1. 2018 Housing Market Outlook
Citrus Valley Association of REALTORS®
November 15, 2017
Jordan G. Levine
Senior Economist

2. Overview Post-Election Outlook Economic Update
Starting 2017 with a bang!
Lots of uncertainty—hard time to forecast
What to worry about, what to be hopeful for
Economic Update
U.S. and California economy
Full employment? Up-/Downside Risks?
California Housing Market Outlook
Lack of inventory -> Affordability -> Homeownership
Tight market -> hard for buyers -> good for sellers
2018 Forecast

3. Let’s Talk Tax Reform

4. Homeownership not front and center
7 tax brackets to 4?
House: 12%, 25%, 35%, 39.4%
Senate: 10%, 12%, 22.5%, 25%, 32.5%, 35%, 38.5%
MID
House: Caps at $500K
Senate: Retains current MID
Double standard deduction
State/Local tax deduction
House: $10K of property taxes
Senate: eliminates all SALT
Other issues?
Limiting 1031 Exchange to primary residence
Capital gains exclusions phase out after $500K
Repeals personal exemption which will hurt many families

5. Results/Consequences?
Good for renter’s pocket books
Not good for their wealth
People don’t tend to save
Bad for existing homeowners
Losing critical tax deductions
Many will see a tax increase
Particularly bad for California
Many homes above $625K
High-SALT state as well
Worst of all
Reduces incentive to own
That is very bad!
This Photo by Unknown Author is licensed under CC BY-SA

6. Macro Considerations About DC Policy

7. Growth is good, but has its side effects too
Potential Inflation
Full Employment
Higher Demand
Growth is good, but has its side effects too

8. There’s also the bond market to consider
Tax Cuts
Bigger Deficits
More Potential Inflation

9. Inflation Ticked Up in August
Aug 2017: All Items 1.94% YTY; Core +1.68% 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. So what? Here’s the punchline.
More Inflation
Bigger Deficits
Higher Rates

11. 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

12. Economic Update

13. Consumers still driving the show
3.1%
GDP 2017-Q2
3.3%
Consumption Q2
4.2%
Unemployment Sept 2017
1.2%
Job Growth Sept 2017

14. Economy still lumbering along
2016: 1.6% (p) 2.1% (f) 2.3%
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 14

15. Labor markets in good shape, but…

16. Tertiary/secondary markets heat up

17. Construction Leads Job Growth
Source:
SERIES: Total Nonfarm Employment By Industry
SOURCE: US Bureau of Labor Statistics, CA Employment Development Division

18. Housing Market Trends

19. Ended fall on a strong note, but growth slows
Sept Sales: 436,920 Units, +2.6% YTD, +1.7% YTY
SERIES: Sales of Existing Single Family Homes
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®
*Sales are seasonally adjusted and annualized

20. Local Market Outperforming State

21. Locally, punching above our weight
Up 7.4% YTD
SERIES: Home Sales
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

22. Working all over, and big cities growing
SERIES: Sales of Existing Single Family Homes
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

23. Prices Give Us a Hint About Roots of Problem

24. Seasonal dip in price, but growth is strong
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®

25. Home prices actually gaining steam
SERIES: Median Price of Existing Single Family Homes
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

26. Supply Takes the Blame, But It’s All Relative

27. Broken record time: it’s still about supply
Range since 1988:
Low: 1.3 months in April 2004
High: 18.8 months in Apr 1991
Long-run average: 6.9 months
SERIES: Unsold Inventory Index of Existing Single Family Homes
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

28. … and no relief in sight
This Photo by Unknown Author is licensed under CC BY
SERIES: Active Listings of Existing Single Family Homes
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

29. Statewide it’s a tale of two markets

30. Listings down = sales down + prices up
Sept 2017
SERIES: Active Listings of Existing Single Family Homes
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

31. Recent Growth Locally, But Again, Uneven

32. Grumpy cat even grumpy-er here…
Declining for 33 Consecutive Months
This Photo by Unknown Author is licensed under CC BY-NC-SA

33. Starter homes: an endangered species
SERIES: Active Listings of Existing Single Family Homes
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

34. So bottom end taking it on the chin

35. Which Brings Us to Market Competitiveness

36. Cashing in at very top end? Worrisome?
SERIES: Sales of Existing Single Family Homes
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

37. Market moving quickly, especially lower

38. And still very competitive amongst buyers

39. Probably Going to Remain Tight

40. My dad would still kill for today’s rates
January 2010 – October 19, 2017
MONTHLY
WEEKLY
Monthly from 2009 to present, weekly for the past 8 weeks
SERIES: 30Yr FRM, 5Yr ARM
SOURCE: Freddie Mac

41. Perspective is everything!!
My Dad

42. But Rising Rates Will Eventually Hit

43. Rate increases will be painful at these prices
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®

44. Affordability already took it on the chin
2017-Q2: % able to purchase median-priced home
SERIES: Housing Affordability Index of Traditional Buyers
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

45. Is it Time to Worry?

46. Should we question price sustainability?
SERIES: Median Home Price to Median Income Ratio
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

47. Prices are certainly expensive

48. Not widespread as last go-round, some w/room to run

49. How Did We Get Here?
Connecting the Dots

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

51. Reason #1: We Don’t Build Enough in CA
Connecting the Dots

52. “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

53. Most Underbuilt Counties in California
SERIES: Nonfarm Job Growth & New Housing Permits
SOURCE: CA EDD, Construction Industry Research Board

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

55. Reason #2: Housing We Have Isn’t Turning Over
Connecting the Dots

56. Older generations 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

57. Existing homeowners won’t move
Long-Time Homeowners are not moving as in the past because:
Low rate on current mortgage
Low property taxes
Capital gains hit
Where can I afford to go?
Remodel and stay
SERIES: 2017 Housing Market Survey
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

58. Reason #3: Single-Family Rentals Rising
Connecting the Dots

59. More single family units now rentals
Potentially as many as 1M units now rentals
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)

60. Not just a mom and pop game anymore
Company
Units
Avg. Price
($000s)
Blackstone (Invitation Homes)
47,317
189
American Homes 4 Rent
46,663
177
Colony Starwood Homes
30,747
185
Progress Residential
19,269
179
Silver Bay Realty Trust
9,235
131
Main Street Renewal
8,554
141
Tricon American Homes
6,858
120
Golden Tree Insite Partners (GTIS)
6,371 89
Cerberus Capital Management
4,703
166
Altisource Residential
4,158
Havenbrook Homes
4,027
113
Company
Units
Avg. Price
($000s)
Haven Homes
2,865
130
Vinebrook Homes
2,056 68
Gorelick Brothers Capital
1,974 97
Camillo Properties
1,359
140
Lafayette Real Estate
1,258 89
Connorex-Lucinda
1,121
178
Transcendent Investment Management
609
109
Broadtree Home Rentals
561
112
Reven Housing Reit
499
159
Prager Property Management
277
215
Pintar Investment Company
228
241
Source: Amherst InsightLabs estimates based on Corelogic County Record and Transaction Data as of Q4 2016

61. So What Does It All Mean for REALTORS®?

62. Putting it all together
Economy still lumbers along
Few red flags in labor market
In terms of trends…
Sales continue to defy gravity
Prices are accelerating
Lack of supply driving market
Tight at bottom, moving at top
Rates are still really low
Household formation rising
Market more competitive
Homes moving quickly
Virtually no discounting
Keeping it really real
There’s some challenges
Lack of new listings
Market will remain tight
Rates are expected to rise… gradually, but going to hurt
Plus, we still have structural stuff
Still…
Demand is there from economy
High end has room to run
Not in a bubble yet
Market IS defying gravity
Forecast: ongoing growth in 18

63. The Forecast

64. U.S. Economic Outlook 2012 2013 2014 2015 2016 2017p 2018f US GDP
2.20%
1.70%
2.40%
2.60%
1.60%
2.10%
2.30%
Nonfarm Job Growth
1.90%
1.80%
1.40%
1.20%
Unemployment
8.10%
7.40%
6.20%
5.30%
4.90%
4.40%
4.20%
CPI
1.50%
0.10%
2.00%
Real Disposable Income, % Change
3.20%
-1.40%
2.70%
3.40%
3.00%
30-Yr FRM
3.70%
4.00%
3.90%
3.60%
4.30%
SERIES: U.S. Economic Outlook
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

65. California Housing Market Outlook
2012
2013
2014
2015
2016
2017p
2018f
SFH Resales (000s)
439.8
414.9
382.7
409.4
416.7
421.9
426.2
% Change
4.1%
-5.9%
-7.8%
7.0%
1.8%
1.3%
1.0%
Median Price ($000s)
$319.3
$407.2
$446.9
$476.3
$502.3
$538.5
$561.0
11.6%
27.5%
9.8%
6.6%
5.4%
7.2%
4.2%
Housing Affordability Index
51%
36%
30%
31%
29%
26%
30-Yr FRM
3.7%
4.0%
3.9%
3.6%
4.3%
SERIES: CA Housing Market Outlook
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

66. CA: Dollar Volume Up 8.6% in 2017, Up 5.2% in 2018
$ in Billion
% Change
SERIES: CA Housing Market Outlook
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

67. 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.

68. CARResearchGroup CARResearchInfo Housingmatters.car.org /JordanGLevine
CARResearchGroup
CARResearchInfo
Housingmatters.car.org
/JordanGLevine
@JordanGLevine