California Association of Realtors Senior Economist Oscar Wei Recaps 2017
While financial markets continued to rise last year, 2018 saw volatility return bringing declines in the DOW, S&P and Nasdaq, observed Oscar Wei, Senior Economist with the California Association of Realtors (CAR), at the April 4 meeting of the Sonoma County Alliance.
He said at the end of 2017, 30-year fixed mortgage rates started to rise and by the end of March the monthly rate was 4.33% and the weekly rate stood at 4.44%, with adjustable (ARM) rates increasing from 3.6% to 3.66% at the close of Q1. At the same time, U.S. 10-year treasury yield fell below 2.8% by March 30.
Wei said his task is to understand consumer real estate buying and selling behaviors through data mining and by analyzing housing market statistics to determine both the current status and future trends.
“One week we saw a drop of 1,000 points as concerns over inflation and the possibility of slower economic growth contributed to these fluctuation, influencing investors to move into safer assets amid increased trade tensions.”
With inflation expected to rise in 2018, as of February the inflation rate (the seasonally adjusted Consumer Price Index for all items) was up 2.2% year to date (YTD). However, the core percentage (all items less food and energy) stood at +1.8% YTD. The Federal Reserve has set a goal of maintaining the rate of inflation at 2.0% per year. Above this level, the fed considers increasing the prime rate to cool the economy. Multiple Fed rate hikes have been predicted during the year ahead.
On the upside, Wei said that while the Trump Administration’s tax reforms will contribute to growth estimated at 3% in 2018 along with higher demand and full employment, it can also contribute to increased inflation and larger federal budget deficits — leading to higher interest rates.
He said Q4 2017 growth was somewhat below expectations. “The miss was due to drags from trade and inventories, not from a reduction in consumer and business demand.” There was a 4.0% increase in consumer spending, an 8.2% increase in business fixed investment and an 11.6% increase in business equipment investment. Domestic demand led imports to a robust 14.1% gain, offsetting the 7.0% rise in exports.
Economic growth stayed solid throughout last year (2.3% GDP) and by Q4 GDP rose to 2.9%. Gross private domestic investment in Q3 rose to 7.3% up from 3.9% in Q2. By February, the U.S. unemployment rate was 4.1%, California’s unemployment rate was 4.3% and job growth was up 1.6%.
Wei commented that as rebuilding efforts continue, the economy could grow at faster rate than otherwise expected. He said both the U.S. and California unemployment rates are at the lowest levels in 27 years. Locally, Sonoma County has the lowest rate (3.0%) according to CA EDD labor market statistics.
The Conference Board reported that consumer confidence declined in 2007 after an 18-year high and rebounded to 127.7 by the fall of 2017.
California Housing Market Outlook
Wei noted that sales of existing single-family homes in the state had a strong bounce back in February, with sales of 422,910 units (up 1.1% year to date YTD and +5.4% YTY). However, he pointed out that sales declined in the lower priced segments of the market among homes up to $199K (-23%), $200K to $299K (-8.5%) and for homes from $300K to $399K (-7%). Sales of higher priced homes increased in a range from +3.5% for homes selling for between $400K to $499K, up to 31.1% for homes over $2M+.
Household growth continues to support housing demand, according to annual household growth data from the CA Department of Finance, but supply remains on a downward trend (from a four-month supply in February 2017 to a 3.9 month supply in February 2018). In terms of active listings, housing supply has improved in some price segments — notably among homes in the $300K to $749K and the $1M to $2.99M price categories.
Since the Great Recession, he said that while the housing turnover rate in the U.S. is increasing for single-family homes, in California it has been on a downhill slide, because long-time homeowners are not moving as often as in the past. Contributing factors include a demographic shift, low rates on current mortgages, low property taxes, concerns over a capital gains hit if owners sell, as well as worries over where current owners could afford to go.
Wei noted that a major negative on the supply side is the fact that new housing is not keeping pace with demand. In California, some 180,000 new housing units are needed each year. In 2017, only 112,886 units were built statewide and in 2018 it is estimated that only 121,320 units will be built. The 60,000-unit housing deficit is split almost 50/50 between single family and multi-family units.
An analysis of the consequences associated with “underbuilding” conducted by CA EDD, CAR and the Construction Industry Research Board focusing on new housing permits, new jobs and existing median prices, showed that the more underbuilding continues, the higher the price growth – with a majority of price growth shown between 40% to 80%.
CAR found that state median prices continued to show strong growth in February 2018 to a high of $522,440 (-1% month to month and +8.8% year to year.).
Wei said today buyers have more “skin” in the game. In 2017, 42.9% of buyers had 20% or more for a down payment, almost on par with the 43.2% in 2006, but down from 54.4% in 2012. The median down payment (% of the price) was 17.6% last year, with only 6% of buyers offering zero down. Some 21.5% were cash buyers. And only 3.9% of buyers had second mortgages – up from 1.8% in 2012, but way below the 43.4% in 2006. However, the number of buyers with Adjustable Rate Mortgages (ARM) increased from 3.5% in 2012 TO 5.1% in 2017.
With monthly payments more affordable, Wei said there is less likelihood of default with the average 30-year mortgage rate at 4% in 2017 compared with 6.4% in 2006. Similarly, the median home price for existing single-family homes has also gone down from $556,430 in 2006 to $525,000 in 2017.
Median household income for homebuyers is up to $120,000 from $100,000 13 years ago, and monthly mortgage payments (on 1st mortgage) were down to $1,924 last year compared to $2,500 in 2006. Taken together, these indicators have moved the housing affordability index (HAI) from 12% in 2006 to 28% in 2017 after a sharp increase in 2012 (when housing affordability in across the U.S. peaked in Q1 2012 at 56%). The HAI shows the percentage of households that can afford to buy a median-priced home.
In Northern California, as of Q4 2017, the percentage of those able to purchase a median-priced home was as follows in the following counties: Solano 44%; Mendocino 28%; Napa 25%; Sonoma 23%, and Marin 18%.
When mortgage interest rates increase, monthly mortgage payments also increase, along with the minimum qualifying income to afford a median priced home in California ($550,990) with a 20% down payment. At an interest rate of 4%, monthly payments average $2,104. At 6%, the monthly mortgage payment averages $2,786. In addition, at 4% interest, minimum qualifying income is $109,522 and at 6% it is $131,056, for examples.
In Sonoma County, (with a Q4 2017 median price of $655,000 with a 20% down payment), a 4% mortgage interest rate would require a monthly payment of $2,502, and at 6% the payment would be $3,142. At 4%, minimum qualifying income is $130,196 and at 6% it is $155,796.
With rising home prices, the home ownership percentage rate has dropped to 63.5% across the U.S. and to 53.2% in California – leading to a home ownership gap between U.S. residents as a whole and those in California, according to the U.S. Census Bureau, Housing Vacancy Survey.
Wei said if home ownership continues to deteriorate at a fast pace, ownership rates will follow the average decline rate of the last 10 years (2007-2016), decreasing on a year-over-year basis by slightly over 1% of the prior year’s rate. If, however, it deteriorates at a slow rate,
the home ownership rate would most likely follow the average decline rate of the last five years (2012-2016), decreasing on a year-over-year basis by 0.5% of the prior year’s rate.
Post Fire Regional Housing Market Comparisons
The October 2017 wildfires burned 245,000 acres in counties affected (Lake, Napa, Sonoma, Mendocino, Butte and Solano). Some 8,900 homes and other buildings were destroyed displacing 100,000 people. The death toll reached 44.
In the North Bay, homes sales activities were expected to drop in fire-ravaged areas, due to a supply shortage and potential buyers being discouraged. Sales dropped 24.5% YTY in Napa in October 2017 and 7.4% YTY in Sonoma. But sales increased 4.9% YTY in Napa and 13.1% YTY in Sonoma since then. Home prices remained on an upward trend. Napa median price increased an average of 7.2% in the last four months, and Sonoma’s median price increased an average of 14.6% YTY in the last four months. In Santa Rosa, empty-lot listings jumped 235% in 231 in March 2018, up from 69 in the same period the year before. In Napa County, empty-lot listings have risen 6.9%.
In the Oakland Hills fire in 1991, 3,276 homes and apartments were lost and 25 died. In this disaster, the regional impact was localized rather than throughout the Bay Area. Housing sales continued to increase in the months after Alameda County was impacted, with growth rates significantly below that of the Bay Area region. Median home prices in Alameda grew less than that of the Bay Area after the fires. Three months later, the median price of Alameda homes increased by a monthly average of 0.2% (YTY), whereas the Bay Area increased by 6.2% (YTY).
Turning to the Malibu/Southland fires in 1993, Wei said the fires did not seem to have much effect on the housing market for LA County as a whole. Sales continued to increase at a double-digit YTY rate. In the three months following the fires, the LA median price declined by an average f 6.8% YTY, whereas the state median price declined by 3.8% YTY.
Housing supply is lower, with the number of active listings dropping an average of 6% YTY and an average of 9% YTY in the last for months in Napa and Sonoma Counties respectively.
In the long run, however, Wei believes that rebuilt homes in burned areas will gradually increase supply and could raise home prices in these neighborhoods since these homes will be newer and improved compared with previous homes. This means that the cost of home ownership in the immediate affected areas could be higher as homeowner’s insurance premiums may increase because of the catastrophe.
In the short term, average rental rates will pick up as displaced homeowners seek temporary shelter while their homes are being repaired – or rebuilt – pushing up demand for rental properties.
Statistics show that sales of existing single-family homes have been rising since late 2017. For example, in Sonoma County in February 2018, there were sales of 239 units, up +9.3% YTD
and +3.9% YTY. The average YTY percentage change from November 2017 to February 2018 was 12.6% — while last October’s YTY percentage change was -7.4%, compared to the average YTY percentage change from January 2017 to September 2017 was -2.5%.
At the same time, Sonoma County’s median home price in February 2018 was $689,000, up 15.1% YTY, as the supply inventory of homes remained below the long-run average in recent months. As of February, the unsold inventory supply was only enough for 3.2 months (an index representing the number of months it would take to deplete the remaining inventory at the end of a particular month, with the sales rate of the month taken into consideration). Inventory includes listings with “active”, “pending”, and “contingent” statuses (when available).
Prior to the fires, the long-run inventory average was eight months. Historically, the low supply mark was set in December 2003 at 1.2 months and the high inventory level of 27.9 months was recorded in February 1991. In contrast, within Sonoma County, the median time that homes were on the market as of February was 33 days.
The following is a snapshot view of real estate sales activity in three Sonoma County cities in March 2018.
Sales of single-family homes in Santa Rosa in March 2018 included 142 units, up 4.8% YTD, and +2.9% YTY. The median price of these homes that month was $665,500, up 5.6% Month to Month and +15.7% YTY, according to Clarus Market Metrics. For sale properties in March included 355 units, down 12.1% for 2018 YTD, and -10.6 YTY. For sale properties represents the overall supply that exists throughout the entire month, including only listings that appear as “active” at any point in time during the month.
Sales of single-family homes in Petaluma in March included 35 units, down 35.5% for 2018 YTD and -48.5% YTY.
The median price of these homes in March was 795,000, up 11.3% MTM and +13.3% YTY. For sale properties in March included 110 units, up 20.1% for 2018 YTD and +1.8% YTY.
Sales of single-family homes in Rohnert Park in March included 12 units, down 18.4% for 2018 YTD and -36.8% YTY. The median price of these homes in March was $602,500, up 5.9% MTM and +17.0% YTY. For sale properties in March included 110 units, down 13.0% for 2018 YTD and -21.0% YTY.
In summary, Wei said, the U.S. economic outlook is positive in 2018 with U.S. GDP predicted to reach 2.6%, nonfarm job growth at 1.5%, unemployment at a low 4%, and the Consumer Price Index (CPI) at 2.3% as an indicator of inflation. The percentage change in real disposable income is in positive territory at +3.6% and the 30-year fixed mortgage rate (FRM) is currently at 4.6%.
The California housing market in terms of single-family home resales for 2018 is predicted to be 423.200, with a +0.3% percentage change. The median price of homes this year is estimated at $555,600 (up 3.2%) and the housing affordability index stands at 26%.
Wei said that — in his view — the economy will be growing slightly faster in 2018, but rates could also be rising at a quicker pace.
“The latest tax reform will have some adverse effects on the housing market, and the degree of impact will vary by price and location.”
With interest rates rising rapidly at the beginning of 2018, buyers rushed in to close by February before rates moved even higher. As such, California home sales bounced back from the slow start observed in January.
“So far, the impact of the wildfires is mainly on the supply side as sales and home prices continue to trend upward,” he concluded.