The prediction at the end of May from the National Association of Realtors had been that home prices would be falling soon due to an unsustainable gap between prices and wages, with no clear date. With more recent data and a Reuters poll of 45 analysts offering more input, the expectation is that prices will continue to rise for at least another year, and probably two.
This is not to say there isn’t a large gap between prices and wages. The expected growth rate in earnings is 2.8% for this year, less than half the expected price increase of 5.7% according to a composite index of 20 cities. Prices are predicted to further increase by 4.3% in 2019 and 3.6% in 2020. While the rising prices are leading to a decline in demand, there is still the factor of supply, with low supply being a driving factor for high prices. April data showed that inventory had declined for 35 straight months. Of the nearly 40 polled analysts who responded to the question of what would happen to the supply of affordable homes over the next 12 months, about 80% said it would either stay the same or fall. Additionally, interest rates on 30-year mortgages are expected to hit 5% by the end of 2019.
Prices have been rising for six years and are continuing to rise. When does it end? Analysts think it may be soon. There’s one key difference between the current economy and the last housing boom. Previously, it was accessible loans that drove high buyer demand and thus enabled sellers to safely raise prices to match increasing demand. Now, prices are skyrocketing much faster than income accessibility. Wages are up only 14% compared to six years ago, in contrast to a price jump of 48%. Another factor affecting affordability is that interest rates are going up.
Rising prices have gone on as long as they have because demand is actually quite high at the moment. People who haven’t been able to buy since the recession — particularly Millennials — are trying to take advantage of the relatively more stable economy. The problem is that they can’t afford it, and more are starting to realize that. Demand is beginning to fall off, and with that, prices are going to need to start coming down in order to sellers to manage to sell at all.
Right now, it’s a gig economy for somewhere around 20% to 30% of the US workforce. Rather than having routine hours and a stable income, these workers are operating on commission and setting their own hours. Such people may be working for a company like Uber or Airbnb, or may be self-employed. While commission-based work can sometimes rake in the numbers on a good deal, sometimes you can go months or even more than a year without any income. To compound the issue, mortgage lenders are often looking for stable income — getting $1 million one day and nothing the next 6 months doesn’t enable you to qualify for a mortgage.
Two of the biggest mortgage lenders, Fannie Mae and Freddie Mac, want to change that. Fannie recently conducted a survey of 3000 lending executives, 95% of whom said current guidelines don’t count much of an increasing number of applicants’ earnings. In order to improve “access to credit,” both companies are seeking to change their guidelines to better match the gig economy. The two biggest obstacles are maintaining high quality loans and low risk of default, and automation. Freddie thinks it has a solution to the latter. A possible solution to the former is to reanalyze whether changing jobs constitutes a disruption of income. It’s entirely possible that the applicant is doing the same thing they’ve been doing for years, albeit with three different companies.
Effective in 2020, California will be the first state to require that all new residential constructions have solar power. This is in response to a requirement that 50% of the state’s energy be from non-carbon-producing sources by the year 2030, which the state feels is best achieved through solar power. The mandate allows for either solar panels on individual homes or a solar panel grid powering multiple homes, and doesn’t specify whether the solar panels are owned by the homeowner or leased. While the cost of building a home could increase by up to $16,000, the lower energy bills are expected to make up the difference, and even reduce net costs by about $40 per month on average.
Chinese investors have historically contributed significantly to foreign investment in California. The numbers dropped sharply last year, from $16.2 billion in 2016 to $7.3 billion in 2017. San Francisco and Los Angeles in particular saw a decline of 52% and 67% respectively. The largest decrease was in money spent to acquire or build hotels. Chinese investors are instead taking their business to the United Kingdom, which presently has a weak currency.
It’s not just California, though. A similar level of decline has occurred throughout all US top markets. It’s speculated that the major reasons for the decline are increased controls by the Chinese government, increased involvement by the US Committee on Foreign Investment, and better opportunities in other countries. California is still an attractive place for investors, but policies it has no control over are negatively affecting investment. Other factors include rising interest rates, imminent trade war with China, and the uncertainty surrounding a soon-ending visa program.
In May, Los Angeles County set into motion a plan drafted in August of last year that would hopefully be the solution to multiple problems at once. The ordinance seeks to create new housing for the homeless through the development of accessory dwelling units, or ADUs. Nonpermitted ADUs have been quite common, and recent changes have made it easier to get them permitted. To take advantage of homeowners’ desire to build ADUs, LA county now wants to grant homeowners a financial incentive of $75,000 for new units or up to $50,000 for converted units, under the condition they follow the new, easier guidelines and also are rented out to formerly homeless individuals or families. The goal is that this is a solution to affordable housing and also one that homeowners are on board with, as it gives them a financial incentive to do what they already wanted to do, which was build ADUs on their properties to collect rent. Could, or should, other regions follow Los Angeles’ lead?
Single women are now the second largest category of homeowners, behind only married couples. They account for over double as many home purchases as single men, at 18% compared to only 7%. The number is expected to keep going up. Even homebuilders are taking note, and new projects are increasingly catering to what are perceived to be womens’ preferences.
Why the shift? It could be rising rents. Though home prices are high now, with rental prices going up as well, a home purchase now is an investment for the future rather than an in-the-moment financial decision. Women are believed to be more likely than men to see a home purchase as a future investment. The data seem to agree, as 23% of single women cited rising rents as a reason for buying now, as opposed to 16% on average for men.
UPDATE: The fifth measure, the $2 billion homeless housing bond, has now been approved for the November ballot.
California is already getting four new housing measures on the November ballot, which would do the following:
1. expand rent control
2. increase Prop 13 benefits to homeowners
3. clean up lead paint
4. $4 billion new development bond
There may be a fifth, though, a $2 billion homeless housing bond that was supposed to go through without voter approval. The revenue was going to be taken from a bond intended for mental health funds, under the assumption that a significant percent of homeless people are mentally ill. This was challenged in court, and the result of the suit is yet uncertain. It may have to go to the voters in November, or it may not even get enough support from lawmakers to get on the ballot.
Rent control seems like it’s a good thing in an environment in which rental prices and house prices are both skyrocketing throughout California. 60% of people support rent control according to a 2017 survey. We certainly need something to to make affordable housing available to more people. But is rent control the correct choice?
With it comes some unfortunate side effects. Homeowners impacted by rent control are not wanting to give up their rental income easily. If rent control prevents them making a profit of renting what they have, they turn to converting or redeveloping their buildings. This artificially inflates the rental value, as it’s a new structure and therefore the owner has justification to raise the rate despite rent control. So homeowners’ response to rent control is, effectively, to reduce the inventory of affordable housing. In addition, areas of mixed rent-controlled and non-rent-controlled units are wealth agnostic — the rent-controlled units don’t necessarily go to those in need of affordable housing.
So, attempting to make existing housing more affordable for renters hasn’t worked out. What’s the solution? Build more. The problem isn’t only lack of affordable housing. It’s also lack of housing in general. Building affordable housing solves both of these issues, and has the added advantage of not relying on a segment of the housing market that doesn’t enable upward mobility. It’s a difficult task, though, since California hasn’t updated its zoning laws for today’s market and they continue to favor single family residences over more affordable multifamily dwellings.