Leslie Appleton-Young
“This is the new normal,” said California Association of Realtors vice president and chief economist Leslie Appleton-Young as she presented the association’s 2017 housing market forecast today.
According to the forecast, 2016 existing-home sales were strong at the beginning of the year but quickly slowed due to tight inventory and skyrocketing median existing-home sales prices, which blew past the last cyclical price peaks by as many as 38.9 percentage points in some regions.
For 2017, C.A.R is expecting for the 2016 trend to continue with a nominal 1.4 percentage point increase in existing-home sales to 413,000 and a 4.3 percentage point increase in median home sales prices to $525,600.
The average mortgage rate for 30-year fixed mortgages is expected to rise, but it will still be in line with the historically low rates seen over the past year.
Lastly, the state’s unemployment rate is expected to dip to 5.3 percent due to strong job growth.
“With the California economy continuing to outperform the nation, the demand for housing will remain robust even with supply and affordability constraints still very much in evidence. The net result will be California’s housing market posting a modest increase in 2017,” said Appleton-Young in a press release.
“The underlying fundamentals continue to support overall home sales growth, but headwinds, such as global economic uncertainty and deteriorating housing affordability, will temper stronger sales activity.”
Supply woes
Overall, there is an average 3.4 months’ supply of homes on the market; the supply is even tighter in the San Francisco Bay Area, where there is only an average 2.4 months’ supply — the lowest of all regions.
Appleton-Young said she expects the inventory to stay tight due to a number of factors, including rising median home sales prices and demographic trends, such as baby boomers deciding to stay put after retirement and millennials deciding to get married at later ages, which dampens the desire to buy sooner rather than later.
According to the U.S. Census Bureau’s 2013 American Housing Survey, 71 percent of Californians aged 55 and older haven’t moved since 1999, and Appleton-Young says that number doesn’t look like it will change anytime soon due to the results of an in-house survey that revealed 64 percent of boomers will stay in their home after retirement.
Another component to California’s supply woes is the lack of new construction, which is evidenced by the National Association of Realtors‘ latest study about the topic.
Although Appleton-Young expressed delight in that a California market didn’t nab the No. 1 spot, she expressed concern that three markets — San Francisco, San Jose and San Diego — made the list.
When taking a closer look, Los Angeles is the most under-built county in the state, with 381,200 new jobs and only 88,134 new permits. San Francisco took fourth place, with 125,542 new jobs and only 18,141 new permits submitted in the past year.
Not only is the lack of construction contributing to inventory shortages, but it is making the affordability issue worse, noted Appleton-Young.
Consumers can’t afford ‘The American Dream’
In 2016, only 29.5 percent of households could afford to buy a median priced home — 26 percentage points lower than the national rate and nearly 10 percentage points below C.A.R.’s long-run average of 38 percent.
The result is that renters are staying put and homeowners are turning to rentals in order to loosen the financial burden of rising housing costs.
Appleton-Young says this trend holds especially true in the San Francisco Bay Area, where approximately 400,000 to 700,000 of owner-occupied single-family homes are now rentals.
Furthermore, the number of renters jumped from 1.9 million in 2005 to 2.6 million in 2015.
Despite low rates, healthy job growth and strong household formation, first-time homeownership rates are low — and millennials, the demographic that was expected to bolster homeownership rates, feel that owning a home is out of reach.
Fifty-six percent of California’s millennials still believe the American Dream is important, and 18 percent believe owning a home is part of fulfilling that dream.
When asked whether they would purchase a home if they could have a lower down payment, 69 percent of millennials said they would become homeowners. But only 19 percent of those millennials knew about FHA loans.
Outside of the millennial demographic, research shows that renters of all ages are still interested in becoming homeowners. According to C.A.R., 51 percent of renters have done housing research over the past year.
Appleton-Young says Realtors must educate buyers of all ages about housing options and available loans that could make homeownership a more affordable and achievable goal.
Homeowners and renters leaving the LA and the Bay
In hopes of finding more affordable housing, homeowners and renters are leaving urban coastal areas and moving inland, where median home prices are lower.
Because of migration, the San Francisco area is expected to experience a 5.6 percentage point drop in resales as the median home price balloons to $833,600. Meanwhile, SoCal will anticipate an estimated 0.7 percentage point increase in resales.
The Central Valley is the only region predicted to experience a significant boost, with a 2.2 percentage point increase in resales and a median home sales price of $294,600.
