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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
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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
Miscellaneous
Facts:
· 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.
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Outlook:
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.
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SOURCES:
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
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