A Roadmap from 2018 to 2019

Macro-economics is a volatile field. Any little thing can take a wrong turn and move the world economy in ways no one has predicted. These days we are truly talking about a world economy, too. When a beggar lights himself on fire in Bangladesh, our stock market takes notice.

But, we keep trying to make sense of it all. Here’s my take on the next few months, narrowing the focus down to real estate here in the south bay. Barring socio-political disasters, this is roughly where I see the market going.

Last year was all about interest rates. Buyer reaction to mortgage rate increases in 2018 holds some lessons for the coming year. We watched the Federal Reserve Bank raise the Fed prime rate four times through 2018, a quarter of a point each time. The first couple times, the number of home sales dropped off for about a month, then swung back to almost where it was before the rate increase. The September increase provoked a different reaction.

Keep in mind that in the weeks ahead of a Fed rate meeting, lenders typically nudge their published rates in the direction the Fed is anticipated to move. As lenders gradually adjusted rates up in September buyers started walking away from the marketplace. Loan applications slowed and lenders watched September profits drop. Then October dropped some more and November some more. Buyers were staying home, and lenders noticed. In December, lenders started dropping rates despite knowing the Fed planned to raise the prime rate another quarter percent.

It worked. Buyers saw the rates drop and wrote offers. December transactions were up 16% over Nov and a tiny 1% over October. Lenders have seen where buyers stop and, for now anyway, are keeping mortgage loan rates down, as well as lobbying to keep Fed rates down. The Fed has already agreed to only two prime rate increases instead of three for the year. Current rate forecasts show the average 30 year mortgage actually declining until May of 2019. Presumably, the Fed will make their first increase for the year in June and we’ll see how the market responds.

Is Your Home in Move-In Condition?

You’ve meticulously maintained your home. The floors are spotless. Someone has really cared for this home, so any buyer can just move straight in, right?

Not necessarily. If your home is in an older style and hasn’t been updated, people will notice. Even if you clean regularly, that doesn’t mean you’ve done all the necessary repairs or replaced outdated fixtures. In order to sell your home, you really need to sell your home. Make people want to buy it. Compare your home to other, similar homes currently for sale. If those are new or remodelled, and yours isn’t, you may not be able to get the same price they will. Then the decision becomes, do you want to make renovations, or potentially end up getting less than you wanted?

Should You Consider Downsizing?

If you’re an “empty nester” whose children are all grown and have moved out of the house you’re still living in, it may be time to downsize. Chances are, your current home is bigger than you need it to be, perhaps too big. Unless you’re renting out rooms, perhaps you never see half your home, or perhaps you’re cleaning rooms regularly that you don’t spend any time in. If you’re a retiree, you may want to stretch your reduced income by moving somewhere with a smaller mortgage payment or less upkeep, or maybe you’d be just as comfortable in a lower cost-of-living neighborhood. If you’ve built up equity, you could use that extra cash to put an even bigger dent in your mortgage payments, or eliminate them entirely, especially with recent changes to capital gains tax law allowing you to exclude up to $500,000 even when downsizing. Another possible benefit is fewer or no stairs. Or maybe you just want to move to a more preferable location.

That doesn’t necessarily mean it’s a decision you should jump on immediately. For many, change can be hard, especially if you are moving far away from friends, family, and neighbors. Many people have trouble knowing what to leave and what to take, since a smaller home will probably have less storage space. In addition, all the normal stress and costs of moving still apply.

Higher interest rates and demand predicted in coming few years

Global markets are stabilizing, which will cause interest rates previously held in check by cautious investors to increase. This predicts a slight downtown in 2018, since currently sales volume is low and prices are high, so rising interest rates will initially decrease demand from prospective buyers who can no longer afford to qualify for what they were aiming for. However, once sellers readjust their prices to the state of the market, buyer demand is expected to go up, peaking in 2020.

Speaking of 2020, analysts are predicting a small recession that year. But don’t worry, it won’t be as bad as 2008. After the peak in 2006, buyer demand plummeted due to an inability to afford to buy. But now that the job market is recovering, more first-time homebuyers that have been slow to build up their careers are expected to be looking in the next few years. In addition, many Baby Boomers are now retiring or will soon, and with that comes selling and relocating to retirement homes. So there will still be plenty of buyer demand after the 2020 peak.

Home-sales-per-household ratio remains flat despite inventory concerns

On a monthly basis, 2.9 homes sold per 1,000 households at the end of 2017. Home sales have remained basically flat since 2012, with a brief dip in 2014-2015.

Home sales peaked during the Millennium Boom when five homes sold per 1,000 households each month during 2006. This figure plunged to bottom at 2.4 homes sold per 1,000 households in 2008. Home sales rebounded slightly in 2009, and have remained stuck at just under three homes sold per 1,000 households since then. 

This dynamic is important to keep in mind when flooded with reports of historically low inventory and rapidly rising prices. While these factors are important to buyers, sellers and sales agents, the flat figure presented here tells a different story about demand.

home-sales-per-household-2017

Chart update 02/02/18

Nov 2017 Nov 2016 Nov 2015
Home sales 37,539 37,594 30,592
Home sales per 1,000 households 2.9 2.9 2.4

The chart above shows the number of homes sold each month per 1,000 households. In November 2017, 2.9 homes sold per 1,000 households — including owner and renter households. Home sales vary greatly from month-to-month. Therefore, to get a feel for the trend, this chart shows a 12-month moving average.

California home sales volume has remained relatively steady each year since rebounding from the 2007 housing crash. But is it possible the ratio of homes sold per household is flat because it’s at its historically appropriate level?

It’s possible, but not likely.

The number of homes sold per household is well below the pre-Millennium Boom average, according to Trulia. This points to a lack of homebuyer demand.

There a few reasons for this demand shortage:

  • home prices began increasing in 2012 and are near or even past their Millennium Boom peak, depending on their location in California;
  • low inventory means fewer sellers are listing their homes, meaning less choice for buyers;
  • insufficient new construction exists in desirable coastal locations due to zoning challenges; and
  • lingering doubt in the housing market following the housing crash and foreclosure crisis.

Further, rising interest rates mean homebuyers will continue to be discouraged in the coming years as their purchasing power is reduced, even as prices rise faster than their incomes can keep pace.

When will demand regain the steam it had during the Millennium Boom?

The next peak in home sales will occur due to a demographic convergence on the housing market from:

  • Baby Boomers, the largest generation of homeowners, who every day are increasingly retiring, selling and buying replacement homes for their golden years; and
  • Generation Y (Gen Y), the up-and-coming generation of first-time homebuyers who patiently waited for the economy to recover following the 2008 crash so they could become established in their careers and save up to become homeowners — albeit later than other generations due to their late start.

Baby Boomers will essentially swap homes with members of Gen Y, as Boomers sell their oversized suburban homes in favor of more manageable condominiums near family and services. Gen Y first-time homebuyers will eagerly buy, as inventory swells for the first time in years. This activity is expected to peak around 2020-2021.

Monthly Market Direction – December 2017

To give you the most current information, we personally chart sales activity in the LA South Bay.  This hyper-local information often involves very small numbers of sales to work with on a monthly basis.

This December 2017 chart shows the daily changes in the number of homes available in blue, and the trend line in red. The red line shows the overall direction, taking time and daily volume changes into consideration.

Given that Christmas and New Year activities take up huge amounts of time, it’s not surprising to see real estate activity decline.  Only the most serious buyers and sellers are on the market this time of year.  The final quarter of 2017 showed a typical movement in favor sellers, simply as a result of fewer homes being available for buyer competition.

We’ll be watching January closely, looking for changes resulting from the new tax laws.

Starting this year, monthly charts will be available on our blog: http://www.carlandarda.com/wp/  Look for “Market Direction.”

How Does Retail Marijuana Affect House Prices?

Voters, policy-makers, and economists are interested in the ways recreational marijuana legalization affects communities. Similarly, economists and homeowners are interested in how marijuana sales impact the value of their most prized possession … their home.

Using publicly available data from the city of Denver and the state of Colorado, business analysts from the University of Georgia, University of Wisconsin and California State University studied the impact of retail marijuana sales on property values. This study reflects a time before and after retail marijuana sales became legal in Colorado in 2014.

In the words of the authors, “…this is the first study to examine at a micro-level the highly localized effect of retail marijuana establishments on house prices…”

Houses closest to dispensaries increased in value 8.4% …”

Economic impact was determined by measuring the distance from the marijuana facility, the value of a house before legalization and the value after legalization. Proximity to marijuana dispensaries was grouped into three categories: The first was 0-.1 miles, the second .1-.25 miles and the third greater than .25 miles. Then, changes in value during the study period were compared to identify any impact and how distance from the dispensary related to the change.

The conclusion: Houses closest to dispensaries increased in value 8.4% more than houses in the second category, which remained the same as those more than a quarter mile away. These findings supported those of an earlier Colorado study, which looked at economic impact on a municipal level, and found a 6% increase city-wide where recreational marijuana was adopted.

Coupled with “no evidence of increased marijuana usage or crimes due to recreational marijuana legalization,” these findings bode well for homeowners near retail marijuana dispensaries.

For greater detail, see Contact High: The External Effects of Retail Marijuana Establishments on House Prices at http://tinyurl.com/yb4vtz2g

SFR Sales in South Redondo Beach, June-August 2017

For the most recent three month period, house sales in Redondo Beach, south of Torrance Blvd, and west of Pacific Coast Highway totaled 21 units. The lowest sale price for $850k for a 3 bed / 1 bath home, while the highest sale was $2,610k for a 5 bed / 5 bath home.

The median price was $1,375k, for an older, 4 bed / 2 bath house. South Redondo Beach SFR sales

June 2017 Update on SoCal Beach Real Estate

Looking for the elusive “top dollar” in real estate can be trying. The market news this month talks to some of the timing surrounding the various factors impacting sales in 2017. I thought our readers might like to see this report from first tuesday (link below), one of the earliest reports to arrive. (It’s not uncommon to receive market analyses two-three months after the data is available.)

This is strictly a major metropolitan, California report, so we’re able to avoid the distraction provided by up and down markets in rural areas and in other states. Note that most beach cities property is in the “high tier” as the likely sale price is over $811K.

The first important data is the 5% increase in high tier prices over 2016. This data point gives a secondary method of estimating current value, and is especially important when the market has low inventory and the associated paucity of legitimate comparables.

The second important piece of information is the slowing rate of that price appreciation. As we can see in the Tiered Property Price Index chart, high tier prices which were out pacing the two lower tiers until 2014, have gradually dropped behind. Compare the current performance to the market performance in 2004, as high tier prices dropped off before the market collapse. In the words of the report author, “By 2018, home prices will likely reverse direction due to a slowing sales volume.”

The Homes Sales Volume vs Pricing chart graphically reflects that sales slowdown. In that chart, it’s easy to see the 2014 slowdown, followed by a relatively flat line after that. Note the report forecast, “… the price increase is expected to fall off by the end of 2017.”

The final chart on Annual Residential Construction in California, speaks to the market for new construction directly, and can be viewed as analogous to the remodeler’s market. This is a measure of the construction industry reaction to the real estate market. Developers and builders are typically among the first to shy away from investment in a slowing market because of the long term required to design, permit and build before being able to market.

Knowing when the market is at the absolute peak is very challenging. Needless to say, if we wait past that point, it’ll be years before getting back to it again.

California’s housing market at the halfway point of 2017; Monthly Statistical Update (June 2017)

Economic Response to Trump Presidency

Following the Federal Reserve Bank meeting last week pundits around the globe have been working at predicting future financial markets under a Donald Trump presidency.  Personally, I’m holding my tongue.  However, the following comments come from one of the many mortgage brokers who keep me aware of changes in the lending market.

Not only did the election of Donald Trump rock the U.S. political establishment, it has had a major influence on interest rates as well—resulting in the economy’s single biggest post election shift. Interest rates on 30-year conforming mortgages have moved up by more than 50 basis points since the election on Nov. 8. (A single basis point is 0.01%.) That means that within just a few weeks, mortgage rates have moved to levels we haven’t seen in more than two years.

So what does that rate shift mean? Well, it indicates an economy with very low inflation moving to one with more significant inflationary pressures.

In real terms, the movement in rates so far has increased mortgage payments by 7%. On a median-price home, that shift amounts to more than $750 in additional interest per year. Make no mistake: That is bad news for future buyers.

This week, the average 30-year mortgage had a rate of 4.27%. Over the past five years of the housing recovery, rates have failed to stay above 4%. But things look different this time around. Rates are more likely to go up from here rather than down. And that means that now more than ever, potential buyers need to be working hard to secure the best rate possible on their own mortgage.

It’s easy to see the immediate impact on buyers.  There are also work-around plans that can help buyers achieve their goals despite the higher rates.

Interest rate increases generally hurt sellers at least as much as buyers, and in some very diverse ways.  Over the next few publications we hope to discuss how sellers can mitigate the impacts.  Keep in touch and we’ll be certain to let you know about those special releases.