California Real Estate Trends Contnue to Climb

Key Takeaways

• Single-family rental growth has slowed in the high-end tier as of May, while the lower end of the market has remained strong throughout the nation, at 5.3 percent annual growth.
• California was home to the largest pool of foreclosures along with Florida, but California's foreclosed inventory sat at only 0.4 percent.
• The California Home Price Index increased 6 percent annually in June, and the forecast shows year-over-year prices are expected to climb by 9.6 percent in 12 months.

CoreLogic’s Market Pulse for August 2016 reports on the national market and local trends, including a new inside look at the rental sector. Similar to the data company’s CoreLogic Home Price Index (HPI) and CoreLogic Case-Shiller Index, the new Single-Family Rental Index (SFRI) measures the growth of the rental market since January 2007.

After a massive growth spurt at the tail end of 2009 and into 2011 and steady growth that continued for a few years after, the SFRI shows rental price gains have recently begun to soften.

Rent growth peaked at 4.6 percent in December 2014 over the previous year, but as of May, the growth rate was 1.2 percent lower, at an annual uptick of 3.3 percent. Following a similar pattern to that seen in the homebuying market, the rental market has seen a slow-down in the high-end sector as of recently, while lower price points are holding their own.

Rent prices at the lowest end of the spectrum were up 5.3 percent in May over the previous year, marking a three-year growth trend around 5.5 percent. At the high end of the market, rentals were up 2.1 percent annually.

Throughout the nation, single-family rental demand is moderating after years of sharp increases, and tight credit conditions are likely to keep that demand hot, particularly in the low- and mid-range price points.

Los Angeles was home to largest growth in the single-family rental market among the 10 largest sectors studied by CoreLogic. The Southern California city saw a 5.4 percent growth rate in May from a year prior.

Current housing market trends

Boomerang buyers — homebuyers returning to the market after losing a foreclosed home — have slowly but surely made their way back into the real estate market. Looking ahead to 2017, the return of boomerang buyers has the potential to be strong, the report says.

CoreLogic reports the year is nearing seven years from the foreclosure crisis peak in 2010, which means that the ‘black mark’ of foreclosure will be officially erased from consumer credit reports.

CoreLogic reports on the hardest hit locations for boomerang buyers that returned by 2013. The three highest states for boomerang buyers — Arizona, Nevada and Michigan — saw 32 percent of its foreclosed homeowners come back to action in the market, compared to a 22 percent national average.

California is doing pretty well in terms of its foreclosed inventory and the return of boomerang buyers, CoreLogic says. The state has a foreclosure inventory of 0.4 percent. Along with Florida, California had the highest total of foreclosures, but the state saw 24.8 percent of boomerang buyers return.

Is It Time for a Resession?

Maybe I’m cranky. And it is a heated political season. But an economic reality check is needed. There’s a huge disconnect between the noteworthy upbeat economic data vs. dour sentiment so often heard around the region.

I’m not rooting for a recession, but here are six things we could learn from another downturn. Well, unless we want to do the hard work and to go the history books and learn – without living through another reversal for the business climate.

1. GIVE PERSPECTIVE

I can see a time – maybe in midrecession 2018 or 2019 – when somebody will reminisce about the good old days.

You know, “Remember 2015 or 2016 ...” I may have to be restrained from harming the person.

It’s been seven years since the Great Recession technically ended. The recovery in and around Southern California has not been perfect or even, but it’s been a noteworthy advance, especially considering the depth of the last downturn.

Times, relatively, are pretty good. Roads are jammed for a reason. Jobs are plentiful even if the pay isn’t always great. And home values have largely recovered. Please remember this strength.

Do we need another economic downturn to recall what real pain feels like?

2. PROVIDE SCALE

We will have another economic downturn. It’s just a fact that the business climate has its ups and downs, and we’re due for a down.

But let’s remember a slowdown does not have to be an economic catastrophe.

In the past quarter-century, this region has seen a prolonged malaise (the early 1990s), a modest dip (after the turn of the century, the post dot-com bust and 9/11 attacks), and a huge disaster (Great Recession, technically 2007 to 2009.)

All hurt many people and businesses. Each happened for different reasons. Each left varied scars on the local business landscape.

But considering the relatively modest oomph of the current economic expansion and recovery marked by limited risk-taking, the next recession could be a mild one.

3. TRUE SLOW GROWTH

You know things are too good when people start complaining about how “busy” Orange County has become.

We again see the cyclical revival of local slow-growth movements in which those who benefited from the upswing start campaigning to shut the doors to further economic expansion.

The common target is new housing, which is desperately needed countywide but is unfairly tarred as the traffic problem. The truth is that local employers hire more people than can afford to live here, so new “affordable” housing would actually lower congestion.

Debate aside, there’s only one thing that quickly empties freeways: a job-killing recession! So, slow-growth fans, be careful what you wish for.

4. REINFORCE DATA

I know some of you think I’m crazy to think times are good.

It’s true not everyone has benefited from the recovery. And other folks think there’s a conspiracy among all data collectors – government, industry groups, private analysts and pundits – to cover up their view of a gloomy reality.

When the downturn arrives, we will see data that show slowing corporate and consumer activity. Unemployment will rise. So will bankruptcies and defaults. Maybe California will stop being the nation’s largest jobs creator.

The widely reported trend lines that rise today will drop when business sours. I will note the dip with the same vigor as today’s upward trends.

P.S. to my revival-denial friends: When the downturn comes, please don’t try to prove your point by quoting the same economic data you currently think are wrong or misleading or even cooked!

5. BUY LOW!

Who wishes they bought property or stocks right after the recession?

Downturns create opportunity for those who can see it.

Maybe certain assets have gotten a little too pricey in this recovery. (I’ll suggest commercial real estate.) One good thing about recessions is their cleansing nature: They often punish what’s become economically illogical.

Unfortunately, human nature makes it tough to want risky assets after markets tumble. Emotions make it especially tricky to decipher which bets are no longer viable vs. which investments have simply been heavily discounted.

I wish we didn’t need another downturn to re-teach “Buy low, sell high” ... but, sadly, that's what it takes.

6. FIX EXCESS

When people forget business reality, recessions begin.

Severe risk-taking or overspending is often the last stage of an upswing as money seems too easy to get. Companies do it. Consumers, too!

When those bets no longer pay off, institutions and individuals pull back spending. The growth ends and the contraction beings.

What worries me today? The fancy food concepts that seem hot these days. I halfway understand pricey wine, but fancy micro-brewery beers or custom-mixed cocktails that can run $15 or more? Really?

And those beverages wash down your $12 (tiny) burger made with all-natural/grass-fed/free-range/humanely killed/hand-ground/brand-name protein with a (small) side of organic/locally sourced/hand-cut/fried-in-gourmet-oils vegetables.

Oh, yeah. Did I mention $100 tomahawk steaks?

But if stuffing tummies on overpriced dinners is this upswing’s worst offense, perhaps the reversal won’t hurt the wallet too much.

The San Francisco Housing Frenzy Shifts Now to Oakland

Stacey Smith and her husband looked at about three dozen homes in the San Francisco Bay area and lost a bidding war before finally purchasing a four-bedroom house in June for $1.5 million — 40 percent more than the asking price.

Their search wasn’t in Silicon Valley or San Francisco. It was just across the bay in Oakland, which has supplanted its pricier and better-known neighbors to become the region’s most heated real estate market.

“Something we had to wrap our head around really quickly was the fact that we were automatically going to bid at least 30 percent over asking,” said Smith, a 50-year-old strategy consultant who moved from San Francisco in search of more space for her family’s three kids. “It’s the new normal.”

Oakland’s housing market is still soaring even as growth cools in San Francisco, where million-dollar median home prices have left buyers searching for more affordable alternatives. The East Bay city had California’s highest annual appreciation of home values and the biggest rent growth of the 50 largest U.S. cities as of June, according to data compiled by Zillow.

Despite persistently high crime rates and political turmoil, Oakland is attracting residents for its relative affordability, vibrant cultural scene, diverse population and urban environment within commuting distance to San Francisco. Companies such as Uber Technologies Inc. are moving in — helping to fuel a 43 percent jump in office rents in two years — while big investors including Blackstone Group LP and Boston Properties Inc. are putting money into residential projects in the city.

“Oakland is the hottest residential real estate market in the Bay Area,” said Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley. “It’s still expensive, but it’s more affordable” than San Francisco.

Biggest gains

Oakland home values soared 16 percent in June from a year earlier to a median $616,300, the biggest gain of California’s major cities, according to Zillow. The median monthly rent jumped 15 percent, the most in the U.S., to $2,846 in the same period. That was almost triple the 5.5 percent growth in San Francisco, and more than five times the nationwide increase.

Houses are selling fast — and far above list prices. The average home in Oakland sold for 17 percent more than asking in the second quarter, according to data from Paragon Real Estate Group measuring properties that didn’t go through a price reduction first. That compared with 9 percent for San Francisco and 5 percent in Silicon Valley’s Santa Clara and San Mateo counties. Oakland homes were on the market an average of 20 days, fewer than the 34 days in San Francisco.

“Most markets would be pleased if they averaged asking price, or 1 or 2 percent over asking price,” said Patrick Carlisle, chief market analyst at Paragon. “To see things averaging 9 to 17 percent over asking price is virtually unheard of. It’s the highest I’ve ever seen.”

The median home price in Oakland has soared 178 percent since 2011, almost double the gain in San Francisco, Paragon data show.

Police scandal

Oakland is still struggling with a reputation for social and political unrest. Its police department is operating without a chief after three departed, one after another, in the span of about a week in June amid a sex scandal involving officers and a teenage prostitute. It’s also an epicenter of social protests, including those connected to the Black Lives Matter and Occupy Wall Street movements.

The troubles aren’t deterring newcomers, city officials say.

“It’s not slowing growth in the way that it used to five or 10 years ago,” said Marisa Raya, an economic analyst in Oakland’s office of economic and workforce development. “But we are certainly seeing a lot of political activism around the super-fast rent growth.”

Oakland voters will consider ballot measures in November to strengthen rent control and issue bonds for affordable housing.

Blackstone rarity

Blackstone has teamed with CityView, a property company started by former U.S. Housing and Urban Development Secretary Henry Cisneros, to build a 423-unit apartment complex in Oakland. The $175 million project at 3093 Broadway, due to be finished in 2018, is the first development in the city for the world’s largest alternative-asset manager.

Jon Gray, Blackstone’s billionaire head of real estate, said he thinks Oakland may become the next Brooklyn — a comparison that has frequently been evoked in recent years as the city comes into its own as a hot spot after previously being overshadowed by its glitzier neighbor.

“We very rarely do ground-up development, so this project reflects our strong confidence in the transformation under way in Oakland,” Gray said in an e-mail.

Boston Properties, the largest publicly traded U.S. office owner, signed a letter of intent to invest in a 25-story residential development in Oakland’s Temescal neighborhood, Chief Executive Officer Owen Thomas said on a July 27 earnings conference call.

“Given the high cost of multifamily product in the San Francisco market, we believe we can deliver high-quality units that are approximately at a 20 percent discount to San Francisco rents in a location that is a 16-minute transit ride from the Embarcadero BART Station in downtown San Francisco,” he said on the call. Arista Joyner, a spokeswoman for the company, declined to comment further.

Job growth

Oakland’s job growth also is showing signs of outpacing its neighbor, with listings up 16 percent since April, compared with a 1 percent decline in San Francisco, according to LinkUp, a job-search engine based in Minneapolis. Among the companies setting up shop is San Francisco-based Uber, which last year bought the old Sears building in the Oakland’s urban core and is renovating it, with plans to open in late 2017.

The city is home to consumer-products maker Clorox Co.; Kaiser Permanente, a nonprofit health insurer and hospital chain; and internet-radio service Pandora Media Inc.

The rate for top-quality office space in the city has grown 43 percent in the second quarter compared with two years earlier, while San Francisco’s rent is up 20 percent in that time, according to data from real estate brokerage CBRE Group Inc.

The influx of companies is helping to prop up housing prices. Even as the technology industry slows, there are still “many, many buyers” in Oakland, said Carla Buffington, a real estate broker at Pacific Union in the city.

“We’re seeing a majority of properties selling with multiple offers,” Buffington said. “Almost weekly, I am shocked by the price that a certain property will get.”