At the end of November, as my faithful audience knows, I was already predicting more of the same for 2018. Meaning that home prices would rise modestly. There’d be fewer homes available in the lowest price ranges, more in the upper ranges. And we’d still see considerably fewer homes available for sale versus our historic averages, as home sellers continue to stay put longer.
I expected interest rates to rise modestly. And any new building starts to quickly be absorbed into the market inventory mix, as seen in the prior 4 years.
However the end of year surprises may be game changers. Sellers who might have “moved up” while mortgage rates are still low, may very well opt not to move and take on larger mortgage and property tax burdens if they are no longer write offs, or at least not to the degree they once were. The reduction in property related write offs will greatly impact OC home owners. If more would be sellers opt not to sell, it puts an even greater squeeze on resale housing inventory.
As usual, the doom and gloom nay-sayers have been vocally in the wings all year long. In June, the OC Register’s Jonathan Lansner asked “Is Orange County housing in a new bubble? Here are 2 divergent views…”
“Orange County’s recent history of ever-rising home prices, now amid a modest cooling of the local economy, brings out fears the local real estate market is getting overheated once again.
You know, “bubble” talk.
In some ways, an asset bubble is in the eye of the beholder.
“Two recent reports on the regional economy from well-known analysts have very different ideas about the housing market’s sanity. Jim Doti and the economists at Chapman University think Orange County housing is in bubble territory with a big “but” … they see no signs of any immediate bursting.
Meanwhile, Mark Schniepp from the California Forecast sees no bubble. Yet.”
Now, the two gurus do agree on a critical issue: a lack of supply. “There’s a razor-thin inventory of homes to buy and those few residences listed for sale still sell swiftly.”
Lansner also gamely pointed out in July, the Arch MI (Mortgage Insurance) report, stating that OC was the 4th “Riskiest US Housing Market”. (Joy).
Yet this same report states “It’s extremely low risk,” Arch Chief Economist Ralph DeFranco says. “The fundamentals are strong. Real estate risk is best seen in context.”
But don’t rush to sell your home yet. Arch estimates there is only an 8 percent chance of Orange County home prices declining during the next two years. And while it’s among the highest nationally, it’s still a “minimal” worry by Arch’s yardstick.
Mind you – all three of these opinions were written before the tax code changes and wildfires came to be. I’d love to hear what they’re saying now.
More recently, First Tuesday’s “Orange County Housing Indicators”, published Dec 31, 2017 shares my opinion that lower inventory is likely the new normal for the foreseeable future.
“Without turnover, homes do not sell. The homeowner turnover rate in Orange County has remained mostly level since the end of the recession in 2009. The renter turnover rate has declined since 2010 and was at 18.5% for 2016, the most recently reported Census year.”
“However, don’t expect the rate of homeownership to fully return to the inflated heights seen in 2007 anytime soon.” (Pay attention, investors.)
Leslie Appleton-Young, California Association of Realtors’ Chief Economist and Vice President, authored “2018 Housing Market Forecast” in late 2017.
In it she reports that the average California homeowner now stays in a home 11 years, skewing the percentage of homes becoming available for sale down to 4.6% (of total homes in a marketplace), versus 5.3% nationally, and 7% for So Cal back in 2005 and years prior.
Presciently she said, “The proposed tax reform would lead to fewer sales transactions as the tax incentives of being a homeowner vanish for many who want to purchase a property. Home sales would decline 3.4 percent if the proposed tax reform were to be implemented – The decline in home values would also lead to homeowners’ reluctance to put their property on the market and further tighten up the housing supply condition in California. An estimated 1.5 percent would be lost in the first year after the implementation of the tax reform.”
She also states “Incentives for Homeownership Obliterated”. (Ouch!)
Also hugely important to So Cal home sellers is the squeeze on foreign cash buyers. Leslie’s end of year report shows how recent Cash Outflow Restrictions are impacting International buyers:
The number of Orange County cash buyers remained stable in 2017, at 22%. The highest rate of cash buyers was in 2011, when 1 in 3 homes were purchased with cash. It’s now closer to 1 in 4. However, if we lose more cash buyers, it could stall luxury sales a bit and potentially translate into softening prices.
As much as the So Cal locals like to protest that housing un-affordability here demands a price correction, I’d like to direct their attention to our neighbors in northern California. While we have now slightly surpassed the median prices seen at “the peak” of the market by +1.8%, San Francisco County homes have already catapulted 42% above their pre-crash peak. And Santa Clara County AKA “Silicon Valley” homes also passed their peak by 32.9%. Sadly, again redundantly, I say this makes us look affordable by comparison.
So, if interest rates do tick up, and if sellers are spooked by the tax law changes, we may actually see some softening of prices.
However, my builder friends already tell horror stories of huge backlogs and incredible price increases for building materials after all southern US storms and the thousands of California properties devastated by more recent fires. Clearly, as a result of material delays new homes will take longer to build and will probably cost significantly more than planned. This can only serve to enhance the value of the resale homes that do come into the market.
So we may net par, in spite of everything.
OC job growth, while far from explosive as First Tuesday reports, is still healthy enough to sustain housing demand. So people are either going to rent or buy – everyone has to live somewhere.
All this conflicting new market date creates a meandering path with many different data points serving to offset one another. In the end, I think we end up right where I expected we’d be back in November – the same as in 2017. Smallish gains and limited inventory.
However, there is one conspicuous market change already visibly at hand. Consumer sentiment or psyche, if you will, is dismally paranoid. Buyers and sellers alike share a pessimistic view of each other, and are looking for deliberately undisclosed skeletons to come rattling out of closets. My best advise to you is to remain calm, and disclose everything you know about a property.
Buyers must not fib about their qualifications or intentions within purchase offers, including not writing them as cash offers knowing full well they intend to get a loan once in escrow, or by claiming the new home will be their primary residence, when it will not. Lenders and sellers are devoid of a sense of humor these days. And this is a recipe for cancelled deals and possibly even financial penalties.
And sellers, do NOT expect to sell your home for a price above the most recent sales. Too much change and uncertainty is in the air. If it benefits you to sell now, be sensible and watch your budget for repairs and staging. Do NOT over price.
As always, I’d love to meet with you to create your 2018 real estate plan. It’s never too soon to start planning. Smart investors will position themselves so their home purchases make sense and so do their rental properties.
Call me anytime at 949-870-2424.