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

2. 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!

3. Post-Election Outlook

4. 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

5. 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?

6. 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

7. The Fed

8. 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

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

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

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

12. Economic Update

14. How’s the economy closer to home?

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

16. 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

17. 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.

18. 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.

19. Job Trends by California Metro Area
Source:
SERIES: Total Nonfarm Employment
SOURCE: CA Employment Development Dept.

20. Housing Market Trends

21. 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

22. 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®

23. 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®

24. 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®

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

26. How’s That Playing Out Here

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

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

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

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

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

32. Biggest Strength is your Biggest Weakness

33. The demand is there, esp. at bottom

34. 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

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

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

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

38. Still a relatively affordable area

39. But… prices growing fast in largest cities

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

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

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

43. Recent Trends in Homeownership

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

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

46. Supply & Affordability: Connecting the Dots

47. “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

48. …But California Used to Produce More
Avg : 200k
Avg : 80k
SERIES: California New Housing Permits
SOURCE: Construction Industry Research Board

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

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

51. Lack of Turnover: Causes and Consequences

52. 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

53. 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.

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

55. 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

56. 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

57. 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)

58. The Forecast

59. 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®

60. 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®

61. 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®

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

63. 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®

64. Conclusions

65. 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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70. Fannie & Freddie Dodd- Frank

71. 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

72. 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 basis points

73. Economic Stimulus Package

74. 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

75. Tax Reform

76. 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!

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

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

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

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

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

82. 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