington Library & Gardens, this grand Monterey Colonial Estate was built by legendary architect Reginald Johnson in 1927 for his parents. The stately six bedroom, seven bathroom residence features a large 25,570 square foot lot and a versatile floor plan offering both formal and informal spaces. The welcoming entry leads to …

Continue reading “Home of the Week: A grand Monterey Colonial estate”

Read More

The U.S. Housing Market: Despite a Demographic Push, Proceed With Caution

 

With California housing markets having decidedly shifted since the summer, the looming question is what comes next. Since 2014, Pacific Union has partnered with John Burns Real Estate Consulting to forecast the market for the upcoming three years. At our November 2017 forecast, we suggested that the John Burns Home Value Index would reach a plateau in 2018 (which we named a “table top”) and maintain that level through about 2020. The major difference between the current peak and the previous peak seen in the mid-2000s is that the current peak resembles a table top, while the last peak was characterized as a “mountain peak” — a peak followed by a large decline.

Source: 2017 Pacific Union Real Estate and Economic Forecast

A lot has happened since our last forecast, but our predictions remain similar.

While our annual forecast event has been postponed to the first quarter of 2019 as a result of the merger with Compass and the wildfires, I recently attended the JBREC annual summit in New York City, and here are the key takeaways.

  • While concerns over the housing market’s strength are rising, the major tailwind is the demographic force. With U.S. millennials numbering 44 million, that generation’s largest age bracket (4.7 million people) will turn 32 years old over the next couple of years, thus creating a huge wave of potential homebuyers.
  • Online buyer behavior suggests that sales will remain solid in markets in the South (such as Charlotte, Houston, Raleigh, and Atlanta) but will decline in West Coast markets and some Northeastern markets, with California home sales expected to post a 2 percent to 7 percent decline over the next six months.
  • Interest-rate hikes following strong price growth over the last year took a large bite out of affordability, making it the biggest concern for California housing markets.
  • While technological advancements have the potential to reduce construction costs, supply constraints outweigh any potential savings in the short term.
  • Affordability constraints are likely to drive builders to pivot down in price to smaller, higher-density, lower-specification homes in slightly less desirable locations. Also, builders are more likely to construct single-family rental properties.
  • Average annual price growth in six California metropolitan areas is projected at 6 percent in 2019 and 3 percent in 2020 before declining by 0.3 percent in 2021.

Long-Term View

Demographic Trends Are Propping Up Long-Term Demand

  • With U.S. millennials numbering 44 million, that generation’s largest age bracket (4.7 million people) will turn 32 years old over the next year, which is the median age of first-time buyers in the U.S. Considering a combined total of about 6 million new and existing homes sold annually in the U.S., millennials have the potential to create a huge wave of first-time homebuyers and account for a much larger share of total housing demand. First-time buyers currently comprise about one-third of all homebuyers.
  • These demographic forces suggest that 1.25 million more households per year over the next 10 years will need housing, which means that 1.375 million new units per year need to be built to meet demand through 2025 (including owner-occupied properties, second homes, and replacement of teardowns).
  • However, after 2025, America’s aging society will reduce the need for housing production since seniors create supply when they pass away or move into assisted-living facilities or their children’s homes. Thus, the net growth of new homes will decline to 230,000 units per year.

But Supply Constraints Make Homes Increasingly More Expensive

  • At the same time, meeting current demand has become increasingly more difficult, as builders take a large risk when buying raw land to entitle in their respective regions.
  • Based on a JBREC survey, buying raw land is perceived by builders as twice as risky as buying a few home-builder stocks, leading to fewer builders willing to make purchases in the current housing cycle.
  • In addition, builders face large labor shortages, which will not abate considering the nation’s aging demographics and immigration restrictions, both of which will lead to much higher construction wages.
  • However, technological advancements in the construction industry — such as building information modeling software, 3D printing, robotics, off-site technologies imported from overseas, and smart homes — have the potential to reduce costs dramatically.
  • Still, many costs will continue to increase:
  1. Lot shortages will keep land prices high.
  2. Labor shortages will keep building costs high.
  3. Inflation and potentially tariffs will keep materials costs high.
  4. Regulation-related costs are high in California.
  5. Significant off-site cost reductions for nicer single-family homes are years away.

Short-Term View

2018 Slowdown

  • Nationally, sales of newly built homes have been slowing all year, with a 13 percent year-over-year decline in October, bringing annualized sales to 553,000 new single-family homes, or 40 percent of the projected 1.3 million needed to meet demand.
  • What led to 2018’s slowdown:
    • Mortgage rates rose by 88 basis points this year, from 3.95 percent in January to 4.83 percent in October, resulting in at least an 11 percent increase in payments without accounting for price appreciation.
    • With price appreciation, Californians’ monthly mortgage payments are up by as much as 25 percent year over year:
      • Silicon Valley, up by 25 percent
      • San Francisco, up by 19 percent
      • The East Bay, up by 17 percent
      • Los Angeles, up by 14 percent
      • Nationwide, up by 13 percent
  • Each 100-basis-point increase in mortgage rates reduces borrowers’ purchasing power by about 7 percent.
  • The impact on affordability is vast, as 44 percent of American households earn less than $50,000 per year and the median U.S. income is $63,000.
  • In the Bay Area, the current minimum annual income required to purchase a median-priced home is more than $202,000, up from $90,000 in 2012. The median household income in the Bay Area averages about $100,000 in the eight local counties excluding Solano.
  • In Los Angeles, the current minimum annual income required to purchase a median-priced home is more than $112,000, up from $54,000 in 2012. The median household income is Los Angeles County is currently about $65,000.
  • Newly constructed homes cater to affluent homebuyers, with 60 percent of public builders across the U.S. now constructing homes with average prices higher than $400,000. In Los Angeles, the median new home price is $682,000, while in the Bay Area, it ranges from about $760,000 in Sonoma County to $1 million in Silicon Valley.
  • Only 24 percent of American renters can afford the median-priced new home today, and just 31 percent can afford a resale home.
  • And while there have been more listings on the market in recent months, inventory is still below average across all price tiers, especially for the most-affordable range, which is almost 50 percent below the average.
  • Lastly, the housing market’s performance and the current slowdown is not a nationwide trend — sales of existing home remain strong in the relatively affordable South.

What to Expect in the Months Ahead

  • The economy will remain healthy, boosted by low unemployment, continued hiring, and wage increases, but the rate of growth will slow.
  • Mortgage rates will likely reach 5.5 percent by the middle of 2019, leading to fewer home sales.
  • Historically, increases in mortgage rates when the economy was strong have generally had a small impact on activity, leading to a 7 percent to 10 percent decline in sales.
  • Online buyer behavior suggests that sales will remain solid in the markets in South (such as Charlotte, Houston, Raleigh, and Atlanta) but will decline in West Coast markets and some Northeastern markets, with California home sales expected to post a 2 percent to 7 percent decline.

What to Expect Beyond 2019

  • Rising rates will slow move-up homebuyer activity, with an 11 percent decrease in total home sales.
  • Mortgage availability has improved, though credit scores and proof of employment play a critical role (unlike during the early 2000s).
  • Affordability constraints are likely to drive builders to pivot down in price to smaller, higher-density, lower-specification homes in slightly less desirable locations. Also, builders are more likely to construct single-family rental properties.
  • The risk of a recession increases, with a 48 percent probability of a downturn within two years and a 64 percent chance within four years. Fifty-nine percent of economists forecast a recession in 2020.
  • However, housing risks vary by market:
  1. California housing markets generally rank normal to higher risk, with no market nationally categorized as very high risk.
  2. Affordability is the primary risk.
  3. A huge upside in the current housing market is homeowner equity, currently at $190,000 inflation-adjusted per U.S. owned household.
  • Other risks:
  1. A rapid acceleration in interest and mortgage rates shaking consumer and business confidence
  2. A decline in foreign buyer activity due to immigration policy or emerging market factors (such as currency, trade policy, local stock markets, or economic fluctuations)
  3. Immigration restrictions: There has already been a pull-back in H-1B visa approvals, which are critical for the tech sector in California; holders of these visas are also participants in local housing markets
  4. Excessive debt burdens (government, corporate, and consumer); if interest rates spike, they would have trouble repaying debt
  5. A stock market correction that could rattle consumer confidence and result in in job losses
  6. A “black swan,” or an unforeseen geopolitical event that triggers significant volatility in financial markets and the economy

California Outlook

  • The chart below shows the John Burns Home Value Index four-year outlook for median home price appreciation in six California metropolitan areas and/or divisions. The numbers indicate the average annual rate of growth or decline.
  • Because of affordability pressures, all six markets are projected to see notably slower price growth over the next three years.
  • Four of the six markets are forecast to see negative growth in 2021 of no more than 1.3 percent. However, all markets will see at least a 5 percent additional cumulative increase in 2019 and 2020 before the reversal in 2021.

Source: John Burns Real Estate Consulting

Taken together, with input from JBREC and the nation’s largest home builders, our final takeaway is that buyers and investors should proceed with caution but proceed nevertheless.

Selma Hepp is Pacific Union’s Chief Economist and Vice President of Business Intelligence. Her previous positions include Chief Economist at Trulia, senior economist for the California Association of Realtors, and economist and manager of public policy and homeownership at the National Association of Realtors. She holds a Master of Arts in Economics from the State University of New York (SUNY), Buffalo, and a Ph.D. in Urban and Regional Planning and Design from the University of Maryland.

(Promotional photo: iStock/RgStudio)

 

_______
Shared with permission from the Pacific Union Blog

Read More