Fed Hike?

A pause in the Fed hikes was looking good.

First, the WSJ posted an editorial on Sunday – a snippet:

If you think your job is tough, consider Federal Reserve Chairman Jerome Powell. He’s signaled for months that the Fed will raise interest rates again this week, but economic and financial signals suggest he should pause. Meanwhile, Donald J. Trump is beating him up almost daily not to raise rates.

What to do? The right answer is to ignore the politics, inside and outside the Fed, and follow the signals that suggest a prudent pause in raising rates at this week’s Open Market Committee (FOMC) meeting. Get the monetary policy that best serves the economy, and the politics will work itself out. Get the policy wrong, and Mr. Trump will be the least of Mr. Powell’s political worries.

Josh agreed in his tweet above, and it looked like we had a shot!

Trump could have just let it go…..but noooo, he had to tweet one more time:

In case the Fed is looking around for evidence, consider our recent home sales:

End-of-Year Detached-Home Sales and Pricing

Category
2017
2018
% change
NSDCC # of Sales, 10/1 – 12/15
600
537
-11%
NSDCC Median SP, 10/1 – 12/15
$1,200,000
$1,350,000
+13%
SD County # of Sales, 10/1 – 12/15
4,637
3,886
-16%
SD County Median SP, 10/1 – 12/15
$615,000
$640,000
+4%

The Fed is going to be tempted to make their rate decision based on politics, and show Trump who the boss is. Median pricing is like politics – it makes you want to make decisions based on less-relevant data.

Keep your eyes on sales – they are the precursor of what’s ahead.

Even if the Fed skips this rate hike, we are still going to see sales plummet next year.  They could help make it a softer plummet though!

2019 Market Outlook

Above is the summary of yesterday’s housing and economic outlook sponsored by First American Title.  Click here for the full report:

SoCal Outlook Dec 2018

Let’s mention those who will be making the market in 2019:

  1. Those with the least amount of experience and education.
  2. Those who don’t own a home here yet.

People in these two categories aren’t hampered by the over-analysis that comes with owning a home here currently.  Those who already own a home in San Diego have paid less, and have a lower mortgage rate.  We are trying to make sense of giving that up, and paying more!

It’s a burden that thwarts most attempts to move by current homeowners.

But those who don’t study it too hard, or don’t already own a home will forge ahead.  They have already decided that buying a home make sense in this environment, and have their own personal consequences if they don’t buy.  They aren’t going to be talked out of it either.

Figure out how many people are in that group, and you can predict the future.

Here are the categories:

  • First-timers
  • Down-sizers
  • Up-sizers with strong needs
  • Incomers from out-of-county/state/country
  • Affluent people

Everyone else will enjoy their comfortable spot on the fence and wait-and-see what these folks will do.  Let’s acknowledge though that people in these five groups aren’t tethered with the same restraints as the rest of us – it’s just a matter of how many people are in these groups.

How many?  My guess is 80% of those who bought in 2018.

More 2019 Forecasts

Realtor.com is optimistic about the 2019 real estate market (Sales to be -2%):

“Inventory will continue to increase next year, but unless there is a major shift in the economic trajectory, we don’t expect a buyer’s market on the horizon within the next five years,” says Danielle Hale, realtor.com®’s chief economist. “Unfortunately for buyers, it’s only going to get more costly to buy, especially the most-demanded entry level real estate. To be successful, buyers should think through how they’ll adapt to higher rates and prices.”

2019 Predictions for Home Buyers

Buyers who are able to stay in the market will find less competition as more would-be buyers get priced out, realtor.com® notes. But home shoppers likely will still feel a sense of urgency as buying a home gets more expensive.

“Their largest struggle next year will be reconciling wants, needs and budget versus the heavy competition of 2018,” realtor.com® notes in its report. “Although the number of homes for sale is increasing, which is an improvement for buyers, the majority of new inventory is focused in the mid- to higher-end price tier, not entry-level.”

2019 Predictions for Home Sellers

The market is largely expected to remain a “seller’s market” in 2019, but homeowners will start to see greater competition from others looking to sell. They “shouldn’t necessarily expect to name their price and get it in full—a change from the past few years,” realtor.com® notes. “Above-median priced sellers may find it will take longer to sell and require offering incentives, such as price cuts or other offerings.” But for those sellers who price their homes competitively, they’ll “still walk away with a handsome amount of profit,” just not with the price jumps seen in previous years, realtor.com® notes.

Link to Article

From the California Association of Realtors:

C.A.R.’s “2019 California Housing Market Forecast” sees a modest decline in existing single-family home sales of 3.3 percent next year to reach 396,800 units, down from the projected 2018 sales figure of 410,460. The 2018 figure is 3.2 percent lower compared with the 424,100 pace of homes sold in 2017.

“While home prices are predicted to temper next year, interest rates will likely rise and compound housing affordability issues,” said C.A.R. President Steve White. “Would-be buyers who are concerned that home prices may have peaked will wait on the sidelines until they have more clarity on where the housing market is headed. This could hold back housing demand and hamper home sales in 2019.”

The average for 30-year, fixed mortgage interest rates will rise to 5.2 percent in 2019, up from 4.7 percent in 2018 and 4.0 percent in 2017, but will still remain low by historical standards.

The California median home price is forecast to increase 3.1 percent to $593,450 in 2019, following a projected 7.0 percent increase in 2018 to $575,800.

“The surge in home prices over the past few years due to the housing supply shortage has finally taken a toll on the market,” said C.A.R. Senior Vice President and Chief Economist Leslie Appleton-Young. “Despite an improvement in supply conditions, there is a high level of uncertainty about the direction of the market that is affecting homebuying decisions. This psychological effect is creating a mismatch in price expectations between buyers and sellers and will limit price growth in the upcoming year.”

Link to C.A.R. forecast

Home Sales 2019

The pundits are chiming in on their housing expectations for next year, and the opinions revolve around one topic:  Higher mortgage rates are changing things.

Here are two experts who don’t think the number of sales will change much:

“As we look toward 2019, we are anticipating home sales to decline around 2%. We’re expecting it to be another slightly slower year as buyers continue to wrangle with higher mortgage rates after contending with several years of rapid price growth.” — Ruben Gonzalez, chief economist at Keller Williams

“We’re going to have the same number of transactions, but…rates are going to nudge up to 5 percent; market times are going to expand out to 30 days. You’ll have to have a different set of skills.” – Brian Buffini

For sales to stay the same, then buyers will have to agree that the sellers’ prices are about right. Will sellers list their homes attractively enough, especially early in the selling season?

Or is it more likely that they will add a little mustard to their price in spring, just because they’re not going to give it away?

I want to compare a full 12-month history to prior years, so let’s examine the December 1st to November 30th period – let’s have history guide us:

NSDCC Detached-Home Sales

Year
NSDCC Sales, Dec 1 – May 31
NSDCC Sales, Jun 1 – Nov 30
2013
1,631
1,670
2014
1,319
1,492
2015
1,463
1,608
2016
1,470
1,651
2017
1,466
1,636
2018
1,339
1,484

The 2018 sales are similar to those in 2014, which happens to be the last time rates had popped up 1%.

But then the rates started declining right away, and by the end of 2014 they were back in the 3s, which powered the strong sales between 2015-2017:

(click to enlarge)

But today, rates are much higher – and so are prices:

Something has to give, doesn’t it?

Sellers aren’t going to bend much on price, especially early in 2018 – they won’t believe their prices are wrong until they try them out for months, and maybe longer.

So if most buyers wait-and-see, then sales have to give.

I’m sticking with my prediction that 2019 NSDCC sales will drop 20%, YoY.

Local Zillow Forecasts

I snipped this Zillow forecast (above) in October, 2016.  They expected La Jolla home values to go up 2.1% in 2017, which earned a ‘Very Cold’ label.

The La Jolla ZHVI rose 7% in 2017, so their forecast was a tad conservative.  The index has been dropping lately, but they are expecting values to flatten:

 

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Other Zillow forecasts – they like Carmel Valley:

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You can find more data here (they predict the U.S. market will be +6.4%):

https://www.zillow.com/home-values/

Rolling Into Stagnant City

A year ago, I guessed our NSDCC sales would be down at least 5% in 2018, and it looks like it will be closer to -10%.  While I’m confident that sellers will refuse to lower their price expectations much in 2019, I doubt that home buyers will just go along as they have in the recent past.

The disconnect will probably mean that the 2019 sales of detached-homes between La Jolla and Carlsbad will drop another 20%, which will change the landscape considerably from the robust sellers’ market we’ve enjoyed over the last nine years.

Homeowners waiting for the top of the market will move closer to the exits, and we will probably have 5% to 10% more listings early next year – with no let up in pricing.  Potential homebuyers who are starved for quality guidance will be conservative and adopt the wait-and-see approach.

It guarantees a slow start to 2019, and a real standoff.

The worst part about the real estate industrial complex is that they provide no help whatsoever on how to deal with market conditions.  They push Yunnie up to the microphone every month to report the latest sales counts, but that’s it.

Consumers and realtors are left to their own devices to figure out what to do.

Buyers will want somebody else go first.

Who will go first?  With the rise in mortgage rates, we have already lost almost the entire move-up market.  My rule-of-thumb is that if you want to stay in your same area, you have to spend 50% more than what your house is worth to make the move.  In other words, if your house is worth a million, the houses you see listed for $1.1 or $1.2 million nearby aren’t enough of an upgrade – you only get, what, one more bedroom?

But if you bought that home for $800,000 with a mortgage rate of 3.5%, the thought of having to spend $1,500,000 with a 5% mortgage rate will send your head spinning:

Purchase Price
Loan Amount
Mortgage Rate
Mo. Payment w/taxes
$800,000
$640,000
3.5%
$3,674
$1,500,000
$1,200,000
5.0%
$7,942

Your home’s appreciation generated the bigger down payment, but you have to pay more than twice as much monthly, and it isn’t fully tax deductible either. How many people NEED to move that bad?

So if the move-up market is comatose, then who’s left?

Those who don’t own a house here yet – the first-timers and newcomers.

They are at a disadvantage from being new the area, and are probably somewhat unfamiliar to the game – so it’s likely that they will be conservative. But the 2019 market will be entirely dependent upon them paying what the sellers want, or close.

I doubt we’re going to see fewer listings next year, so if there are 5% to 10% more listings – all with optimistic prices – and buyers are waiting to see what happens, there will be many more for-sale signs around.  That alone will cause buyers to pause.

Only the vastly-superior homes will be selling, and everyone will struggle to get the price gap right between the creampuffs and dogs.  The fixers will need heavy discounts, but thankfully, there is a floor.  I’ve probably taken 100 inquiries on my Brava listing – the flipper/investor action is still strong, though they are slightly more conservative about next year too.

Realtors could provide the solutions, but will they?

Here are the typical responses to taking a higher-priced listing:

SELLERS:  “Let’s add a little mustard to my list price.”

TOP AGENT: “The market is soft, and virtually all active listings are priced above what the market will bear. An attractive price will help to set us apart, and our expertise will help to clinch the sale in a timely fashion.”

REGULAR AGENT: “Let’s try the value range pricing!”

NEW AGENT: “What the heck, we can always lower the price later!”

Will the home sellers be sufficiently motivated to price their home sharply?  For those who have been waiting for the top of the market, the answer is no.  They are only selling if they can get their price – especially if they plan to move up in the same area.

We’re headed for a showdown – who will blink first?

There will be a healthy market for for the well-location remodeled homes, but the rest will sit a while before they figure it out – and many will not.

Annual sales dropping 20%?

We’ve been here before, and survived it.  We will survive this round too – we don’t have the shock of a market driven by no-qual loans all of a sudden shifting to qualifying-only, like we did in 2008:

Year
NSDCC Detached-Home Sales
Year-over-Year Change
2005
3,014
2006
2,626
-13%
2007
2,479
-6%
2008
2,037
-18%
2009
2,223
+9%
2010
2,461
+11%

Where will prices go? It will be a very soft landing, because without foreclosures and short sales, there won’t be desperate sellers dumping on price – they will wait it out instead.

Heck, they’ve waited this long, what’s a couple more years?

It will be case-by-case though. There will be a few great deals, some retail sales, and a lot of standing around.  Welcome to Stagnant City!

Get Good Help!

‘Bump in the Road’

Of all the other choices over the last 40 years, I’ll take the last four years as my favorite trend line!

Thornberg has been the most level-headed analyst since the bust:

The annals of postwar Southern California real estate history are full of boom-and-bust cycles, with periods of sharp price appreciation that suddenly skid to a halt. Whether those ups and downs offer any guidance — or hope — for today’s homeowners is a subject for debate.

Some of those who study the housing market predict annual price increases will slow. Others think values could dip. But there is general agreement that a meltdown is not in the offing, given a healthy economy and dearth of home building. The current slowdown, said Christopher Thornberg of Beacon Economics, “is a bump in the road.”

This time around, the risk of a crash from overborrowing is minimal, if not nonexistent, experts said. Reforms after the financial crisis dramatically tightened lending standards. Today, even though lending has eased somewhat, borrowers are more likely to be able to afford their loans.

That’s borne out in the data:

  • Mortgage lending is relatively restrained. Last decade, total mortgage debt consistently grew by double digits. In the second quarter, those debts rose only 3.5% from the same period a year earlier, Federal Reserve data show.
  • Homeowners aren’t as squeezed. Total U.S. mortgage payments in the second quarter accounted for 4.2% of total disposable personal income, the lowest level in at least 38 years. The rate was in the 6% range for most of the mid-2000s bubble, and it hit 7% just before the crash.
  • Borrowers are less risky. The median credit score for those taking out a mortgage in the second quarter was 760, compared to a bubble-era low of 707.

“I don’t think we need to worry this time around about a bursting of a credit bubble,” said Stuart Gabriel, director of the Ziman Center for Real Estate at UCLA. “We can cross that factor off the list.”

Link to latimes.com article

C.A.R. 2019 Forecast

The California Association of Realtors has released their 2019 forecast (above).

Their projections haven’t been that close, which means their guess of 3.3% fewer sales should end up being -5% to -8%.  The pricing statistics should keep rising though, due to buyers holding out for superior homes – with fewer inferior homes selling, the median can rise even though prices are stagnant or falling.

A comparison of the C.A.R. forecasts (released every October):

Category
2018 Forecast
2018 Actual
2019 Forecast
SFH Resales #
426.2M
410.5M
396.8M
SFH Resales %chg
+1%
-3.2%
-3.3%
SFH Median SP
$561,000
$575,800
$593,400
SFH Median SP %chg
+4.2%
+7%
+3.1%
30YR rate
4.3%
4.7%
5.2%

From the C.A.R.

Market shift underway as housing shortage issue becomes demand issue

A combination of high home prices and eroding affordability is expected to cut into housing demand and contribute to a weaker housing market in 2019, and 2018 home sales will register lower for the first time in four years, according to a housing and economic forecast released today by the CALIFORNIA ASSOCIATION OF REALTORS®’ (C.A.R.).

C.A.R.’s “2019 California Housing Market Forecast” sees a modest decline in existing single-family home sales of 3.3 percent next year to reach 396,800 units, down from the projected 2018 sales figure of 410,460. The 2018 figure is 3.2 percent lower compared with the 424,100 pace of homes sold in 2017.

“While home prices are predicted to temper next year, interest rates will likely rise and compound housing affordability issues,” said C.A.R. President Steve White. “Would-be buyers who are concerned that home prices may have peaked will wait on the sidelines until they have more clarity on where the housing market is headed. This could hold back housing demand and hamper home sales in 2019.”

(more…)

Local Home Sales, YTD

The California Association of Realtors predicted that statewide sales in 2018 would increase 1%, and the California median sales price would rise 4.2%.

My guess was for the San Diego County detached-home sales to drop 5%, and the median sales price to rise 5% in 2018. How are we doing?

Here are the detached-home sales and median price for the first nine months of the year in San Diego County:

SD County Detached-Home Sales, January through September

Year
Number of Sales
YoY Change
Median SP
YoY Change
2012
18,648
$375,000
2013
19,385
+4%
$450,804
+20%
2014
16,858
-13%
$497,250
+10%
2015
18,389
+9%
$527,000
+6%
2016
18,192
-1%
$555,000
+5%
2017
18,068
-1%
$600,000
+8%
2018
16,413
-9%
$641,000
+7%

It may seem like the sky is falling, but we should just appreciate how great we’ve had it over the last few years, and accept that we’re going to have fewer sales from now on. Here are the stats for La Jolla-to-Carlsbad:

NSDCC Detached-Home Sales, January through September

Year
Number of Sales
YoY Change
Median SP
YoY Change
2012
2,322
$825,000
2013
2,554
+10%
$945,000
+15%
2014
2,183
-15%
$1,028,564
+9%
2015
2,405
+10%
$1,085,000
+6%
2016
2,345
-2%
$1,165,000
+7%
2017
2,385
+2%
$1,230,000
+6%
2018
2,161
-9%
$1,320,000
+7%

It’s going to be harder to sell your home.

Get Good Help!

Carlsbad Population Growth

For those who wonder what has been propelling the housing market lately, let’s note that people keep moving here – an average of 1,500 per year moved to Carlsbad over the last nine years!

The City of Carlsbad shows the current population to be between 110,000 and 113,000 people today.  When fully built out in 2035, the general plan calls for approximately 135,000 people:

I hope those extra 20,000+ people bring the big money!

http://www.carlsbadca.gov/services/depts/planning/growth.asp

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