Thursday, February 23, 2017

California Home Buyers Push Vallejo as the Hottest Market in the US

The tight just keep on getting tighter. In the last, briefest month of winter (yay!) supplies were scarcer than ever in the residential real estate market, according to a preliminary analysis of our data here at®. Factoring in strong buyer demand, sales remained strong in February after a January in which the pace of existing-home sales was at a 10-year high.
And early birds were scrambling to get the worms … er, homes, which are moving off the market 5% more quickly this February than a year ago, and five days faster than in January. That’s even as prices remain at record highs.
“Spring has arrived early this year, at least in terms of the rapid decline in the age of inventory,” Chief Economist Jonathan Smoke of said in a statement. “Strong off-season demand powered new seasonal highs in prices and left us with a new low in available homes for sale. Potential sellers take note: This year is shaping up to favor you even more than last year.”

Another indication of the continuing strength of buyer demand is that the median list price remains level at $250,000, which is a steep 9% higher than one year ago. If this figure holds by the end of the month, it would be a record for February. Buyers are also ramping up their search online: saw the highest year-over-year increase in average views per listing since April 2015.

The Hot List:

Rank (February)20 Hottest MarketsRank (January)Rank Change
1Vallejo, CA32
2San Francisco, CA1-1
3Dallas, TX41
4Denver, CO84
5San Jose, CA2-3
6San Diego, CA5-1
7Sacramento, CA6-1
8Stockton, CA91
9Colorado Springs, CO134
10Yuba City, CA7-3
11Modesto, CA165
12Midland, TX2715
13Detroit, MI152
14Oxnard, CA11-3
15Fresno, CA10-5
16Columbus, OH12-4
17Boulder, CO258
18Boston, MA3214
19Santa Rosa, CA190
20Los Angeles, CA17-3

While nearly 425,000 new listings will have entered the market in February, there still aren’t enough to meet buyer demand. In fact, the sharp double-digit decline in for-sale housing inventory observed since October is continuing.
All this may sound like music to sellers’ ears, but not so much for buyers. However, buyers who are able to land the home of their dreams can reassure themselves that their investment is likely to be a solid one—especially in our hottest markets, where homes are selling fastest and there’s the most demand.
This month’s ranking has California dominating the list as usual, with 12 markets, but five other states made a showing: Texas, Colorado, Ohio, Michigan, and Massachusetts.
Leading the list is Vallejo, where the median days on market fell by almost half, powering it back into the top spot for the first time since August.
New to the list this month are Boulder, CO; Boston; and Midland, TX, which jumped eight, 14, and 15 spots respectively since January. Note that these metropolitan markets may also comprise neighboring cities or towns. For example, the Boston market also includes Cambridge and Newton, MA.

Wednesday, February 15, 2017

Real Estate Investing-It's All About the Business Cycle

Analyzing real estate is all about the cycles. Evaluating real estate investments, including real estate investment trusts (REIT), depends on evaluating three cycles: the economic cycle (primarily jobs), the building cycle, and the interest rate cycle.
We believe we are in a good spot in the economic cycle for attractive U.S. real estate returns, with steady job gains and an improving domestic economic growth outlook. The building cycle for real estate shows little sign of the type of overbuilding that has ended previous cycles. Finally, although we expect interest rates to rise, we expect increases to be modest, and for the increases to be driven by improving economic growth and a gradual pickup in inflation, conditions historically favorable for real estate stocks.
Based on these metrics, our real estate outlook is favorable, especially for income investors in the case of REITs. Below we discuss these cycles and what they mean for publicly-traded real estate in 2017.

Cycle #1: Economic Cycle

We believe real estate is well positioned for this stage of the economic cycle. Job growth has been steady, with an average of 195,000 jobs created monthly over the past 12 months. Jobs put workers in offices. Jobs give workers the wages to shop in the malls (or online, creating demand for warehouse space). Jobs enable workers to pay higher rents for their houses and apartments. And jobs help create inflationary pressure that gives real estate owners the pricing power to raise rents. All of these factors tie real estate to employment. This close relationship is evidenced by the 0.9 correlation between real estate stocks and total private employment [Figure 1], highest among the 11 S&P 500 sectors. Note that the stock performance leads the job count by about six months.
So where do we go from here? We have indicated that we expect job growth to slow in 2017, but several factors suggest the potential for continued solid gains and support for real estate investments. Fiscal stimulus from tax reform, infrastructure spending, and deregulation could help stimulate job growth, although the help may not come until late in the year. Consumer and business confidence are high, which tends to result in additional hiring. The employment component of the Institute for Supply Management’s manufacturing index is strong, having increased five straight months to 56.1 (50 is the breakpoint between expansion and contraction). All in all, the job picture looks good, although some slowdown in the 2016 pace would not surprise us, especially considering the economic expansion is nearly eight years old and unemployment is near its expected long-term rate.
Other cycle gauges we watch include the yield curve (the difference between short-term and long-term interest rates) and the index of leading indicators (LEI). These indicators, among others, suggest the cycle has a ways to go and further gains for real estate may lie ahead. And don’t forget interest rates are still low and the Federal Reserve (Fed) has only hiked rates twice, suggesting the economic cycle has a good amount left in the tank.

Cycle #2: Building Cycle

When assessing the building cycle, the key question to ask is whether the real estate industry is overbuilding. One consequence of the 2008-2009 financial crisis was that the supply of real estate was significantly constrained by the severity of the recession and reduced credit availability. The slower pace of building leaves the commercial real estate market in better supply-demand balance today than it has been at this stage of prior cycles. Case in point, the level of commercial construction in the latest gross domestic product (GDP) data, at $440 billion, is still only about halfway to the 2000 and 2007 peaks despite the $100 billion increase since the post-crisis trough in early 2011 [Figure 2]. Not only that but the pace of construction has pulled back since 2014, further evidence of the lack of froth.
Our proprietary LPL Research “Over Index” (a component of the Recession Watch Dashboard) also sheds light on the question of whether the real estate industry is overbuilding. This index has three components: overspending, overconfidence, and over-borrowing. Scaled to 100%, the over-borrowing measure—based on both consumer and business debt?—?is at just 32% (based on available data as of January 6, 2017), indicative of a disciplined market. The other two components are both at 40% or lower.
We do not see evidence of excessive froth in real estate lending markets. The latest Fed loan officer survey showed more tightening of commercial real estate lending standards than easing, although the survey showed less tightening over the past two quarters. Depending on the path of bank regulation, we could see further easing, but the key here is these data reflect discipline. The latest survey conducted by the Real Estate Roundtable indicated that those expecting tighter commercial real estate financing conditions are equal to those expecting easier conditions, and the ratio has been improving over the past several quarters. Finally, commercial real estate loan delinquency data indicates a healthy market, with a delinquency rate of 0.87%, below the troughs of the 1990s and 2000s. A healthy market coupled with disciplined lending practices is a good combination. Overall, we see good balance in the commercial real estate markets.

Cycle #3: Interest Rate Cycle

Rising interest rates are one of our biggest concerns when considering real estate. Higher interest rates reduce the attractiveness of potential distributions offered by REITs, and they increase borrowing costs for developers. As a result, real estate securities tend to underperform the broad equity market when interest rates rise. This relationship is shown in Figure 3, which presents the relative performance of real estate (compared with the S&P 500) plotted against the inverse of the 10-year Treasury yield. This relationship does not always hold, but certainly has over the past five years.
Higher interest rates are not all bad news. The interest rate cycle is tied to inflation, an important component of real estate values. Real estate owners often have the ability to raise rents in an inflationary environment and preserve or enhance the value of their assets. Higher rents support REIT dividend growth, which has historically exceeded the rate of inflation. In fact, the income component of REIT returns has exceeded inflation, based on the Consumer Price Index (CPI), in 15 out of the past 16 years based on S&P Dow Jones Indices data.
We expect interest rates to rise gradually over the course of 2017 and into 2018, presenting a headwind for real estate relative performance. However, should equity market returns in 2017 be modest as we expect, real estate?—?especially REITs?—?may have the potential to deliver an above-market total return.

Other Considerations

We believe the aforementioned cycles inform the majority of the decision regarding investing in real estate, but here are a few other things to consider:
  • Cyclical vs. defensive sectors. We expect the macroeconomic environment to favor cyclical sectors, a potential headwind to real estate relative performance. Cyclical sectors are more economically sensitive, while defensive sectors are less sensitive to changes in economic conditions.

  • Valuations are slightly rich. Although the market values for publicly-traded real estate are slightly below net asset values (the actual values of the underlying properties), valuations based on cash flows are above average and cause for some concern. Cash flow growth is expected to be modest and may not support valuations.

  • Tax reform uncertainty is high. While some form of tax reform is very likely and should help the economic backdrop, some measures under discussion may have a negative impact on real estate, in particular the possible elimination of the deductibility of interest on debt. A border adjustment tax as part of tax reform may also increase the cost of construction. The timing and nature of tax reform remain a source of uncertainty for real estate.

  • Stand-alone sector lift? Being split out of financials into its own S&P sector may still lead to greater interest among generalist investors (discussed here). Generalists remain underweight the sector.


Evaluating domestic real estate depends on evaluating three cycles: the economic cycle, the building cycle, and the interest rate cycle. We believe we are in a good spot in the economic cycle; the real estate building cycle shows little sign of overbuilding that has ended previous cycles; and although we expect interest rates to rise, we expect increases to be modest and for the increases to be driven by improving economic growth and a gradual pickup in inflation, conditions historically favorable for real estate stocks.* It’s not all clear skies, but we believe the outlook for real estate in 2017 is favorable.

Wednesday, February 1, 2017

Bay Area Housing Sales Cool, But Prices Climb

Bay Area home sales sagged in December from a year earlier, but — continuing a nearly five-year trend — the median price of a single-family house continued to climb.
For the nine-county region, the median price was $680,000 in December, up 3 percent from December 2015, according to CoreLogic, the real estate information service. Discounting a single month — March 2016, when the price remained flat — it was the 57th consecutive month of year-over-year gains.
For 2016 as a whole, the median price paid for a single-family house rose 4.5 percent to $700,000 from $670,000 in 2015.
As Bay Area home prices increase — along, lately, with mortgage rates — families seeking to move up to larger homes can face steep financial challenges. But homeowners who move out of the region have the potential to pocket significant profits on their home sales, for now.
The upshot is that the Bay Area’s once red-hot market has settled into a simmer. With buyers competing for a notoriously tight supply of homes, prices keep rising, though not at the same clip as in previous years: “The overall trend this past year has been toward a moderation of price growth and at least a modest decline in sales,” said Andrew LePage, a research analyst with CoreLogic.
Despite national reports about a surge of buyers getting off the fence as mortgage rates began to rise after the presidential election in November, LePage wondered if the effect was less powerful here.

“It’s possible,” he said, “that in the Bay Area, where homebuyers face some of the highest prices and mortgage payments in the country, rising mortgage rates in November 2016 had a net negative impact on the number of home sales recorded in December 2016.”
December sales were down on a year-over-year basis through most of the region: by 5.4 percent in Contra Costa County, 7.7 percent in San Mateo County, 8.9 percent in Santa Clara County and 9.1 percent in Alameda County.
Home sales in the year-earlier period may have been artificially inflated, LePage said, as new federal mortgage rules had delayed some deals into December 2015 that otherwise would have closed sooner.
Looking at 2016 in its entirety, sales were down 2.6 percent in the nine counties from the year before.
“There’s nothing on the market,” said Kevin Swartz, a Saratoga-based agent with the Sereno Group. He cited just 594 active listings in December for all of Santa Clara County. “That is incredibly low,” he said.
The flip side of the situation is that most of what is available sells — and at a good price.
After eight years in Sunnyvale, Swartz’s clients Nancee Braddock, a retired registered nurse, and her husband Jim Gurney, a videographer, sold their 1,570-square-foot home for $1,725,000, about $25,000 over the asking price. There were four bids on the property, which was on the market for barely a week.

Why move?
“To get away from the traffic,” said Braddock, who previously lived with Gurney in Los Altos Hills. “The traffic is just unbelievable, especially in the last four years — bumper to bumper down El Camino. So we were looking for some place not so congested and not so rushed, where there’s not always somebody behind you who’s late for something.”
The couple, whose children are grown, moved to Port Townsend, Washington: “You just feel like you can breathe here,” Braddock said.
The cost of their 2,300-square-foot house in Washington: just under $500,000.
Compare that with the median prices for Bay Area homes in December: Contra Costa County was comparable at $498,500, up 8.4 percent from a year earlier. But the median price was $700,000 in Alameda County, up 3.2 percent; $865,000 in Santa Clara County, up 1.2 percent; and $1,155,000 in San Mateo County, up 5 percent.
Those home prices were down from November.
(CoreLogic’s aggregated December sales and price figures for the Bay Area as a whole were estimates because it said data for San Francisco County were not yet available).
Anecdotally, agents mentioned a softening of the high-end market: “Almost no transactions at all,” said Alain Pinel’s Mark Wong, who is based in Saratoga. “But at the entry level, it’s very active, often with multiple offers and well over asking.”
Wong mentioned a house in San Jose — about equidistant from the Municipal Rose Garden and Santa Clara University — that listed “at $499,000 and got 40 offers, and they ended up with $750,000. You’re talking about a quarter million over asking,” he said, sounding amazed, “and this is a total fixer-upper and tear-down. You cannot live there.”
In the East Bay, agent Kevin Kieffer, based in Walnut Creek with Keller Williams, noted too many buyers for too few properties: “Demand’s super-high, inventory is super-low, and buyers are being more prudent and not as willing to overbid,” he said. “We’re in a worse inventory situation than we were last January. Still, one listing comes up and we’re getting multiple offers — kind of unusual for the rainy season.”
His clients Simon Yee and Tamara Corduck recently sold their Dublin house — four bedrooms, two baths, about 1,350 square feet — for $722,000. The couple, who work in tech, bought it about eight years ago for $540,000, but were looking for something larger now that they have two children.
“Buying a home was pretty hard because the supply was so limited in the Tri-Valley area,” Yee said. “We looked for over a year, put it on hold for a bit and then started back up.”
Eventually, they bid on a house that listed for $1,095,000 in Danville’s Greenbrook neighborhood: four bedrooms, three baths and about 2,275 square feet. The schools are good. The yard is decent. The house needs some upgrading: “New colors, and the cabinets might need some change,” Yee said.
They bought the house at a slight reduction: $1,072,000.
“We bided our time,” he said. “You have to be patient. And we discovered it’s best not to sweat the little things; you have to see the big picture. You’re not going to get your perfect home, which is hard to accept when you’re spending over $1 million. Once we got past that — that it could be 80 percent perfect — it was a little bit easier to pull the trigger.”