The 2016 local real estate market remained strong as a result of tight supply and high demand. Multiple offers were the norm. The share of international buyers dropped to 3% in California, the lowest level in 9 years.
Continued improvement in the employment market, solid income gains and competition for a limited number of homes pushed prices higher
in most cities in the local market.
Summary of Market Forecast for 2017:
· US economy and job growth expanding
· CA economy out-performing the nation
· Strong 2017 housing market with little risk of a major downturn
· Slowing price and sales growth in 2017
· Rates rising in response to Fed policy but remaining attractive
· Millennials leaving the nest as job opportunities expand
· Listings remaining low
· Affordability challenges for first time & repeat buyers
· Boomers staying put
· International buyers dropping (China announced a new policy effective January 1, 2017)
· CA Jobs growing faster than nation with CA unemployment near an 8-year low
· Consumer confidence at a 9 year high and spending is robust
· Lack of affordability will remain the main challenge
· Migration patterns mirror housing affordability and jobs
· The economy will keep going – longest business cycle in history
· A trend toward government deregulation
· Wild Card: policies of President-elect Donald Trump
The fundamentals for the 2017 housing market remain strong but it will be a year of slowing and moderate growth, set against the backdrop of a changing composition of home buyers and a post-election interest rate jump that could potentially price some first-timers out of the market. Interest rates are expected to reach 4.5 percent due to higher expectations for inflationary pressure in the year ahead with unemployment expected to decline to 4.7 percent nationwide by the end of the year. Despite a more moderate housing market overall in 2017, strong local economies and population growth will continue to fuel the market.
New-home buyers could face increased building costs if President-elect Trump follows through on his tougher immigration policies, which may worsen the construction industry labor shortage. With the expected continuing increase in interest rates, first time buyers will face new hurdles as they navigate the qualification and buying process. These higher rates are associated with anticipation of stronger economic and wage growth next year, both of which favor buyers. However, higher rates will make qualifying for a mortgage and finding affordable inventory more challenging.
This year’s housing indicators don’t take one major wild card into account: President-elect Donald Trump. Tax cuts and increased infrastructure spending would stimulate economic growth, which is good for housing. But a trade war with China and an ideological confrontation with California could hurt our economy.
A new housing crisis may worsen under the Trump administration, according to some housing economists. Trump backs the Republican Party stance to change the structure of or completely eliminate the Consumer Financial Protection Bureau that was created by the Dodd-Frank Act to oversee Federal financial laws. Trump believes that the lack of mortgage credit availability is due to excessively strict criteria and unless you have a lot of money in the bank, you can’t borrow.
This would boost mortgage lending in the short term, and give more people the opportunity for home ownership, a pillar of the American dream. However, it could have ugly effects down the road. The higher demand for homes would push up house prices, and pretty soon the next generation would find themselves struggling to qualify for sufficient mortgage finance and as we learned just a few years’ ago, loosening lending standards can lead to dangerous housing and credit bubbles.
Abundance of Uncertainty
· Brexit: Limited direct impact on US.
· Unexpected rise in interest rates
· Hit to equities
· Global instability
Supply Remains an Issue
Long-time homeowners are not moving as in the past. Some of the reasons are listed below:
· Low rate on current mortgage, low property taxes
· Capital gains hit
· Replacement housing may be unaffordable
· May not qualify for a mortgage today
· Elect to remodel and stay - children to inherit the home of their parents?
· Fewer housing units being turned over since the Great Recession
· Owners investing in stay put alterations/additions reaches all-time high and gaining steam - up 16% from 2015 level
Boomers not moving as often: 71% of Californian’s aged 55+ haven’t moved since 1999 and the majority do not plan to sell home when they retire
· 92% have equity in their home
· 52% of parents worry about children having fewer opportunities to succeed
· 75% plan or have already helped children with down payment.
· Only 31% of households can buy a median priced home in California
· Millennials: The American dream is still important. Many millennials also believe buying a home is a safe investment
· Nearly half of all renters plan to buy a home. 69% of millennial renters would look into purchasing if knew about lower down-payments
· The number of years a homeowner owns before selling is up to 10 years from 6-7 years in the past
2016 Housing Statistics:
The number of houses sold annually was higher in Palo Alto for 2016 and lower for Menlo Park and Atherton. 371 houses sold in Palo Alto (compared to 326 in 2015), 296 houses sold in Menlo Park (compared to 315 in 2015) and 70 houses sold in Atherton (compared to 76 in 2015).
As of December 31, 2016 we had only 11 active listings of single family homes in Palo Alto, 12 in Menlo Park and 9 in Atherton.
100 townhouses and condos sold in in Palo Alto in 2016 with a median price of $1,505,000 compared to $1,462,000 last year, an increase of 3%. 74 townhouses and condo sold in Menlo Park with the median price declining 9.4% from $1,400,000 in 2015 to 1,267,500 in 2016
The median sale price for a single family home in Palo Alto decreased 4.3% to $2,555,000 (compared to $2,670,000 for last year), the first decrease since 2010. The sale to list price ratio was 104% and average days on the market was 23 days, an increase from 18 for 2015.
For Menlo Park the median sale price increased 4.9 % from $2,030,000 to $2,130,000 in 2016. The sale to list price ratio was 103.9% and average days on the market was 19 days, the same as last year.
For Atherton the median sale price increased 0.84% from $5,950,000 to $6,000,000. The sale to list price ratio was 97.7% and average days on the market was 73 days, up from 52 days for last year. The highest sale on MLS in Atherton was 246 Atherton Avenue, which sold at $33,350,000. It is important to note that Atherton continues to have more private sales than any other town in the area.
Predicting how the real estate market will behave is never an exact science and 2017 could be especially difficult to predict.
I think at this point it will be a very interesting year as we see what policies President-elect Trump will put into place.
Trump appears to be trying to create a new spirit for business so that even small businesses might stand a chance in 2017 and beyond. This could help more people feel confident about buying a home, or investing regardless of the prices. However, planned repatriation of business back to the US may come with a big price — a high dollar and strong inflation.
Top Factors That Will Affect The Housing Market In 2017
Increasing interest rates and changing buyer demographics are setting the stage for five key housing trends:
1. Millennials and boomers will dominate the market –– Next year, the housing market will be in the middle of two massive demographic waves, millennials and baby boomers, that will power demand for at least the next 10 years.
More millennials will become homeowners, driving up the home ownership rate. Millennials are also more racially diverse, so more homeowners will be people of color, reflecting the changing demographics of the United States. Millennials are expected to make up about a third of the buyer pool.
In the last several years baby boomers' participation in the housing market has dwindled, although that may be starting to change as the oldest baby boomers are entering their late 60s. While a sizable number want to downsize to control expenses, we're seeing others move to the biggest house they've ever owned because they've got children and grandchildren and they want them to come visit.
2. Fewer homes on the market and fast moving markets – Inventory is currently down The conditions that are limiting home supply are not expected to change in 2017. For those considering new construction in 2017, it’s worth considering the added cost that may come amidst ongoing construction labor shortages that could get worse if President-elect Trump follows through on his hardline stances on immigration and immigrant labor.
The percentage of people who drive to work will rise as homeowners move further into the suburbs seeking affordable housing.
3. Interest rates: A 30-year fixed rate mortgage averaged 4.32% for the week ending December 29, up from 4.01% a year earlier. Mortgage rates forecast to stay low and could reach 4.5% in 2017. With Trump in power, lending requirements are expected to be eased.
Low inventories and modest economic growth should push up price growth next year. If economic indicators are any guide, the housing market is heading for a fifth straight year of rising home prices, increased sales, more rent hikes and booming home construction.
4. Impact of Chinese buyers on the local market
China’s foreign exchange regulator announced a new policy effective January 1, 2017 that affects all individuals who are looking to buy overseas real estate China’s capital controls are becoming stricter.
· Citizens will now have to fill out an application form stating the purpose of their foreign purchase. The purpose cannot be real estate investment, but it can be done for purposes such as travel, education and so on.
· Prepare for a longer time to close deals with Chinese buyers.
· Chinese investors continue to find ways around the controls.
· I expect that the average purchase price for Chinese buyers will decrease in the next few years. More middle income class Mainland Chinese are looking to invest in overseas properties, and more second tiers cities are being targeted due to budget and capital controls.
The real estate market goes through cycles. Buyers who try to wait for prices to bottom before buying may miss the opportunity to buy. My recommendation therefore is to think strategically about when you want to buy and what kind of house you would like to buy and decide the risks that you are willing to take. If you find the right house for you, you may want to buy it now rather than wait for a market adjustment.
For sellers, the market appears to have reached a peak and prices have stabilized or are on the way down for some cities. Therefore it is a good time to sell before prices go further down and interest rates go higher and before the fundamentals in the economy change.
*Please share my semi-annual report with your friends who might be looking to buy or sell their home. As always thank you for your support, I appreciate any referrals you send my way. I will be happy to answer any questions or discuss in further detail the state of the real estate market.
California Association of Realtors, Leslie Appleton
US Dept. of Commerce, Bureau of Economic Analysis
Statistics are from MLS listings and do not include private sales