2017 Housing Market Perspectives Southwest Riverside County Association of Realtors® June 1, 2017 Jordan G. Levine Senior Economist jordanl@car.org

Overview Post-Election Outlook Economic Update Started 2017 with a bang! STILL Lots of uncertainty—hard time to forecast What to worry about, what to be hopeful for Economic Update Global, U.S., and California economy Full employment? Up-/Downside Risks? California Housing Market Outlook Story remains the same, plus some wild cards Regional Housing Market Outlook Lots of opportunities locally—challenges too Days as affordable bedroom area numbered? 2017 Forecast Don’t shoot the messenger!

Post-Election Outlook

The federal policy whipsaw Deregulation: industry & banks General regulatory environment CFPB & Dodd-Frank Tax cuts on business & people 3 brackets, lower rates More than half corporate rate Tax reform: repatriating profits Infrastructure investment? Better trade terms? Economy relatively healthy GSEs and the FHA/HUD Will they stay or will they go? MIP reduction already gone Mortgage interest deduction? Pro-growth = higher rates Especially if more hawks at Fed Supply is already an issue here CA very exposed to trade war What does retaliation look like? Capital flows to/from China? Healthcare & Immigration Demand, but also Fed $$ CA exposed there too Uncertainty & Market volatility

The good, bad, and the ugly Economy relatively healthy Deregulation: industry & banks General regulatory environment CFPB & Dodd-Frank Infrastructure investment? Tax cuts on business & people 3 brackets, lower rates More than half corporate rate Tax reform: repatriating profits Better trade terms? Mortgage interest deduction? GSEs and the FHA/HUD Will they stay or will they go? MIP reduction already gone Healthcare & Immigration Demand, but also Fed $$ CA exposed there too Uncertainty & Market volatility Pro-growth = higher rates Especially if more hawks at Fed Supply is already an issue here CA very exposed to trade war What does retaliation look like? Capital flows to/from China?

So what’s the punchline? Bad news for homeownership? Tax hit to existing homeowners Higher prices Higher rates No incentive to own for renters Less affordability

The Fed

Mortgage Rates down, don’t get too excited January 2010 – May 4, 2017 MONTHLY WEEKLY Monthly from 2009 to present, weekly for the past 8 weeks SERIES: 30Yr FRM, 5Yr ARM SOURCE: Freddie Mac

Median Monthly Mortgage Payment - CA What Will Happen When Mortgage Rates Increase? MONTHLY MORTGAGE Q4-2016 Median Price $511,360 20% Downpayment INTEREST RATE SERIES: Housing Affordability Index SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Minimum Qualifying Income - CA What Will Happen When Mortgage Rates Increase? Minimum Qualifying Income Q4-2016 Median Price $511,360 20% Downpayment INTEREST RATE SERIES: Housing Affordability Index SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Housing Affordability Index - CA What Will Happen When Mortgage Rates Increase? % OF HOUSEHOLDS THAT CAN BUY, ALL ELSE CONSTANT Q4-2016 Median Price $511,360 20% Downpayment INTEREST RATE SERIES: Housing Affordability Index SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Economic Update

How’s the economy closer to home?

Jumping off from a decent starting point 1.2% GDP 2017-Q1 0.6% Consumption 2017-Q1 4.4% Unemployment April 2016 1.6% Job Growth April 2016

Slowest GDP growth since Q1 2014 ANNUALLY QUARTERLY Weakness was primarily centered on a slower pace of consumer spending. Real consumer spending inched up just 0.3 percent in Q1, which was the weakest annualized pace growth since Q409. Milder-than-usual winter weather during the first two month of the year was the factor that kept economic growth below the norm. As such, consumers did not spend as much on utility services. On the other hand, business fixed investment posted a strong quarterly performance, up 9.4 percent. The outlook for capital spending outside of the energy sector has improved now that the nearly two-year slide in industrial activity appears to have ended. Small business owners are more upbeat, and a rising number of business owners plan to increase capital spending. The shift in business attitudes is a potential potent tailwind and raises some upside bias to the forecast. The Congressional Budget Office recently released its estimates for potential real GDP growth of just below 2 percent. Meanwhile, most private estimates project real growth above 2 percent in the near-term. So, is inflation on the upward slope over the next two years— and where inflation goes, will the fed funds rate follow? This will be a touchy issue for the next two years as a stronger dollar and higher interest rates may act as a partial offset to the fiscal stimulus plans of the current administration. Business/consumer sentiment continues to suggest the weakness in Q1 was not the start of a new trend. On early signs of strengthening consumer , resilient BFI and residential construction activity, conditions suggest US GDP will rebound in Q2. 2009 Largest Annual Drop since 1946 (-2.8%) SERIES: GDP SOURCE: U.S. Bureau of Economic Analysis 16

Unemployment rates lowest since 2007 US 4.4% (April 2017) & CA 4.8% (April 2017) SERIES: Unemployment Rate SOURCE: U.S. Bureau of Labor Statistics, CA Employment Development Dept.

CA jobs growing faster than Nation US 1.6% (04/17) SERIES: Total Nonfarm Employment SOURCE: U.S. Bureau of Labor Statistics, CA Employment Development Dept.

Job Trends by California Metro Area Source: http://www.labormarketinfo.edd.ca.gov/LMID/Employment_by_Industry_Data.html SERIES: Total Nonfarm Employment SOURCE: CA Employment Development Dept.

Housing Market Trends

Sales lost momentum after strong Q1 Apr-16: 413,380 Apr-17: 406,300 SERIES: Sales of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS® *Sales are seasonally adjusted and annualized

Sales of Existing Detached Homes Riverside County, Apr-17 Sales: 2,147 Units, +1.6% YTY, +7.2% YTD, SERIES: Sales of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Supply Continued to Drop from Last Year Note: The Unsold Inventory Index represents 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 in consideration. Inventory includes listings with “Active”, “Pending”, and “Contingent” (when available) statuses. SERIES: Unsold Inventory Index of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Median Price of Existing Detached Homes Riverside County, Apr. 2017: $379,000, Up 1.6% YTY California: $536,750, Down 1.7% YTY SERIES: Median Price of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Housing Affordability In CA: by county SERIES: Housing Affordability Index of Traditional Buyers SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

How’s That Playing Out Here

We’ve fared a bit better, but not great SERIES: Sales of Existing Single Family & Condo Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Top 10 markets provide most of the action SERIES: Sales of Existing Single Family & Condo Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Broad-based growth locally SERIES: Sales of Existing Single Family & Condo Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Overall, the market is competitive SERIES: Median Sales-to-List Price Ratio in Southwest Riverside SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Lower price segments dominate SERIES: Sales of Existing Single Family & Condo Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Biggest Strength is your Biggest Weakness

The demand is there, esp. at bottom

In-migration from LA on the rise too Net Domestic Migration NDM Totals 2014 NDM -79,152 2015 NDM -83,191 Change 5.1% 2015 NDM by Tenure Owners -41,557 Renters -41,634 Total SOURCE: U.S. Census, American Community Survey

But we have our own supply issues SERIES: Number of Active Listings in Southwest Riverside SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

It’s not getting better, esp. at bottom SERIES: Number of Active Listings in Southwest Riverside SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

That’s pushed up prices here too SERIES: Median Home Price in Southwest Riverside SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Still a relatively affordable area

But… prices growing fast in largest cities

And sales have suffered at the bottom SERIES: Sales of Existing Single Family & Condo Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

… and most homes are selling quickly SERIES: Median Time on Market in Southwest Riverside SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

AND for top dollar… hard for buyers SERIES: Median Sales-to-List Price Ratio in Southwest Riverside SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Recent Trends in Homeownership

Homeownership bearing the brunt SERIES: Homeownership Rate (%) SOURCE: U.S. Census Bureau, Housing Vacancy Survey (HVS)

Homeownership challenges by race SERIES: Surplus/Deficit of Home Sales Relative to Population Base SOURCE: U.S. Census Bureau, American Community Survey

Supply & Affordability: Connecting the Dots

“Missing” 80,000 New Units Annually 2016: 98,881 (47,889 sf, 50,992 mf) 2017f: 100,246 (51,720 sf, 48,526 mf ) CA HCD Projected Housing Needs: 180,000/yr. SERIES: California New Housing Permits SOURCE: Construction Industry Research Board

…But California Used to Produce More Avg. 1955-1989: 200k Avg. 2006-2015: 80k SERIES: California New Housing Permits SOURCE: Construction Industry Research Board

Most underbuilt counties in California SERIES: Nonfarm Job Growth & Residential Building Permits SOURCE: CA EDD, Construction Industry Research Board

More “underbuilding,” less affordability SERIES: Nonfarm Job Growth, New Housing Permits, Existing Median Prices SOURCE: CA EDD, C.A.R., Construction Industry Research Board

Lack of Turnover: Causes and Consequences

Where is the inventory? Long-Time Homeowners are not moving as in the past Low rate on current mortgage Low property taxes Capital gains hit Where can I afford to go? Could not qualify for a mortgage today Remodel and stay Are we headed for the “European Model” where children inherit the home of their parents? One more thing…Secular decline in marriage

Fewer units turning over since the Great Recession Housing Turnover Rate (Single-Family Homes only) SERIES: Percent of existing single-family homes being sold SOURCE: Census Bureau, American Community Survey, Moody’s Analytics, C.A.R.

People are staying in their homes longer SERIES: 2016 Housing Market Survey SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Boomers not moving as often 71% of Californian’s aged 55+ haven’t moved since 1999 SERIES: Distribution of Home Ownership by Year Moved In SOURCE: U.S. Census Bureau, 2013 American Housing Survey

Owners investing in staying put? Another angle on low turnover—reinvesting in your current home for the long haul so you don’t have to move. The value of residential alterations/additions permits in California is at an all-time high through the first 7 months of 2016 compared with the first 7 months of any other year ever. Also accelerating this year—up 16% over last year and the strongest growth for the series this cycle. SOURCE: California Homebuilding Foundation (CHF)/Construction Industry Research Board (CIRB) Downloaded from Moody’s Analytics

More single family units now rentals Potentially between 400,000 and 700,000 SF Rentals that Used to be Owner-Occupied SOURCE: U.S. Census Bureau, Annual Social and Economic Supplement (ASEC) to the Current Population Survey (CPS) Downloaded from the National Bureau of Economic Research (NBER)

The Forecast

U.S. economic outlook 2011 2012 2013 2014 2015 2016p 2017f US GDP 1.6% 2.2% 1.7% 2.4% 2.6% 2.1% Nonfarm Job Growth 1.2% 1.9% 1.8% 1.3% Unemployment 8.9% 8.1% 7.4% 6.2% 5.3% 4.9% 4.7% CPI 3.1% 1.5% 0.1% 1.4% Real Disposable Income, % Change 2.5% 3.2% -1.4% 2.7% 3.4% 3.0% 30-Yr FRM 4.5% 3.7% 4.0% 4.2% 3.9% 3.6% 4.4% SERIES: U.S. Economic Outlook SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

California economic outlook 2011 2012 2013 2014 2015 2016p 2017f Nonfarm Job Growth 1.1% 2.4% 3.0% 2.2% 2.7% 2.3% 1.9% Unemployment Rate 11.8% 10.4% 8.9% 7.5% 6.2% 5.5% 5.4% Population Growth 0.7% 0.9% 1.0% Real Disposable Income, % Change 3.5% 4.7% -1.1% 3.2% 3.6% 4.5% SERIES: CA Economic Outlook SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

California housing market outlook 2011 2012 2013 2014 2015 2016 2017f SFH Resales (000s) 422.6 439.8 414.9 382.7 409.4 416.3 419.6 % Change 1.4% 4.1% -5.9% -7.8% 7.0% 1.7% 0.8% Median Price ($000s) $286.0 $319.3 $407.2 $446.9 $476.3 $502.3 $525.4 -6.2% 11.6% 27.5% 9.8% 6.6% 5.4% 4.6% Housing Affordability Index 53% 51% 36% 30% 31% 28% 30-Yr FRM 4.5% 3.7% 4.0% 4.2% 3.9% 3.6% 4.4% SERIES: CA Housing Market Outlook SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Sales and price up in 2016 and in 2017 Units (Thousand) SERIES: CA Housing Market Outlook SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

CA: Dollar Volume Up 7.2% in 2016, Up 5.4% in 2017 $ in Billion % Change SERIES: CA Housing Market Outlook SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Conclusions

Fasten seatbelts for bumpy ride Lots of political uncertainty Economy and housing market doing ok for now, but… Several threats to homeownership in California Lack of housing and its effects on affordability Low turnover rate further restricts supply High prices and downpayment requirements Rising interest rate environment is expected Future policy changes: GSEs, Mortgage Interest Deduction? Migration from less affordable areas—how long will they stay affordable? Many of these fundamental issues aren’t abating any time soon That means fighting for market share in a relatively flat market

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Fannie & Freddie Dodd- Frank

Changes to Dodd-Frank should help housing “Financial Choice Act” Banks will loosen lending standards Lower credit score requirement (still need about 726) FICO Less onerous regulatory requirements Capital requirements on banks Liquidity requirements on banks Provide buyers more mortgage options Could open up private mortgage financing GSEs have been dominating this cycle There’s always a but! Increase in housing demand could push up home prices Affordability already a significant challenge Heighten risks of having another housing and credit bubble Pendulum probably swung too but, don’t wild west either

What will happen to the GSEs? Market reactions suggest optimism in the future of the GSEs Mnuchin came out early saying “Privatize” Backed off privatization during confirmation hearings FHFA said taxpayers won’t be saddled with GSE losses in 2018 MBA, others don’t think it makes the short list Many others say “now is the time” Could significantly increase the cost of borrowing Cheaper to gamble with a guarantee than not, all else equal Moody’s estimated anything from 40-94 basis points

Economic Stimulus Package

Big plans already seeing big changes $550 billion $1 trillion in infrastructure investments over 10 years $100 billion per year in infrastructure investments “Rebuild our highways, bridges, tunnels, airports, schools, hospitals.” Goal: boost economic growth Result: GDP higher… at least short-term More jobs = more housing demand Upward pressure on home prices Affordability already an issue Don’t expect much in terms of new supply

Tax Reform

Putting more money in pockets is good. But what about homeownership?! Overhaul of the current tax code Reduction in tax rates Drop from 7 tax brackets to 3 10%, 25%, 35% Increase standard deduction Remove virtually all other deductions Eliminate the federal estate and gift taxes Results/Consequences? Good for renter’s pocket books, not good for their wealth Historically, people just don’t save unless they have a home Bad for wealth accumulation, communities, and social engagement Bad for homeowners—will take a tax hit because of lost deductions Reduces the incentive to become a homeowner—very bad!

Macro effect of fiscal policies? Tax Reform Boosts GDP Big Infrastructure Stimulus More Demand for Housing

Effects of all federal policies? Potential Inflation Full Employment Higher Demand Effects of all federal policies?

Net effect of all federal policies? Tax Cuts Bigger Deficits More Potential Inflation

So what? Here’s the punchline. More Inflation Bigger Deficits Higher Rates

Second order effects on housing? More Demand Supply Shortage Higher Prices Second order effects on housing? Higher Prices Higher Rates Deteriorating Affordability

So what’s the punchline? Bad news for homeownership? Tax hit to existing homeowners Higher prices Higher rates No incentive to own for renters Less affordability