By David Girling
REAL ESTATE ECONOMIST,
GIRLING REAL ESTATE INVESTMENT GROUP
Home values are appreciating (but at a slower annual rate), housing affordability is low, interest rates increased throughout most of 2018 but corrected late in the year, and housing inventories are low but increasing.
These factors, along with the others discussed in Dave’s Top 10, are interrelated, and each is examined in greater detail in a more comprehensive web version of this article, which was released in February 2019. The goal of Dave’s Top 10 is to give you some information so that you can better understand the economic issues affecting real estate today, answer questions your clients may ask, and come to some conclusions about where the real estate market may be headed.
10. Home Sales/Housing Demand. Stock market volatility (which has affected consumer confidence), uncertainty over government shutdown, rising interest rates (until recently), higher home prices (resulting in lower affordability), tax law changes, and slowing global growth (China is at its slowest annual pace since 1990) have caused buyers to pause and home prices to correct. As a result, the demand for housing has declined as evidenced by the decline in existing home sales. (Pending and existing home sales are indicators of demand for housing.)
Source: California Association of REALTORS®
9. New Construction. Homebuilders are not keeping pace with the demand for new housing, and homebuilding has slowed. A recent builder survey reports, “Customers are taking a pause due to concerns over increasing interest rates and home prices.” Housing starts were 1,256,000 units in November, but they need to be in the 1.5 to 1.6 million range to bridge the inventory shortage.
8. Housing Inventories: Inventories both nationally and in California have been on the rise with supply in California at 3.5 months, up from 2.5 months a year ago (6 months is considered normal). Active listings have also increased, up 31 percent in November year over year. Supply, which has been low the past few years, coupled with reduced demand is bringing the supply-demand equation into equilibrium. But despite some improvement, many factors (e.g., potential for higher property taxes, capital gains, loans with higher interest rates, etc.) are keeping inventory levels low.
Source: California Association of REALTORS®
7. Stock Market Volatility and Lower Interest Rates. Interest rates increased throughout most of 2018 but fell off toward the end of the year with the volatility in the stock market and economic uncertainty. Investors were selling stocks and investing in safer Treasuries, which brought down yields. The 10-year Treasury, the benchmark for mortgage rates, is 2.65 percent (2/11/19), having reached a high of 3.23 percent in November. The rate for a 30-year fixed- rate mortgage is now approximately 4.46 percent, and the fully amortized mortgage payment on a $500,000 loan is $2,522 per month. With the Federal Reserve indicating that it will be scaling back on its rate increases, expect rates to stay close to current levels throughout 2019. However, in view of all the uncertainty associated with the government, expect the unexpected.
6. Foreign Investment in the United States. Despite the strong dollar, foreign buyers still see the U.S. real estate market as a “safe haven” and continue to impact the U.S. real estate market. The top five countries of foreign buyers are China, Canada, the United Kingdom, Mexico, and India, and the top five states for purchases by foreign buyers are Florida, Texas, California, New Jersey, and Arizona. Among purchases by foreigners, 44 percent were all cash, 10 percent were over $1 million, and the median sales price was $302,290, compared with the U.S, median price of $263,800 (Source: NAR study for the period 4/2016–3/2017).
5. Home Values. Home values have been appreciating at unsustainable rates for the past few years; but over the past six to nine months, they have been decelerating and leveling off. Although median prices for California and Orange County at $557,600 and $785,000, respectively, were up 1.45 percent and 1.3 percent in November, they appreciated at levels below what we have seen previously. Expect home values to increase, but at reduced rates, in the 2 to 3 percent range in 2019.
4. Mortgage Originations. With rising interest rates, loan refinances in December as a percentage of total mortgage originations were 29 percent, down from 40 percent a year earlier. Adjustable rate mortgage (ARM) originations were also the highest ever at 9.2 percent of total originations (5.6 percent the year before), reflecting the lower rates in December and borrowers looking for additional flexibility when competing for a home purchase. Lending is very challenging today, and lenders will need to become more creative with their loan programs to promote more purchase loans and maintain the overall level of originations.
3. Millennials. “It’s not that they’re not going to buy homes,” said the Deputy Chief Economist at First American. “It’s just that they’ll purchase these homes later in life.” Millennials, the largest generation in history, are tech savvy, educated, ethnically diverse, and are marrying and having children later in life. Their homeownership rate is 8 percent below that of the Gen Xers and baby boomers at the same age. They are postponing homeownership because of high levels of student loan debt, difficulty in accumulating funds for a down payment, affordability challenges, and delayed marriage and household formation. The good news is that millennials still see homeownership as a big part of the American Dream and that millennial homeownership rates are projected to increase.
2. U.S. and California Homeownership Rates. Across the United States, the homeownership rate now stands at 64.4 percent, reflecting a steady increase from its low of 62.9 percent a few years ago. The rate in California is 55.2 percent, the third lowest behind Washington, D.C., and Hawaii. As mentioned above, look for millennials to drive the homeownership rate. Upward.
1. Affordability. Higher interest rates and home price appreciation have impacted affordability such that the percentage of Orange County homebuyers who can afford to purchase a median-priced, existing, single-family home is currently 20 percent. The percentage for California as a whole is 27 percent. According to C.A.R., the income needed is $125,540 in California and $177,050 in Orange County. Affordability is the biggest challenge faced by the housing market, and it does not appear to be showing any significant improvement, even with the correction in interest rates in late 2018 and the slowing appreciation rates for home prices. Housing affordability will define our market for the next few years.
David Girling completed his undergraduate degree at the University of Southern California and earned an MBA from the Anderson Graduate School of Management at UCLA. In 2008, he formed Girling Real Estate Investment Group (Girling REIG) with his father, Bing. They are affiliated with Villa Real Estate. Dave was President of the Newport Beach Association of REALTORS® (NBAOR) in 2015 and has been a Newport Beach Harbor Commissioner since 2012.