The U.S. Housing Market: Despite a Demographic Push, Proceed With Caution

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With California housing markets having decidedly shifted since the summer, the looming question is what comes next. Since 2014, Pacific Union has partnered with John Burns Real Estate Consulting to forecast the market for the upcoming three years. At our November 2017 forecast, we suggested that the John Burns Home Value Index would reach a plateau in 2018 (which we named a “table top”) and maintain that level through about 2020. The major difference between the current peak and the previous peak seen in the mid-2000s is that the current peak resembles a table top, while the last peak was characterized as a “mountain peak” — a peak followed by a large decline.

Source: 2017 Pacific Union Real Estate and Economic Forecast

A lot has happened since our last forecast, but our predictions remain similar.

While our annual forecast event has been postponed to the first quarter of 2019 as a result of the merger with Compass and the wildfires, I recently attended the JBREC annual summit in New York City, and here are the key takeaways.

  • While concerns over the housing market’s strength are rising, the major tailwind is the demographic force. With U.S. millennials numbering 44 million, that generation’s largest age bracket (4.7 million people) will turn 32 years old over the next couple of years, thus creating a huge wave of potential homebuyers.
  • Online buyer behavior suggests that sales will remain solid in markets in the South (such as Charlotte, Houston, Raleigh, and Atlanta) but will decline in West Coast markets and some Northeastern markets, with California home sales expected to post a 2 percent to 7 percent decline over the next six months.
  • Interest-rate hikes following strong price growth over the last year took a large bite out of affordability, making it the biggest concern for California housing markets.
  • While technological advancements have the potential to reduce construction costs, supply constraints outweigh any potential savings in the short term.
  • Affordability constraints are likely to drive builders to pivot down in price to smaller, higher-density, lower-specification homes in slightly less desirable locations. Also, builders are more likely to construct single-family rental properties.
  • Average annual price growth in six California metropolitan areas is projected at 6 percent in 2019 and 3 percent in 2020 before declining by 0.3 percent in 2021.

Long-Term View

Demographic Trends Are Propping Up Long-Term Demand

  • With U.S. millennials numbering 44 million, that generation’s largest age bracket (4.7 million people) will turn 32 years old over the next year, which is the median age of first-time buyers in the U.S. Considering a combined total of about 6 million new and existing homes sold annually in the U.S., millennials have the potential to create a huge wave of first-time homebuyers and account for a much larger share of total housing demand. First-time buyers currently comprise about one-third of all homebuyers.
  • These demographic forces suggest that 1.25 million more households per year over the next 10 years will need housing, which means that 1.375 million new units per year need to be built to meet demand through 2025 (including owner-occupied properties, second homes, and replacement of teardowns).
  • However, after 2025, America’s aging society will reduce the need for housing production since seniors create supply when they pass away or move into assisted-living facilities or their children’s homes. Thus, the net growth of new homes will decline to 230,000 units per year.

But Supply Constraints Make Homes Increasingly More Expensive

  • At the same time, meeting current demand has become increasingly more difficult, as builders take a large risk when buying raw land to entitle in their respective regions.
  • Based on a JBREC survey, buying raw land is perceived by builders as twice as risky as buying a few home-builder stocks, leading to fewer builders willing to make purchases in the current housing cycle.
  • In addition, builders face large labor shortages, which will not abate considering the nation’s aging demographics and immigration restrictions, both of which will lead to much higher construction wages.
  • However, technological advancements in the construction industry — such as building information modeling software, 3D printing, robotics, off-site technologies imported from overseas, and smart homes — have the potential to reduce costs dramatically.
  • Still, many costs will continue to increase:
  1. Lot shortages will keep land prices high.
  2. Labor shortages will keep building costs high.
  3. Inflation and potentially tariffs will keep materials costs high.
  4. Regulation-related costs are high in California.
  5. Significant off-site cost reductions for nicer single-family homes are years away.

Short-Term View

2018 Slowdown

  • Nationally, sales of newly built homes have been slowing all year, with a 13 percent year-over-year decline in October, bringing annualized sales to 553,000 new single-family homes, or 40 percent of the projected 1.3 million needed to meet demand.
  • What led to 2018’s slowdown:
    • Mortgage rates rose by 88 basis points this year, from 3.95 percent in January to 4.83 percent in October, resulting in at least an 11 percent increase in payments without accounting for price appreciation.
    • With price appreciation, Californians’ monthly mortgage payments are up by as much as 25 percent year over year:
      • Silicon Valley, up by 25 percent
      • San Francisco, up by 19 percent
      • The East Bay, up by 17 percent
      • Los Angeles, up by 14 percent
      • Nationwide, up by 13 percent
  • Each 100-basis-point increase in mortgage rates reduces borrowers’ purchasing power by about 7 percent.
  • The impact on affordability is vast, as 44 percent of American households earn less than $50,000 per year and the median U.S. income is $63,000.
  • In the Bay Area, the current minimum annual income required to purchase a median-priced home is more than $202,000, up from $90,000 in 2012. The median household income in the Bay Area averages about $100,000 in the eight local counties excluding Solano.
  • In Los Angeles, the current minimum annual income required to purchase a median-priced home is more than $112,000, up from $54,000 in 2012. The median household income is Los Angeles County is currently about $65,000.
  • Newly constructed homes cater to affluent homebuyers, with 60 percent of public builders across the U.S. now constructing homes with average prices higher than $400,000. In Los Angeles, the median new home price is $682,000, while in the Bay Area, it ranges from about $760,000 in Sonoma County to $1 million in Silicon Valley.
  • Only 24 percent of American renters can afford the median-priced new home today, and just 31 percent can afford a resale home.
  • And while there have been more listings on the market in recent months, inventory is still below average across all price tiers, especially for the most-affordable range, which is almost 50 percent below the average.
  • Lastly, the housing market’s performance and the current slowdown is not a nationwide trend — sales of existing home remain strong in the relatively affordable South.

What to Expect in the Months Ahead

  • The economy will remain healthy, boosted by low unemployment, continued hiring, and wage increases, but the rate of growth will slow.
  • Mortgage rates will likely reach 5.5 percent by the middle of 2019, leading to fewer home sales.
  • Historically, increases in mortgage rates when the economy was strong have generally had a small impact on activity, leading to a 7 percent to 10 percent decline in sales.
  • Online buyer behavior suggests that sales will remain solid in the markets in South (such as Charlotte, Houston, Raleigh, and Atlanta) but will decline in West Coast markets and some Northeastern markets, with California home sales expected to post a 2 percent to 7 percent decline.

What to Expect Beyond 2019

  • Rising rates will slow move-up homebuyer activity, with an 11 percent decrease in total home sales.
  • Mortgage availability has improved, though credit scores and proof of employment play a critical role (unlike during the early 2000s).
  • Affordability constraints are likely to drive builders to pivot down in price to smaller, higher-density, lower-specification homes in slightly less desirable locations. Also, builders are more likely to construct single-family rental properties.
  • The risk of a recession increases, with a 48 percent probability of a downturn within two years and a 64 percent chance within four years. Fifty-nine percent of economists forecast a recession in 2020.
  • However, housing risks vary by market:
  1. California housing markets generally rank normal to higher risk, with no market nationally categorized as very high risk.
  2. Affordability is the primary risk.
  3. A huge upside in the current housing market is homeowner equity, currently at $190,000 inflation-adjusted per U.S. owned household.
  • Other risks:
  1. A rapid acceleration in interest and mortgage rates shaking consumer and business confidence
  2. A decline in foreign buyer activity due to immigration policy or emerging market factors (such as currency, trade policy, local stock markets, or economic fluctuations)
  3. Immigration restrictions: There has already been a pull-back in H-1B visa approvals, which are critical for the tech sector in California; holders of these visas are also participants in local housing markets
  4. Excessive debt burdens (government, corporate, and consumer); if interest rates spike, they would have trouble repaying debt
  5. A stock market correction that could rattle consumer confidence and result in in job losses
  6. A “black swan,” or an unforeseen geopolitical event that triggers significant volatility in financial markets and the economy

California Outlook

  • The chart below shows the John Burns Home Value Index four-year outlook for median home price appreciation in six California metropolitan areas and/or divisions. The numbers indicate the average annual rate of growth or decline.
  • Because of affordability pressures, all six markets are projected to see notably slower price growth over the next three years.
  • Four of the six markets are forecast to see negative growth in 2021 of no more than 1.3 percent. However, all markets will see at least a 5 percent additional cumulative increase in 2019 and 2020 before the reversal in 2021.

Source: John Burns Real Estate Consulting

Taken together, with input from JBREC and the nation’s largest home builders, our final takeaway is that buyers and investors should proceed with caution but proceed nevertheless.

Selma Hepp is Pacific Union’s Chief Economist and Vice President of Business Intelligence. Her previous positions include Chief Economist at Trulia, senior economist for the California Association of Realtors, and economist and manager of public policy and homeownership at the National Association of Realtors. She holds a Master of Arts in Economics from the State University of New York (SUNY), Buffalo, and a Ph.D. in Urban and Regional Planning and Design from the University of Maryland.

(Promotional photo: iStock/RgStudio)

California Housing Inventory Near a 3-Year High in September

October 23, 2018 by  • Posted in 

  • California had a 4.2-month supply of inventory in September, the highest level recorded in 31 months.
  • Statewide, home sales declined by 12.4 percent from September 2017 while dropping by 16.4 percent in the nine-county Bay Area.
  • The Bay Area’s median sales price was $930,000 in September, an annual gain of 9.8 percent after 14 straight months of double-digit-percent annual appreciation.

Although the Golden State’s tight housing supply situation improved again in September, rising mortgage rates and buyer sentiment that the market may be topping out conspired to hold back home sales.

That’s according to the latest home sales and price report from the California Association of Realtors, which puts the state’s months’ supply of inventory at 4.2 as of September, the highest level in 31 months. Active listings increased for the sixth consecutive month and were up by 20.4 percent from September 2017.

The nine-county Bay Area saw the number of homes for sale improve on both a monthly and annual basis, as the month’s supply of inventory rose to 3.2. All counties posted year-over-year gains, with the monthly supply of inventory ranging from 2.7 in Alameda County to 5.6 in Napa County.

An increased number of homes on the market did not translate to higher sales, which declined by 12.4 percent year over year statewide, the largest such drop in more than four years. All major regions of the state saw double-digit-percent annual sales declines, with Bay Area activity down by 16.4 percent, the biggest decrease in nearly eight years.

California home appreciation continued to moderate in September, with the $578,850 median sales price up by 4.3 percent on an annual basis. In a statement accompanying the report, CAR Senior Vice President and Chief Economist Leslie Appleton-Young said that she expects appreciation to further decelerate in the coming months, driven by homebuyer reluctance to enter the market given current prices.

The median sales price for a single-family home in the Bay Area ended September at $930,000, a year-over-year gain of 9.8 percent. For the previous 14 months, the region had posted double-digit-percent annual home prices gains.

All nine counties recorded home price growth from September 2017, ranging from 14.2 percent in San Mateo County to 5.5 percent in Alameda County. San Mateo County overtook San Francisco as the state’s most expensive county, with a median sales price of $1,600,000, followed by San Francisco ($1,507,500), Marin ($1,395,000), and Santa Clara ($1,250,000) counties.

Real Estate Roundup: California Claims One-Third of the 20 Fastest-Growing U.S. Luxury Housing Markets

September 24, 2018 by  • Posted in 

Here’s a look at recent news of interest to homebuyers, home sellers, and the home-curious.

Demand for luxury homes remained strong nationwide this summer, with California counties accounting for a substantial portion of the markets where prices are growing the most.

That’s according to research from, which ranks the top 20 U.S. housing markets for annual appreciation at the luxury price point, defined as the top 5 percent of residential properties. In Santa Clara County, luxury home prices increased by 14.5 percent year over year in June, making it the country’s third fastest-growing high-end market. A luxury home in Santa Clara County commanded $2,844,000 as of June.

Sonoma County‘s luxury home price rose by 13.3 percent from June 2017, while prices climbed by 12.2 percent in San Mateo County and 10.3 percent in San Francisco. Those latter two counties had the most expensive luxury homes of any city included on the list, a respective $3,505,000 and $3,313,000. The other California counties that rank among the country’s fastest-appreciating luxury markets: Santa Cruz (13.0 percent growth), Sacramento (10.0 percent growth) and San Luis Obispo (9.5 percent growth). also tracks the 20 fastest-moving luxury markets, five of which are in the Golden State: Contra Costa County (53 days), Alameda County (59 days), Santa Clara County (60 days), Sacramento County (67 days), and Los Angeles County (68 days).

Earlier this month, a study found that Alameda County’s Fremont is one of the best places in America to raise a family, and now another report says that it is also one of top places to buy a home big enough to accommodate a clan.

A new analysis by SmartAsset ranks the top 20 U.S. cities in which to buy a home large enough to raise a family on a 100-point scale based on six criteria: five-year change in home value, percentage of homes with at least two bedrooms, property-tax rates, change in rental costs, percentage of housing-cost-burdened homeowners, and housing costs compared with household income. Fremont ranks No. 5 on the list of places to buy a family-friendly home, with an overall score of 87.47.

Between 2012 and 2016, home prices in Fremont increased by 51 percent, and nearly 90 percent of homes in the city have at least two bedrooms. During that time, SmartAsset notes that rental costs in Fremont rose by 34 percent, which the company says means that renters are missing out on an opportunity, even though home prices in the city are relatively expensive compared with other housing markets included on the list.

Although the number of U.S. homes for sale in August increased moderately from one year earlier, there are still not enough properties to meet demand, causing prices to continue their climb and homes to sell at a brisk pace.

The National Association of Realtors’ latest existing-home sales report puts the median price for all properties at $264,800 last month, an annual increase of 4.6 percent and the 78th consecutive month of year-over-year gains. There were 1.92 million existing homes on the market, up from 1.87 million at the same time in 2017, while the monthly supply of inventory rose from 4.1 to 4.3 on an annual basis.

Homes typically sold in 29 days, with more than half of them finding a buyer in less than a month. In a statement accompanying the report, NAR Chief Economist Lawrence Yun said that the nation’s inventory shortage is driving the pace of sales and that new-home construction is insufficient to satisfy the number of Americans who wish to purchase real estate.

About three-quarter of prospective homebuyers are investigating financing before they do anything else, with first-timers even more likely to do their homework in advance.

Survey results from loanDepot and mellohome found that 73.5 percent of all homebuyers and 85.1 percent of first-time buyers are weighing financing options before they begin their search. In a statement accompanying the report, mellohome CEO Chris Heller noted that this trend is a big change from a decade ago, when buyers would typically have their real estate professionals do the finance-research legwork for them.

Buyers are likely doing their due diligence so that they can compete in a tight market, with more than two-thirds of respondents reporting difficulty finding a suitable home. Nearly that many said that coordinating mortgage paperwork was problematic, underscoring results from a recent Fannie Mae poll, in which 66 percent of Americans said that they would prefer that the entire process of obtaining a mortgage be conducted online.

Craig Curreri

707.477.5120   License #: 01408111

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