1. 2018 Housing Market Outlook
Tuolumne County AOR & Business Council
November 15, 2017
Oscar Wei
Senior Economist

2. Overview Economic Update California Housing Market Outlook
2018 Forecast

3. Economic Update

4. Economic Growth Stayed Solid in Q3 As Investment Spending Remained Strong
3.0%
GDP 2017-Q3
2.4%
Consumption Q3
4.1%
Unemployment Oct 2017
1.4%
Job Growth Oct 2017
Gross Private Domestic Investment: Q317 – 6.0%, Q217 – 3.9%

5. Growth remained solid in Q3, despite hurricanes’ effect
GDP : 1.5%; 2017 Q3: 3.0%
ANNUALLY
QUARTERLY
Notes:
E – expected, F – forecast, P- preliminary
1929 though first quarter 2009 annual GDP figures were revised in July 2009 using 2005 benchmark.
2009 Largest Annual Drop since 1946 (-2.8%)
SERIES: GDP
SOURCE: US Dept. of Commerce, Bureau of Economic Analysis 5

6. Unemployment Rates Inched Up in August but Still Near Recent Lows
US 4.1% (Oct 2017) & CA 5.1% (Sep 2017)
SERIES: Unemployment Rate
SOURCE: U.S. Bureau of Labor Statistics, CA Employment Development Dept.

7. U.S. job growth bounced back after slow growth in September
CA 1.7% (09/17)
US 1.4% (10/17)
SERIES: Total Nonfarm Employment
SOURCE: U.S. Bureau of Labor Statistics, CA Employment Development Dept.

8. Unemployment rate by California Metro Area
September 2017: California 5.1%
Source:
SERIES: Civilian Unemployment Rate
SOURCE: CA Employment Development Division

9. Inflation Trending Up since July
Sept 2017: All Items 2.2% YTY; Core +1.7% YTY
“Core Inflation” is All Items Less Food and Energy
The CPI data is seasonally adjusted.
SOURCE:
Go to
First choose "All Items." "Monthly" and "Yr/Yr%" series.
Then find "All items less food and energy" towards the bottom of the CPI list. Do the same as above.
SERIES: Consumer Price Index
SOURCE: US Bureau of Labor Statistics

10. Tax Reform Proposal Provisions that affect the housing market:
Reduce the mortgage interest deduction (MID) cap from $1M to $500k
Cap property tax deductions at $10,000
Require five years instead of two for the exclusion of capital gain tax on primary home sales. Taxpayer use of the exclusion would be limited to one sale every five years, rather than one every two.
Eliminate the MID on second homes
Homeowners no longer able to deduct interest on home equity loans

11. Impact on the Housing Market
Incentives of using MID as a tax saving tool as a homeowner would be nullified, as the standard deduction nearly doubles
Lowering MID cap and limiting property tax cap increases the cost of owning a home for many homeowners in high cost state
Further constraint housing supply shortage with the new capital gain tax requirement
Home values decline as tax saving benefits vanish

12. What Members Can Do REALTORS® Should Call Congress Now!
Call
Enter NRDS ID to get connected followed by the # sign to be connected to their Member of Congress’s office.
Call from 6:00 AM to 2:00 PM Pacific Time Weekdays
Please ask your Representative to OPPOSE this and ANY tax reform proposal that WEAKENS THE INCENTIVE TO OWN HOMES.

13. California Housing Market Outlook

14. Sales Continue to Grow but at a Slower Pace
California, Sept Sales: 436,920 Units, +2.6% YTD, +1.7% YTY
Sep-16: 429,760
Sep-17: 436,920
Peak:624,957 units in 2005
Valley:189,345 units in 1982
2012 annual sales up 4.3% from 2011
2011 annual sales up 1.4% from 2010
2010 annual sales down 12.3% from 2009
2009 annual sales up 24.5% from 2008
2008 annual sales up 30.4% from 2007
2007 annual sales down 33.4% from 2006
2006 annual sales down 23.8% from 2005
2005 annual sales up 0.8% from 2004
2004 annual sales up 3.8% from 2003
2003 annual sales up 7.6% from 2002
2002 annual sales up 14.1% from 2001
2001 annual sales down 4.7% from 2000 YTD
2000 annual sales up 1.4 from 1999
1999 sales up 7.3% over 1998
10/93: 41.0
Consumer Confidence
01/00:
03/03: 63.0
5/07: 128.4
2/09: 23.9
SERIES: Sales of Existing Single Family Homes
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®
*Sales are seasonally adjusted and annualized

15. Decline in Pending Sales Suggests Softening in Closed Sales in Upcoming Months
California: September 2017
Sep-16: 127.7
Sep-17: 120.0
SERIES: Pending Home Sales Index, Seasonally Adjusted
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

16. Mortgage Rates: Highest since July
January 2010 – November 9, 2017
MONTHLY
WEEKLY
Monthly from 2009 to present, weekly for the past 8 weeks
SERIES: 30Yr FRM, 5Yr ARM
SOURCE: Freddie Mac

17. Household Growth Continues to Support Housing Demand
SERIES: Annual Household Growth
SOURCE: CA Department of Finance

18. Sales Improve in Mid and High Priced Markets But Decline in Lower Priced Segments
Sept 2017 (Year-to-Year)
SERIES: Sales of Existing Detached Homes
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

19. Supply Remains an Issue
Sept 2016: 3.5 Months; Sept 2017: 3.2 Months
Range since 1988:
Low: 1.3 months in April 2004
High: 18.8 months in Apr 1991
Long-run average: 6.9 months
Note: “Unsold Inventory Index” represents the number of months it would take to sell the remaining inventory for the month in question. The remaining inventory for the month is defined as the number of properties that were “Active”, “Pending”, and “Contingent” (when available) and divide the sum by the number of “Sold” properties for the month in question.
SERIES: Unsold Inventory Index of Existing Single Family Homes
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

20. Supply Saw Declines, Especially in Bay Area
September 2017
SERIES: Sales and Listings of Existing Single Family Homes
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

21. Supply Constraint across Most Prices, but Most Obvious in the Lower End
Sept 2017
SERIES: Active Listings of Existing Single Family Homes
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

22. Fewer Units Turning Over Since the Great Recession
Housing Turnover Rate
(Single-Family Homes only)
Long-Time Homeowners are not moving as in the past because:
Demographic shift
Low rate on current mortgage
Low property taxes
Capital gains hit
Where can I afford to go?
CA turnover rate trend
SERIES: Percent of existing single-family homes being sold
SOURCE: Census Bureau, American Community Survey, Moody’s Analytics, C.A.R.

23. Sellers Are Not Moving as Often as Before …
SERIES: 2017 Housing Market Survey
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

24. … Especially for Baby Boomers
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

25. C.A.R. Tax Portability Initiative
How will the initiative work
C.A.R.’s Portability Initiative would allow homeowners 55 years of age or older to transfer
some of their Proposition 13 property tax base to a home of any price, located anywhere in the state, any number of times.
Why is this needed?
Under Proposition 13, homeowners are protected from rapidly increasing property taxes. However, seniors fear they will not be able to afford a big property tax increase
if they sell their existing home and buy another one, discouraging them from ever moving. The initiative will allow them to sell their home while keeping some property tax protections, and therefore create homeownership opportunities for young families.

26. “Missing” 72,000 New Units Annually
2016: 98,881 (47,889 sf, 50,992 mf) 2017p: 107,756 (53,708 sf, 54,048 mf ) 2018f: 115,292 (58,542 sf, 56,750 mf)
CA HCD Projected Housing Needs:
180,000/yr.
SERIES: California New Housing Permits
SOURCE: Construction Industry Research Board

27. Housing Supply Gap Will Be Over 2 Million at Current Construction Pace
With housing needs increasing at a rate of 180,000 every year, California will need more than 3.3 million units by 2030 to fill the housing demand and bring it back to 2005 level.
At the current construction pace, however, California will have a backlog of over 2 million by 2030
SERIES: Housing Supply Gap
SOURCE: Calculation by CALIFORNIA ASSOCIATION OF REALTORS®

28. California Not Building Enough Because…
SOURCE: CA Legislative Analyst Office

29. Market Competitiveness Up in 2017 6 out of 10 had Multiple Offers
SERIES: 2017 Housing Market Survey
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

30. And the Market is More Competitive for First-Time Buyers …
First-time Buyers
Repeat Buyers
All Buyers
% with Multiple Offer
68.8%
55.5%
60.4%
% of Sales Above
Asking Price
41%
28.8%
32.9%
Days on Market 10 14 13
SERIES: 2016 Housing Market Survey
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

31. …Partly Because Many of Them Live in the Supply Constraint Bay Area
SERIES: 2017 Housing Market Survey
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

32. Despite the Tough Market Conditions, Share of 1st Time Buyers reached highest level since 2012
SERIES: 2017 Housing Market Survey
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

33. Financial Characteristics: First-Time vs. Repeat (2017)
First-time Buyers
Repeat Buyers
All Buyers
Median Household Income
$85,000
$150,000
$120,000
Median Monthly Mortgage Payment
$1,750
$2,200
$1,924
Median Downpayment (in $$)
$35,000
$108,300
$72,000
Median Downpayment (in % to Price)
7.4%
20%
17.6%
SERIES: 2017 Housing Market Survey
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

34. Financial Characteristics II: First-Time vs. Repeat (2017)
First-time Buyers
Repeat Buyers
All Buyers
% of buyers with zero down payment
10.2%
3.2%
6.0%
% of cash buyers
6.7%
29.0%
21.5%
% of home buyers with a second mortgage
5.9%
2.8%
3.9%
% with FHA Loan
22.6%
9.1%
14.8%
SERIES: 2017 Housing Market Survey
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

35. Characteristics of Homes: First-Time vs. Repeat (2017)
First-time Buyers
Repeat Buyers
All Buyers
Median Sales Price
$440,000
$550,000
$525,000
Median Square Footage
1,477
1,800
1,650
% of Detached Single-Family
75.8%
79.6%
78.0%
% of Condo/Townhome
18.4%
12.8%
14.6%
SERIES: 2017 Housing Market Survey
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

36. Statewide Median Price Growing Faster
California, September 2017: $553,490, -2.1% MTM, +7.2% YTY
Sep-17: $553,490
Sep-16: $516,450
SERIES: Median Price of Existing Single Family Homes
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

37. Housing Affordability Peaked Q1 2012
California,
Annual
Quarterly
C.A.R.’s traditional Housing Affordability Index (HAI) was replaced with the First-Time Buyer Housing Affordability Index (FTB-HAI) in 2006.
Note this slide takes the average of the 3 months in each of the quarters.
C.A.R. began producing its Housing Affordability Index (HAI) in At that time, fixed-rate mortgages were the prevailing form of financing a home purchase, while the calculations used to produce the HAI reflected a 20 percent down payment. The methodology also assumed a monthly payment for principal, interest, taxes and insurance that was no more than 30 percent of a household’s income. In the more than two decades since the CALIFORNIA ASSOCIATION OF REALTORS® first conceived the HAI, the mortgage finance landscape has changed dramatically. The range of mortgage products available to buyers as well as underwriting criteria has changed. C.A.R. developed the new index measuring affordability for first-time home buyers to better reflect the realities of today’s real estate market.
SERIES: Housing Affordability Index of Traditional Buyers
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

38. Housing Affordability In CA: By County
2017-Q3: % able to purchase median-priced home
SERIES: Housing Affordability Index of Traditional Buyers
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

39. Minimum Annual Income Required During Affordability Peak vs. Current
SERIES: Housing Affordability Index of Existing Detached Homes
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

40. Lackluster Income Growth Also Contributed to the Affordability Issue
Income growth could not keep up with price growth until recently
SERIES: Household income growth vs. Home price growth
SOURCE: U.S. Census Bureau, Current Population Survey/Annual Social and Economic Supplement, CALIFORNIA ASSOCIATION OF REALTORS®

41. What Will Happen When Mortgage Rates Increase?
Q Median Price $553,260
20% Downpayment
MONTHLY MORTGAGE
Minimum Qualifying Income
INTEREST RATE
INTEREST RATE
SERIES: Housing Affordability Index
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

42. Affordability Is also an Issue for Renters
California Average Asking Rent
SERIES: California asking rent and household income
SOURCE: California Department of Housing and Community Development, Census Bureau Decennial Census, American Community Survey

43. Homeownership Dropped, Big Gap in CA
SERIES: Homeownership Rate (%)
SOURCE: U.S. Census Bureau, Housing Vacancy Survey (HVS)

44. Homeownership Will Deteriorate if the Trend Continues
Scenario “Fast”: Homeownership rate follows the average decline rate of the last 10 years ( ), decreasing on a year-over-year basis by slightly over 1% of the prior year’s rate.
Scenario “Slow”: Homeownership rate follows the average decline rate of the last 5 years ( ), decreasing on a year-over-year basis by 0.5% of the prior year’s rate.
Scenario “”Average”: Average of the “Fast” and “Slow” scenarios.
SERIES: Homeownership Rate
SOURCE: U.S. Census Bureau, American Community Survey, C.A.R. projection

45. The Forecast

46. U.S. Economic Outlook SERIES: U.S. Economic Outlook
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

47. California Economic Outlook
SERIES: CA Economic Outlook
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

48. California Housing Market Outlook
SERIES: CA Housing Market Outlook
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

49. Concluding Remarks
Economy was sluggish in Q1, but bounced back in Q2 and Q3. It should experience steady growth in the next couple quarters
Housing market doing ok now, but sales growth will slow
Interest rates still low but should rise in 2018
Supply and affordability will remain issues in the near term
Outmigration to more affordable areas will continue

50. Housing Matters Podcast
The all-new Housing Matters Podcast is your housing hub for market analysis, economic trends, and housing news from the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) and its institute the Center for California Real Estate. Be sure to subscribe on iTunes to hear the latest episode every other Friday to learn what you need to know about the market from C.A.R. experts who will give you their take on the week’s top real estate stories.

52. Stay Connected with C.A.R. Research
CARResearchGroup CARResearchInfo On.car.org/CARResearch Housingmatters.car.org

53. Thank You This presentation can be found on www.car.org/marketdata
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