Real Estate Bubble in SOCAL? Not Likely

The chance of a widespread drop in local or statewide home prices in the next two years is practically nil, according to a new forecast from a private mortgage insurer.

Arch MI’s quarterly housing reports 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.”

Here’s how Arch sees the region:

In Orange County, 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.

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. 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.

Arch’s estimated 2 percent chance of housing depreciation in Los Angeles County was down from 5 percent a year ago and the county’s historical risk of 28 percent since 1980. L.A. County home prices rose 7.7 percent in the past year vs. 6.5 percent in the previous year. Arch saw L.A. homes as 4 percent undervalued in the first quarter vs. 50 percent overvalued in the previous decade’s buying frenzy.

L.A.’s market strength comes despite affordability 24 percent below the national average at the start of 2016, and 13 percent lower than historic affordability dating to 1980.

The Inland Empire’s 2 percent price-drop risk was down from 4 percent a year ago and below its historical average risk level of 28 percent.

Home prices in the Inland Empire rose 6.7 percent in the last year vs. 6.4 percent in the previous year. Arch saw Inland homes 2 percent undervalued in the first quarter vs. 60 percent overvalued in 2006.

The Inland Empire’s first-quarter affordability was 21 percent less than the national average and 12 percent under its historical levels.

Don’t think Arch is easy on real estate.

Its economists see plenty of risk in states with energy-dependent economies. North Dakota, with a 52 percent risk of price drops, is in the most precarious shape, followed by “elevated” risk in Wyoming (46 percent chance of a drop) and West Virginia (35 percent).

Arch found “moderate” risk in Alaska, New Mexico, Louisiana, Oklahoma and Texas – home to five of the seven diciest metro areas including Houston (national worst at 39 percent chance of price drop) and Fort Worth (16 percent chance).

“The risk of future price declines over the next two years is limited to mining and drilling areas hardest-hit by lower energy prices. Of course, for the nation as a whole, cheaper energy is a strong positive,” Arch’s report states. “Apart from some weakness in several energy-extraction states, home prices should rise faster than inflation over the next few years due to strong fundamentals.”

Hottest US Real Estate Markets for Summer 2016!

Wow, it sure did get hot fast this year! Summer has barely unfurled, but the residential real estate market is already delivering the most blistering June in a decade, according to new data on inventory and user activity on realtor.com®. Homes for sale in June are moving off the market 2% more quickly than last year as prices continue to hit new record highs.

However, there were signs of a slight—we’ll repeat, a slight—slowdown in a handful of the nation’s hottest markets.

“In June, for the first time that I can recall, the hottest real estate markets saw inventory movement slow down, while the rest of the country saw inventory speed up,” says Jonathan Smoke, chief economist of realtor.com. “We’ve essentially seen how low the age of inventory can go.”

“It’s like saying the A students had their grades slip by a point, but everyone else’s grades moved up,” he says.

Smoke’s team projects that the median age of inventory nationwide for the full month of June will be 65 days—2% less than June 2015 but the same as May. One-third of the 300 medium to large markets surveyed saw a month-over-month decline in the days that homes spent on market—some of them with a percentage decline into the double digits.

The hottest markets, identified by the team as those with the most views per listing and the quickest inventory movement, had homes selling 20 to 38 days faster than the rest of the U.S. The median age in the hottest markets increased by an average of 1 day from May.

Continuing this spring’s trend, pent-up demand from buyers who weren’t able to purchase a home last year, combined with low inventory, pushed up prices and got homes to sell quickly. Very quickly.

For-sale housing inventory is increasing on a monthly basis as is typical of the season, but total inventory remains lower than one year ago. An estimated 525,000 new listings are expected to come onto the market by the end of the month—a 3% increase over May—but that number will fall short of quenching existing demand—as evidenced by the higher prices. Compared with June 2015, listing inventory fell 5%.

Meanwhile, the median home list price was $252,000, 8% higher than one year ago and 1% higher than last month. However, much of the effect of higher prices is being offset by mortgage rates that are the lowest we’ve seen in three years, Smoke notes.

This month’s hottest markets list is (again!) dominated by California, but it’s sharing the spotlight with eight other states represented (Texas, Colorado, Indiana, Ohio, Michigan, Washington, Massachusetts, and New Hampshire). Dallas and San Diego joined the top five club, and Grand Rapids, MI, and Los Angeles returned to the top 10. With Grand Rapids, Michigan has three markets in the top 20. These markets comprise the greater metropolitan area, so Dallas also includes Fort Worth and Arlington, and Detroit includes Warren and Dearborn.

Seasonality is definitely a factor in these rankings, Smoke says.

“This is a peak time for people to be buying vacation homes in Michigan, because the weather is perfect. California markets tend to be fairly consistent—we don’t see huge changes.”

Would a Proposed Rent Control Bring Silicon Valley's Soring Rents into Balance?

After years of punishing rent increases, activists across Silicon Valley and the San Francisco Bay Area are pushing a spate of rent control proposals, driven by outrage over soaring housing prices and fears that the growing income gap is turning middle-class families into an endangered species. Those campaigns, if successful, would lead to the largest expansion of tenant laws since the 1970s.

“In the national picture, tenants’ rights and housing advocacy for the poor has been pretty sleepy for several decades,” said Michelle Wilde Anderson, a law professor at Stanford. “California is starting to wake up, and it may lead to national change.”

The Bay Area may be a special case, with the growth of technology industries driving housing costs into the stratosphere and a California initiative system that allows citizens to put proposed laws on the ballot. But the state has a long history of being at the forefront of populist uprisings that spread across the country, and rent control movements have already popped up in other higher-cost cities like Portland, Ore., and Seattle.

In 1978, Proposition 13 sharply reduced California’s property taxes, presaging a nationwide tax revolt. More recently, the state government adopted one of the nation’s most expansive minimum wage laws, to $15 statewide by 2022, reflecting a populist tide against income inequality that the rent control effort is also riding.

“This is happening so fast that we in the advocacy community can’t even keep track of it,” said Daniel Saver, a housing lawyer who is helping draft rent control proposals in several towns.

Instead of being based in big cities like San Francisco, today’s renters’ rights movement is centered in the collection of suburbs and bedroom communities that fill the peninsula south of the city. Here, the collision of tech riches with decades of slow-growth development measures has pushed rent prices up about 50 percent over the last five years, according to Zillow, the online real estate pricing service.

Today, as in the 1970s, the economic prescription would be to build more and soon. But as tales of eviction spread and landlords raise prices to the limit, even people who acknowledge rent control’s problems argue that it is still the best instrument to help middle-class families and lower-paid service employees who can no longer live close to work.

“The solution to the overall increase in housing prices in this area is bringing supply and demand into better balance,” said Leonard Siegel, a city councilman in Mountain View, where Google has its headquarters. “But until we get there — which means we need time to build housing — we keep losing people, and the fabric of our community is being torn apart.”

Silicon Valley looks and feels suburban, lacking in pedestrians and full of single-family homes. It also has many tenants. In Mountain View, for instance, renters make up 60 percent of the households. And since this is a place where a $1 million starter home is considered a steal, those renters also include well-paid tech workers at some of the most valuable companies on earth.

“In many of these places, rent growth by far outpaces income growth,” saidSvenja Gudell, chief economist at Zillow. “And you will find that not only at the bottom of the market, but even at the top of the income distribution, where incomes are growing but not as fast as rents are growing.”

Google employees routinely show up at City Council meetings to speak out about rents and evictions. And after a 2014 election that served as a housing referendum by bringing Mr. Siegel and two other housing advocates onto the council, Mountain View is poised to add 15,000 new units, about a 40 percent increase in the housing stock.

Nevertheless, a group called the Mountain View Tenants Coalition is collecting signatures for a voter initiative in hopes of putting rent control on the November ballot. One of the group’s leaders and its chief spokesman, Evan Ortiz, is a 29-year-old Google employee who works in ad sales.

Thomas K. Bannon, chief executive of the California Apartment Association, a landlords’ group, said his members were mobilizing a statewide response and planning to spend millions of dollars — he would not estimate exactly how many millions — to beat back the initiatives one city at a time. The members’ message: Don’t blame landlords. Blame cities for making it so hard to build new housing.

“We recognize that if there isn’t new development and there aren’t dollars for affordable housing, we are going to be up against the wall,” he said. “The days of the industry trying to play below the radar are, unfortunately, over.”

Rent control is rare nationally, and it is generally left over from decades-old laws for urban areas of New York, California and New Jersey, as well as the District of Columbia. About half the states have laws prohibiting localities from regulating rent prices at all, according to the National Apartment Association, while others, including California, have imposed limits, such as making more recent buildings exempt.

Economists have an almost universally dim view of rent control because it does nothing to attack the underlying problem here, which is that more people want to live in the Bay Area and Silicon Valley than there are housing units to put them in.

Indeed, study after study has shown that while limits on rental increases may have helped a comparative handful of tenants stay in their apartments, they only added to a shortage of affordable housing and did little to stem the tide of higher costs.

Rent control also comes with unintended consequences. The supply of rental apartments can become tighter as landlords exit the business. The properties that remain can become shabbier as owners stop keeping up with maintenance.

“Rent control exists for a reason, and it’s because someone gains from it,” said Daniel Fetter, an economics professor at Wellesley College in Massachusetts. “The question is, ‘Is that really the best policy for achieving those ends?’”

But such abstruse arguments don’t carry much weight when many people are worried about being displaced, especially in the Bay Area, where losing a cheap apartment can mean moving an hour or more from work.

On a recent evening in Burlingame, a Silicon Valley bedroom community about 20 minutes south of San Francisco, a 66-year-old legal secretary named Cindy Cornell sat at a foldout table in a San Francisco Giants visor collecting signatures for another rent control initiative.

About half the households in Burlingame are renters, and the list of horror stories went up and down the economic ladder. There was a 36-year-old mother of one whose husband is an engineer who makes good money at a tech company. She signed because their landlord raised the rent to $4,600 from $3,400 while she was pregnant.

A woman with four children and a husband who paints houses signed because the rent on her two-bedroom apartment had risen to $1,600 a month from $1,400 a month in two years.

A half-hour later in nearby San Mateo, Reyna Gonzalez, a 57-year-old nanny, was going door to door with her granddaughter and a clipboard, finding voters for similar proposal.

Whether or not these efforts are successful, Mr. Bannon, from the landlords’ group, said he expected escalating housing costs to remain one of the state’s central political issues for years.

“My members are not going to put their buildings on wheels and move them out of California,” Mr. Bannon, the landlord lobbyist, said. “We’ve got to do something to build. We can’t continue like this.”

3 Facts of the "New Normal" in Bay Area Real Estate

1: This is a high-stress market and it will continue

Buying or selling a home is usually prompted by a life event: death, divorce, marriage, relocation, job change and increase or decrease in family. These life events often bring stress and buying or selling a house adds to this stress. Add in the drama of a notably contentious presidential campaign, toss in the uncertainty of the financial markets and then add the pressure of the fast-paced expensive Bay Area market where decisions and offers need to be made quickly.

Unfortunately, all this is here to stay for a while. Yes, any normal person would be hard-pressed not to feel like they were in a tornado.

2: Low inventory of good homes will continue to drive pricing. However, buyer demand is becoming tempered and more deliberate

Yet another reminder that markets invariably change. While our group of top agents acknowledged the low inventory, they also recognized that buyers were becoming much more selective and deliberate. They look, they think and if they don't "feel it" they move on. "Who cares if there is an offer date?" "Another day and another home will appear." "Maybe the home won't sell and we can buy it for less." If they don't see the value they pass.

As a client of mine once said during a previous hot market, "This market is so crazy even a burning house will sell." Not so any more. Many agents believe sellers are seeing the last days when homes with deficiencies will sell quickly for top dollar. Great homes in great locations, priced fairly and marketed properly are selling. However, we are now beginning to see situations where even these homes only have one offer and sometimes, unfortunately, none.

3: Now more than ever you must play to win

While we don't believe another downturn is on the horizon, having a Realtor with strategies to address even the slightest of market corrections is critical to success whether you are a buyer or seller. A San Francisco agent in our group told a story of a home with 12 disclosure packets out to potential buyers. When the offer date came his buyer did not make an offer. What happened? The buyer thought the home would sell outside his price range. Sadly for him, the home sold below what he was prepared to spend. The moral to the story is "nothing ventured nothing gained." We are entering into a shifting market. Don't be afraid to make an offer.

Finally: The bottom line is we are moving to a ‘new normal’

The "feet on the street" believe that the outlook for the rest of the year remains positive, but moderating, with a continuing but more purposeful demand for Bay area housing.