The California Drought May Be Ending

The state’s biggest reservoirs are swelling. The Sierra Nevada have seen as much snow, sleet, hail and rain as during the wettest years on record. Rainy Los Angeles feels more like London than Southern California.

So is the great California drought finally calling it quits?

Yes. Or at least maybe. If the storm systems keep coming, state and regional water managers say, 2017 could be the end of a dry spell that has, for more than five years, caused crops to wither, reservoirs to run dry and homeowners to rip out their lawns and plant cactus.  

“You’ve seen jumps in snowpack and precipitation amounts. You look at the charts, you see the line just pretty much go straight up,” state climatologist Michael Anderson said. For most of the state, the end “is in the realm of possibility now, which is kind of a nice thing to think about.”

But Anderson cautioned that the current “La Niña-ish” weather patterns, as he called them, make it tough to know what the rest of the winter will bring. “The funny thing about this weather pattern — it’s about as unpredictable as you can get.”

But Anderson cautioned that the current “La Niña-ish” weather patterns, as he called them, make it tough to know what the rest of the winter will bring. “The funny thing about this weather pattern — it’s about as unpredictable as you can get.”

Nature could suddenly turn off the faucet, water officials warn.

“It could shut down,” said Jeanine Jones, interstate resources manager in the Department of Water Resources. “We’re about a third of the way into the wettest part of the season. We have to see what happens in the rest of the year.”

On Thursday, the U.S. Drought Monitor announced a major improvement in California’s drought picture. It showed much of Northern California out of drought conditions.

Whether the drought is in its death throes also depends on what you look at. “In terms of surface water, most of California is no longer in drought,” UC Davis water expert Jay Lund said Wednesday in a blog post.

But there is no set definition of drought, nor is there any legal criterion for declaring a beginning or end to it in California.

“We can’t say that we’re no longer feeling the impacts of the drought,” said Deven Upadhyay, water resource manager for the Metropolitan Water District of Southern California.  “Later this year, we may be able to say that we’ve really turned the tide and the drought’s over,” he said. “But we’re not there yet.”

Metropolitan imports water from the Colorado River and Northern California. Lake Oroville, the biggest reservoir in the state system that sends supplies to the Southland, is filling at a stunning rate. That is almost sure to mean the agency will get more water from the north than it has in years.

But Metropolitan’s regional reserves are still far lower than they were at the beginning of the drought. And, Upadhyay says, 2017 could turn out to be a lone wet year followed by more dry years, as was the case in 2011.

“I sometimes talk about it as being more like a nine or 10-year drought,” he said. “Really, the only wet year we had was 2010-11. That was a single wet year in what is really kind of a prolonged drought.”

For now, though, all but a few pockets of the state are wet and getting wetter. Weather gauges at Rocky Butte in San Luis Obispo County recorded 17 inches of rain in the first 10 days of this month.

“They’ve been absolutely hammered,” said Joe Sirard, a National Weather Service meteorologist. “And up at Big Sur, tremendous amounts of rain. That atmospheric river ... just inundated that area.”

Between Tuesday and Wednesday, the statewide snowpack jumped from 135% to 158% of normal for the date. In the drought-punished Southern Sierra, the snowpack is 187% of the norm.

Since Oct. 1, total precipitation in the range has been soaring at rates similar to the wettest winters in the modern record: 1982-83 in the northern and central Sierra and 1968-69 in the Southern Sierra.

Lake Shasta, the state’s largest reservoir and a major source of water for San Joaquin Valley agriculture, is 81% full and releasing water to create more storage room. Oroville, which supplies the State Water Project, is nearly three-quarters full.

“We’ve had fantastic runoff up here in the Sacramento [River] Basin, Feather [River] Basin. Some pretty jaw-dropping numbers,” Anderson said.

In the first 10 days of this month, more water flowed into Oroville than the entire city of Los Angeles uses in a year.

In much of Southern California, the dry autumn has given way to above-average rainfall that is helping replenish local groundwater basins that typically provide roughly a third of the region’s water supply. 

December rains were “long and steady,” good for seeping into the San Gabriel Valley aquifer, said Tony Zampiello, executive officer of the Main San Gabriel Basin Watermaster, the agency that manages the groundwater basin.

Most of the aquifer’s recharge comes from mountain runoff and rainfall on the valley floor, both of which have been in short supply in recent years. Water levels in a key well dropped 50 feet during the drought as local districts serving 1.3 million people pumped more out of the groundwater basin than nature was putting back in.

“We need to start bringing water back in the basin. We’re obviously hoping this year will work out well,” Zampiello said.

How Rising Mortgage Rates May Not Matter to Housing

Mortgage rates are now sitting solidly at the highest level in two years and could move even higher in the coming weeks.

Granted, January  is not exactly the hottest season for the housing market — homes don't top the holiday gift list — but in February, all eyes move to the all-important spring season.

Even before a Fed move, the average rate on the popular 30-year fixed mortgage shot up from record lows immediately after the presidential election, as investors piled into the stock market and sold out of the bond market [mortgage rates loosely follow the yield of the U.S. 10-year Treasury].

They then continued to move slowly higher, with the resulting move going from about 3.5 percent to now 4.25 percent. The last time rates moved by that much, in June 2013, home sales suffered and house price gains dropped by half.

This time around, however, there is great debate over whether rising rates really matter to housing. After all, increasing rates are indicative of a stronger economy, and a stronger economy favors housing.

If interest rates are rising because the economy is growing more rapidly, then, typically, incomes also rise, and the rise in incomes offset the increase in the size of the mortgage payment, and housing goes just fine," said Doug Duncan, chief economist at Fannie Mae, in a recent interview with National Mortgage News.

Income growth is surely a driving factor for homeownership, but buying a home is the most emotional purchase a consumer can make. While a majority of current and prospective homeowners view the U.S. real estate market favorably, there is greater concern about how an increase in the Fed's benchmark interest rate, expected to be announced Wednesday, will hit housing affordability.

A report released Tuesday by Berkshire Hathaway HomeServices, a real estate brokerage, found 76 percent of current homeowners and 79 percent of prospective homeowners cite increasing interest rates as a challenge impacting today's housing market; those are 16 and 8 percentage-point jumps, respectively, from the same time last year — just before the central bank raised its benchmark rate for the first time in nearly a decade.

The survey also showed an increased number of buyers and owners would feel anxious if rates were to rise further. Perception is everything in housing.

"Mortgage rates remain near historic lows, although it may not seem that way to recent, first-time buyers and those considering a home purchase," said Stephen Phillips, president of Berkshire Hathaway HomeServices.

Real estate experts at Redfin, another real estate brokerage, predict that rates will not move that much higher in 2017, in fact no higher than 4.3 percent on the 30-year fixed. They also expect that access to credit will be easier:

"In 2016, large financial institutions such as Bank of America, JPMorgan, Wells Fargo and Quicken all introduced mortgages requiring as little as 1 percent to 3 percent down. We expect increases in the availability of low down payment mortgages to draw more millennial buyers into the housing market," said Nela Richardson, chief economist at Redfin.

Researchers at Zillow, a property listing and analytics company, surveyed consumer housing trends and found that buying a home is less tied to current mortgage rates and more closely linked to a consumer's financial well-being. Life events, such as job changes, promotions or change in the number of people in the household are the precipitating factors for a purchase.

"While those looking to buy a home are understandably concerned about the path of rates ahead, it's important to remember that borrowing costs remain exceptionally low by historical standards," said Erin Lantz, vice president of mortgages at Zillow.

"Rising rates may impact the location or size of the home they hope to purchase, but buyers that are fully committed to buying a home are unlikely to be swayed by the FOMC's [Federal Open Market Committee] decision to raise rates." 

Still, affordability is weakening for those who want to buy, especially first-time buyers. The number of homes available to the average first-time buyer fell more than 12 percent compared with 2015, according to Trulia, another real estate listing site owned by Zillow.

Starter homes make up less than one-quarter of available listings nationwide, while premium homes make up half. In addition, average first-time buyer households will need to spend 39 percent of monthly income to buy a home, which is nearly a 2 percentage-point increase over 2015.

The greatest barrier to a robust spring housing market next year is not, however, higher mortgage rates — it is lack of supply.

Listings dropped throughout 2016 compared with 2015 and show no signs of improving. While there are some signs of home price gains easing, especially in California, one of the nation's largest and priciest housing markets, sales cannot increase if there aren't more homes to buy. Homebuilders are still operating at well below historical norms, and while they increase production little by little, it is not nearly enough. Sellers are also staying put.

"We've seen housing tenure increase the past few years, and turnover is low relative to historical averages," said Richardson of Redfin. "The typical homeowner stays in their home twice as long as they did 15 years ago. An increase in rates will serve to strengthen this trend towards longer tenure and lock homeowners into their low-rate mortgages."

This happened after the rate jump in 2013 as well, and conditions for sellers are worse today — first and foremost that it's harder to find an affordable trade-up home. There is also more incentive for homeowners to trade up but keep their current home to rent.

"For a homeowner who has the gift of a 3.5 percent (or lower) 30-year fixed rate, it may pay to keep their home as an investment property even if they do decide to trade up," added Richardson.

2017 Real Estate Market Predictions from the Experts

In so many ways 2016 was an unprecedented, volatile and, for some, excruciating 12 months. And the housing market was not immune to the year’s whims. At the start experts anticipated a pick up in building activity, instead builders are still not producing enough homes. Meanwhile, home prices appreciated beyond expectations and mortgage rates toyed with record lows before crossing 4% for the first time in two years. "If the expectation was that the market would transition smoothly from deep red hot recovery to normal--that certainly didn’t happen," says Svenja Gudell, chief economist at real estate data firm Zillow.

Nevertheless, Gudell and others argue that on balance 2016 was a pretty good year for housing. National prices finally crossing the previous 2006 peak, mortgage rates remained historically low and there were some signs that Millennials, a generation which some feared would never buy homes, are beginning to enter the market. Through it all the election loomed large. In 2017 we'll see how profound it's effects.

Here are seven things housing experts expect to see in 2017:

1. Prices will continue to rise--but more slowly. 

Prices rose every month last year (through October) with the largest gains coming in the later half and a 5.61% increase in national. Experts expect prices will continue their climb, but gains will slow. "We believe price increases will hold steady despite slowing sales growth, because homebuyer demand is stronger now than it was at the same time last year, and because we foresee a small uptick in homes for sale," notes Nela Richardson, chief economist at real estate brokerage Redfin.

"With the current high consumer confidence numbers and low unemployment rate, affordability trends do not suggest an immediate reversal in home price trends," noted David Blitzer, chairman of the Index Committee at S&P Dow Jones Indices, in the December release of the Case-Shiller home price index. "Nevertheless, home prices cannot rise faster than incomes and inflation indefinitely.”

Redfin expects the median home sale prices to gain 5.3% in 2017 compared to 2016, which would not be a major change from the 5.5% year-over-year gain expected to close out this year. Zillow is forecasting the median home value to rise 3.2% from $192,500 between November 2016 to November 2017. Zillow's home value index rose 6.5% in the year ending November 30th.

2. Affordability will worsen. 

Wages are expected to grow in America's big cities this year, but the share of homes affordable to someone earning the median income is not. This trend, which has stymied many aspiring to buy their first home over the past few years, will be intensified by a continued shortage in low- to moderate-priced inventory and rising mortgage rates. "The irony of the modern housing market is that the places where we are seeing wage growth are places where people can't live because they are too un-affordable. There is a mismatch," says Nela Richardson, chief economist at real estate brokerage Redfin.

A decade ago a mismatch like this would not have been so apparent because buyers could get subprime loans, but now high credit is a requirement. The percent of new listings in the lowest price tier of the market has declined nearly every month in the last five years. Experts agree that even if builders are more active this year, they are unlikely to significantly add to the starter home stock in 2017.

3. Mortgage rates will be volatile. 

The two major political events of 2016 set mortgage rates moving in opposite directions. In June, the British vote to exit the European Union put rates near a record low. In November, the U.S. election of Donald Trump had the opposite effect, sending rates above 4% for the first time in two years. By historic standards rates are still low. In 2017 experts expect movement, but differ on where for the 30-year fixed rate will land. Estimates out there range from between 3.75% and 4.6%--not so far from where it is today.

"Mortgage rates going up is a bit of euphoria and optimism over [Trump's] promise to lower taxes, increase infrastructure spending and drive 4% econ growth," says Richardson. "As more details materialize and we get a realistic assessment, we will see rates bump around." Notes Gudell: "If you squint at line you will see nice upward trend, but it will happen at a volatile pace."

In December the Federal Reserve bumped short term interest rates o between 0.50% and 0.75%, the second hike in a decade. The 25 basis point move left rates low by historic standards and on did not have a huge impact on mortgage rates. However, the Fed's policy makers indicated they anticipate three hikes in 2017, which could have a larger effect. That's up from the two officials projected before Donald Trump was elected. That said, Fed projections can be taken with a grain of salt: they also originally thought they would hike three times in 2016.

4. Credit availability will improve--maybe. 

By and large early Trump administration priorities are not expected to deal directly with housing. However, the president-elect and his team have made it clear that they hope to roll back much of the post-crisis financial regulation laid out in the Dodd-Frank Act. In theory, this could open up banks to lend more freely to wide-range of would be buyers. Though not everyone is convinced this type of lending is the direction banks would go with any new found freedom. Meanwhile, there is speculation that Trump would return government-controlled mortgage companies Fannie Mae and Freddie Mac to private control. Investors have cheered the possibility, but some housing economists worry such a move would further restrict who could get credit to buy a home.

5. Supply will improve but remain short. 

Declining inventory was without a doubt the defining feature of the housing market in 2016. It led to price appreciation, as well as a hyper fast market for buyers and discouraged would-be-sellers who feared entering the buying fray. A complete turnaround is unlikely in 2017, but there are some signs the coming year could see a small bump in housing supply--at least on the new home front.

Homebuilder sentiment picked up late last year, as many expect Trump to be a friend to the industry. Meanwhile, strong demand should also encourage building. "Controlling for the number of households in the U.S., housing starts are still only 55% of the 50-year average," wrote Trulia Chief Economist Ralph McLaughlin. "The historical view looks like there’s also more room for housing starts to grow." Construction, however, is unlikely to improve the affordability picture because there is a growing premium for new homes and most building in recent years has been on the high-end, since builders feel they can get a better return there. 

When it comes to existing homes a phenomenon Richardson calls "rate lock" may constrain inventory. Homeowners who locked in a mortgage below 4% are likely to stay in low priced homes rather than upgrade, a pattern that last emerged when rates briefly rose in 2013.

6. More Millennials will become homeowners--and renters. 

According to Zillow half of all buyers are under age 36. Not every economist agrees with this assessment, however it is clear that Millennials will continue to make up a large and growing portion of the buyer pool. Of course much of this is due to the fact that Millennials--adults born after 1980--are now the largest adult generation and make up the greatest percentage of the workforce. Redfin expects Millennial homebuyers will move from the coasts to "inland markets" where starter homes are more affordable.

7. Competition will grow fiercer.

In 2017 sellers will maintain the edge over buyers as demand is expected to increase. In 2016 the typical homes stayed on the market for just 52 days, about a week faster than in 2015 and the fastest year since Redfin began measuring in 2009. The brokerage expects 2017 to be even faster.