2019 Market Predictions

The California Association of Realtors (C.A.R.) is predicting a slowdown in the 2019 housing market. Interest rates will continue to go up, straining already weak affordability and reducing demand. The senior Vice President and Chief Economist of C.A.R., Leslie Appleton-Young, says that high prices despite our recovery from the housing shortage are fueling a period of uncertainty among homebuyers. Buyers will feel the need to stand back while he market figures out where it’s going — which is probably down.

Another issue that will be facing California in 2019 is outmigration. Many people no longer able to afford homes where they have been living are forced to move elsewhere. This is often another county with lower priced and less desirable homes, and sometimes even outside of California with its relatively high-priced home market.

C.A.R. has provided data for the prior five years beginning in 2013, this year’s projected numbers, as well as forecast numbers for 2019:

Year:                                                                           2013       2014       2015       2016       2017       2018       2019
Single Family Home resales, thousands: 414.9      382.7     409.4      417.7      424.1      410.5      396.8
% change:                                                               -5.9%    -7.8%      7.0%       2.0%      1.5%      -3.2%      -3.3%
Median price, thousands:                               $407.2   $446.9   $476.3    $502.3   $538.0   $575.8    $593.4
% change:                                                              27.5%      9.8%       6.6%       5.4%      7.2%       7.0%       3.1%
Housing Affordability Index*:                         36%         30%        31%        31%        29%        28%         25%
30-year fixed rate:                                              4.0%        4.2%       3.9%       3.6%      4.0%       4.7%       5.2%

*The Housing Affordability Index is the percent of households who can afford a median-priced home.

More: https://www.car.org/aboutus/mediacenter/newsreleases/2018releases/2019housingforecast

Rent Control & Proposition 10

This is for all those who have asked my professional opinion regarding Proposition 10, which makes rent control possible in California, basically by voiding the 1995 Costa-Hawkins Rental Housing Act.

In the process of evaluating this ballot item, I researched a number of relatively contemporary studies and reports. Doing so was an interesting study in how arguments are crafted without ever saying what the source of information is, or proving the validity of same. Below you’ll find a collection of web-based documents I used. Happy reading!

I am not including support for my position in this writing. The facts and arguments are contained in the documents below. If my statement is not convincing, you’re welcome to do your own research.

What I have been able to determine is that rent control most benefits those people who are living in a rental at the time rent control is applied, assuming they remain in that unit. Those people have two benefits. First is the social benefit of being able to continue living where they have been living and know the locale, the neighbors and are close to the places where they regularly travel. Second is the financial benefit that attends having a predictable rent which does not periodically take huge jumps in concert with the ebb and flow of US economic conditions.

As time goes on, laws are gradually changed, and landlords find work-arounds that avoid rent control. As it was stated in one paper, “Rent-controlled buildings were almost 10 percent more likely to convert to a condo or a Tenancy in Common (TIC) than buildings in the control group, representing a substantial reduction in the supply of rental housing.” At that point rent control becomes not only useless, but acts as a constraint on those who would find a more effective or fair way of dealing with the problem of income inequity.

There appear to be lots of different ways to address the problem of inadequate housing for lower and middle class households. The basic rent control mechanisms employed today have not been updated to contemporary standards of research, thinking, and analysis. If we were to apply some “big data” techniques to the problem, there could be some newer, more successful plans developed, much as is being done right now in the field of public housing projects. Ideas that have failed over time should be trashed and new emphasis placed on finding solutions. That has not been done. We are still tossing up the same tired ideas and unproven concepts, and arguing over ancient “facts.”

None of those improvements will take place as long as the current prohibition on rent control continues to exist. While the Costa-Hawkins act remains in place there is no motivation for government or landlords to look for a solution. As is stated in the Haas report, “California can protect cost-burdened renters from exorbitant rent increases and displacement while also increasing the needed supply of housing, provided that we take a comprehensive approach that includes rent control among multiple policy mechanisms and investments.”

We need that comprehensive approach, and we need a serious, unbiased look at how to make housing a “non-concern” for our citizens. In short, we need to vote “Yes” on Prop 10 and then put our elected representatives to work funding a serious study and solution. Note I said “funding,” not “finding.” This needs to be accomplished with government money, not with money from an industry noted for finding ways to make more money, more easily. Profit cannot legitimately be the goal.

https://www.gsb.stanford.edu/insights/rent-controls-winners-losers
https://psmag.com/economics/can-california-repeal-state-wide-l
https://sf.curbed.com/2018/9/27/17910948/uc-berkeley-haas-rent-control-prop-10
https://haasinstitute.berkeley.edu/sites/default/files/haasinstitute_rentcontrol.pdf
https://psmag.com/economics/in-defense-of-rent-control
https://caanet.org/app/uploads/2016/02/Jan2016_Rent_Control_Study.pdf
http://www.lao.ca.gov/Publications/Report/3345
https://www.nmhc.org/news/articles/the-high-cost-of-rent-control/

Coastal California a Challenge to Homebuyers

Some of the highest price-to-income ratios in the nation are found in California. This is even more true in the coastal areas, where the numbers exceed both the national average of 17.5% of income spent on mortgage payments, itself up from 15.4% last year, and also the maximum advised by financial experts of 31%. Zillow cites figures of 54% of average household income in San Jose, 45% in Los Angeles and San Francisco, and 38% in San Diego. Even some inland areas are nearing that 31% threshold, with Sacramento at 29% and Riverside at 28%.

While rising interest rates affect all segments of the market, the low-tier homeowners are taking the biggest hit. Despite the mortgage value being lower, low-tier homeowners also typically have less income than high-tier homeowners, meaning they may actually be spending twice as much of their income on mortgage payments. Renters have it the worst; the average low-tier renter in Los Angeles would need to spend 121% of their income on rentals and is forced to seek outside assistance with making payments.

The increasing strain on buyer purchasing power is already starting to result in price cuts and eventually lower list prices. So, expect prices to trend downward even as interest rates go up.

More: http://journal.firsttuesday.us/home-price-to-income-ratio-soars-in-californias-coastal-cities/65518/?utm_source=newsletter&utm_medium=email&utm_content=100818&utm_campaign=saprior

Price Cuts Signal Falling Prices Soon

As of September, the number of price cuts nationwide was at its highest point since the recession. Throughout the last half of August and first half of September, over a quarter of homes — 26.6% — took a price cut. While it’s normal for price cuts to be more common in the third quarter, as holidays are approaching but not yet upon us, the trend has been upwards for several years. This means sellers should begin listing lower in 2019, realizing that they are listing their homes above value for the market conditions brought on by income not keeping up with prices and rising interest rates.

In California, price cuts were on the rise in every major city. Very significant increases occurred in the following counties:

  • 56% of homes in Fresno;
  • 49% of homes in Bakersfield;
  • 40% of homes in Sacramento;
  • 37% of homes in San Diego;
  • 31% of homes in Orange County;
  • 28% of homes in Riverside;
  • 25% of homes in Los Angeles; and
  • 13% of homes in San Francisco.

More: http://journal.firsttuesday.us/price-cuts-hit-post-recession-high/65508/?utm_source=newsletter&utm_medium=email&utm_content=100818&utm_campaign=saprior

New Constructions Selling Slower than Expected

After a long period of builders being reluctant to construct new homes, construction is now on the rise again. In the second quarter of 2018, the number of new constructions was 3336 among four Southern California counties, comprising Los Angeles, Orange, Riverside, and San Bernardino counties. This amounts to a 19% increase from the prior year. There’s just one problem, though: Those homes aren’t selling.

There are multiple factors possibly at play here. The most obvious is that overall sales are down as a large contingent of would-be buyers are unable to afford stepping into the high-priced market. Another is the type of homes being constructed. A significant portion of new constructions are high-end single-family residences, as opposed to affordable housing complexes. While the segment of the population that would be in the market for a high-end home is doing all right financially and could probably afford to buy something, they don’t actually have a reason to buy in a high-priced market. In essence, builders saw a demand for construction, but were too interested in return on investment value rather than actually getting a sale and missed on the demographic.

An expected response to overshooting on inventory would be that sellers may start to notice that they aren’t getting a sale, and decide to drop their listing price or accept a lower offer than they would ideally want. Now in the last quarter of the year, we’re already seeing this happening as the number of price cuts continues to rise, though not at the same pace as inventory.

More: https://www.ocregister.com/2018/08/30/southern-california-supply-of-unsold-new-homes-at-6-year-high/

Are Listing Photos an Invasion of Privacy?

It’s standard to include photos along with a listing so that agents and buyers can get a good idea of what a house looks like before seeing it in person. Not every agent or seller includes photos, but it’s never problematic to put them up.

That is, until the house sells. The photos usually stay up. One buyer that we’ll call “Deborah” asked her agent to remove the photos after the sale. The agent refused, saying agents like to see them for the purposes of comparison. There are two potential issues here:

1) The one which applies in Deborah’s case, that now these are simply photos of her home, which is no longer listed. Anyone can view images of the interior of her home, which she believe is an invasion of her privacy, or worse, a security risk.
2) There’s a possibility that the interior could have changed drastically after the purchase, in which case the photos aren’t at all useful for comparisons. There’s no way of knowing.

Agents already have the ability to remove photos after a sale, but as demonstrated here, the agents hold all the cards in that decision. The solution Deborah proposed is an opt-out list, allowing buyers to state whether or not they want listing photos to remain after the sale.

So, what about you — should photos stay? Should they be removed? Do you like Deborah’s opt-out solution? Maybe you have a different solution? Tell us what you think!

More: https://magazine.realtor/daily-news/2018/08/20/should-listing-photos-be-removed-after-the-sale

44% of Major Metros See Higher Foreclosure Rates

The July data for ATTOM Data Solutions’ US Foreclosure Market Report was released in August. 219 metropolitan areas were analyzed, among which 96 had an increase in foreclosure processes started. It’s only up 1% from June, but had been going up for three consecutive months. The small year-over-year increase of less than a percent is after a 36-month year-over-year decrease.

Despite the small numbers, Senior Vice President of ATTOM Daren Blomquist doesn’t think this is a fluke. Many local markets are continuing to see increases. The biggest jumps at the state and local level are Florida with a 35% increase statewide and the Houston, Texas metro area up a whopping 76%.

More: https://www.attomdata.com/news/market-trends/foreclosures/july-2018-u-s-foreclosure-market-report/

Price Cuts Are What’s Behind the Flat Market

The market had been a seller’s market for quite some time, but now the scales are tipping more towards buyers, leading to what is now a flat market. As of June of 2018, home prices were still on the rise, albeit more slowly. But sellers noticed something — they weren’t selling without a price cut. 14% of all June listings took a price cut.

After the crash of 2008, construction has been slow and tilted towards high-end homes and single-family residences. Millennials who are now eagerly looking for their first homes are coming into an environment of lack of housing and especially affordable housing. Sellers are having to respond to prospective buyers’ high demand, but inability to survive in the current market. Currently, that means price cuts. Eventually sellers, and their agents, are really going to catch on and start listing lower. That’s going to bring the market closer to equilibrium.

More: https://www.cnbc.com/2018/08/16/housing-tipping-back-to-a-buyers-market-as-sellers-cut-prices.html

Finding the Right Home is Taking Longer

According to a survey conducted in the second quarter of 2018 by the National Association of Home Builders, 53% of buyers had been looking for over three months. This is up 2% from the Quarter 1, but down 9% from Quarter 4 of 2017. The primary reasons for such long search times are not finding a home with the right features and being unable to afford the homes on the market. These two reasons accounted for 45% and 43% of responses respectively.

Buyers are definitely adamant about finding a home, though. Only 16% said they would quit looking if they couldn’t find anything soon. Instead, 55% would continue to search for their ideal home. Many would compromise: 34% said they may be willing to expand their search area, 24% may look for a slightly less ideal property, and 19% may try to stretch their budget.

More: https://magazine.realtor/daily-news/2018/08/15/home-searches-are-stretching-on-longer

When Should I Buy or Sell?

If you’re an investor, there are three market direction factors which are important when deciding whether it’s the right time to buy or sell:

1) yield spread — the difference in rates between the 10-year Treasury Note and 3-month Treasury Bill. A positive number means recession is probably not imminent within the next 12 months, but gets closer as the number approaches zero or negative.

2) home sales volume — The number of homes sold in the last 9 months. A low number may indicate either low inventory or low demand.

3) home prices — If prices get too high, prospective homebuyers may not be able to afford to buy right now. This also applies to rental prices.

As of May 2018, the yield spread was at its lowest point since 2009, but still positive at 1.07. The downward trend is indicative of a recession within the next few years, but not immediately. Home sales volume shifts dramatically from quarter to quarter, which affects house prices temporarily, but the overall annual change has been negligible in the downward direction. This is a result of low inventory as there is very little construction. Home prices, though, have continued to increase at a rate that wages haven’t kept up with.

Sometimes price increases are just part of the cycle. In this case, though, it’s an unstable price bump. Price bumps can be detected by a lack of increase in yield spread and sales volume as well as unusual market factors.

These factors combined mean a recession is likely within the next few years and many people can’t afford to buy what few homes are available. For most people, it’s neither time to buy nor time to sell — were in between a buy phase and a sell phase. However, if you can, that also means it’s a perfectly fine time to do either.

More: http://journal.firsttuesday.us/how-to-time-the-market/18501/?utm_source=newsletter&utm_medium=email&utm_content=062518&utm_campaign=saprior