Real Estate Market Report: Watching the Bubble
Despite recent economic turbulence, experts remain optimistic that there is no “housing bubble” in SoCal’s immediate future Economists and analysts from USC’s Lusk Center, The A. Gary Anderson Center for Economic Research at Chapman University, CoreLogic and Arch MI differ in opinions on the future of real estate. Here’s what they have to say:
The USC Lusk Center for Real Estate’s Casden Economic Forecast reports that several forces should combine to drive heightened demand for housing in California the next two years. Two of these are job and income growth, along with low but rising mortgage rates. But a third demographic force will also play a significant role. “Many Millennials delayed life cycle decisions such as forming households, becoming homeowners, and starting families in the immediate aftermath of the recession. Now in their late 20s and early 30s, these individuals are in a position to become renters and first-time buyers in large numbers over the next few years, a development that should drive new construction and lift the housing market overall,” the report says.
According to June 2016’s updated forecast from The A. Gary Anderson Center for Economic Research at Chapman University for the U.S., California and Orange County, construction spending, as measured by lagged real values of permit valuation, is continuing on a downward trend. The forecasted average annual growth in construction spending of 6.5 percent in 2016 compares to 10.4 percent in 2015 and 19.5 percent in 2014. “The current level of housing affordability coupled with a relatively tight supply of unsold housing will serve to push housing prices up by 5.7 percent in 2016, roughly equivalent to the 5.6 percent pace registered last year,” the report says.
The Summer 2016 edition of the Housing and Mortgage Market Review (HAMMR), published this past summer by Arch MI, pegs the risk of a price drop based on a host of real estate trends, credit market factors and economic patterns. Recent economic turbulence has raised questions about the durability of housing’s rebound from its collapse and the Great Recession. Based on first-quarter data, Arch calculated the risk of price drops in all of California—as well as in Orange, Los Angeles, Riverside or San Bernardino counties—at a “minimal” 2 percent vs. 5 percent nationwide. A year ago, California’s price-drop risk was 8 percent, equal to the national risk level in 2015’s first quarter. “We see no housing bubble in Southern California,” says Ralph DeFranco, chief economist for Arch MI’s owner, Arch Capital. “Even though homes feel expensive, they are supported by the amount of income people have.”
“The median price paid for a Southern California home has risen on a year-over-year basis each month for over four years, and over the past two years, those annual gains have been single digit and fairly steady, averaging about 6 percent,” according to Andrew LePage, research analyst with CoreLogic in a July 2016 update. “As the region’s median sale price edges closer—within about 8 percent—to its all-time high, it’s important to consider the context: It’s been almost nine years since the median peaked at $505,000, in the spring-summer of 2007. Adjusting for inflation, (June 2016’s) $464,000 median remained almost 19 percent below that 2007 peak. Even in Orange County, where last month’s median sale price hit a new high for the second consecutive month, the median, after adjusting for inflation, was still 10 percent below its all-time high from the last cycle.”
According to the USC Lusk Center for Real Estate’s Casden Economic Forecast, Orange County’s economy is routinely among the best performing in Southern California. Home sales and prices will also edge more closely to pre-recession levels and affordability concerns will increase. Over the past year, the County’s total stock of housing increased, but most of that increase came in the form of multifamily units, both rentals and owner-occupied. “Steady increases in Orange County’s population will drive housing demand in general. Because it is a relatively high-priced market, more new arrivals will opt for some type of multifamily living arrangement or another. Accordingly, Orange County will continue to add to its stock of multifamily units over the next two years, with permit counts approaching or exceeding levels that prevailed before the recession,” the forecast says.
In Orange County, the risk of a price decline was 2 percent in the first quarter, down from 8 percent a year ago and its historically high risk of 27 percent dating to 1980, according to Arch MI. Price momentum is solid, with O.C. home values up 6.3 percent in the 12 months ended in the first quarter vs. 4.8 percent in the previous year. By Arch’s estimates, Orange County homes were 3 percent overvalued in the first quarter compared with its economic fundamentals. “At the last decade’s bubble peak, Orange County homes were 40 percent overvalued. Those price gains came despite continued problems with financial affordability among buyers,” the Rach report says. Arch’s math shows O.C. house hunters in the first quarter had 30 percent less buying power than the average national shopper. O.C. affordability ran 17 percent below its historical trend vs. national averages.
The A. Gary Anderson Center for Economic Research at Chapman University’s updated forecast says that similar to California, residential permit valuation in Orange County is forecasted to decrease from 11.2 percent growth in 2015 to 4.5 percent growth in 2016. But this will be enough to bring residential permit valuation above the $3 billion level for the first time ever this year. Low mortgage rates and higher median family income coupled with a tight housing supply will keep upward pressure on housing prices. Housing appreciation in Orange County is forecasted from 2.7 percent in 2015 to 4.6 percent in 2016. The year end Chapman forecast noted that a potential Orange County homebuyer with a median family income will need to spend 37.2 percent of his or her earnings on mortgage payments in 2016. That’s up from around 35 percent in 2015 and 26.4 percent in 2012. “In spite of low mortgage rates, housing affordability has declined sharply since 2012, when home prices rebounded and income growth was stagnated,” the Chapman forecast said.
CoreLogic’s June 2016 report says the median sale price in Orange County reached a new peak in June of 2016 of $657,500, surpassing its previous all-time high of $651,500 in May of 2016. Prior to that, the county’s peak median sales price was $645,000, which was reached in both June 2007 and April 2016.
The high sales volume and low interest rate environment has boosted the bottom lines of banks and mortgage companies in the second half of this year. In fact, in August, Freddie Mac projected that this year’s loan origination volume will return to 2012 levels based on a variety of factors surpassing the two trillion dollar mark. First, rates remain near historic lows (and they expect them to stay there for the next 24 months). Low inventory and high demand will continue to put upward pressure on housing prices and lack of sufficient construction starts to keep up with demand. The 30 year conforming fixed rate average in July was 3.44% (loans capped at $417,000 loan amounts in LA and Orange Counties) which is the lowest month average since January of 2013.