The coming year in real estate is likely to hinge on a mix of things we know, things we expect and things we don’t know.
While that is always the case, 2018 is expected to be more unpredictable than usual.
What We Know:
1. California economy is strong and unemployment numbers very low, meaning we have lots of folks looking for housing, both rentals and homes to buy. The recession cost the state an estimated 1.3 million jobs. Since 2010, the state has added 2.4 million jobs, led by jobs in the construction sector. Those workers need housing.
2. New housing stock is increasing. In fact, economists with Freddie Mac forecast new construction to be a “primary driver of sales in 2018,” with housing starts up about 10 percent from 2017 and home sales increasing about 2 percent nationally. But will it be enough? In addition to pent-up demand and the entry of millennials into the housing market, natural disasters have devastated existing housing stock in the Gulf states as well as closer to home. The devastating fires in both Northern and Southern California are expected to increase demand both for short-term rentals and for skilled construction workers.
3. Interest rates, which have been very low this year at about 4 percent for the average 30-year fixed rate mortgage, are likely to rise. The Fed raised rates Dec. 15. Because this was expected, mortgage prices had already adjusted in anticipation of this change. Although a new Fed chair has been named, the philosophy of the board is unlikely to change much, meaning rates will probably be adjusted upward two or three more times this year. If inflation remains low, the adjustment should be fairly minor, giving us an end-of-2018 average home mortgage rate in the mid- to high 4s.
4. Ceilings were raised on FHA and VA mortgages, meaning buyers will be able to use the loans for higher priced homes or in cases when they have modest downpayments.
In 2017, about 77 percent of Bay Area homes for sale had multiple offers, with almost 60 percent selling above the asking price, making it the most competitive region in the state and one of the most competitive in the nation.
What We Expect:
1. Rental housing stock, which has failed to keep up with demand, is likely to rise. This is due in part to new state laws that relax restrictions on “granny units” and in part to tax incentives for investors to hang on to rental properties.
2. Both the entry-level and move-up markets are expected to see less activity. Assuming the “Tax Cuts and Jobs Act” passes both houses of Congress and is signed into law, homeowners may be moving less often and homebuyers will have a higher threshold to meet in obtaining new mortgages.
Long-time California homeowners already are not moving as often as in the past, in part because they want to hold on to low property tax basis and low interest rates on mortgages, as well as wanting to avoid being hit with capital gains taxes, according to Leslie Appleton-Young, chief economist and vice president of the California Association of Realtors. Elements in the new tax law would increase those pressures.
3. Other changes in the tax law could affect housing in a myriad of ways. According to Appleton-Young, doubling the standard deduction, modification of the state and local tax deduction, elimination of certain deductions for moving expenses, and changes in the capital gains rules will reduce incentives for buyers to buy and for homeowners to move.
“The proposed tax reform would lead to fewer sales transactions as the tax incentives of being a homeowner vanish for many who want to purchase a property … The decline in home values would also lead to homeowners’ reluctance to put their property on the market and further tighten up the housing supply condition in California.”
4. Proponents of the bill predict it will spur growth in the economy. Economists are mostly skeptical of that claim, but say if it does, the Fed will likely increase interest rates more to tamp down inflation.
“For several years, we have had moderate economic growth of about 2 percent a year, solid job gains, and low mortgage interest rates,” according to Sean Becketti, chief economist with Freddie Mac. “We forecast those conditions to persist into next year.”
For California, 2017 sales started strong, then slowed markedly by the end of the year, in large part due to lack of inventory and higher prices. Inventory has declined steadily for the past three years, with the biggest declines at the lower price points, where first-time homebuyers are competing with investors for inventory. The prediction for 2018: 1 percent increase in sales, 4.2 percent increase in prices.
What we don’t know:
1. Possible changes in state property tax laws could motivate some older buyers to sell, because they would be able to carry their low tax basis with them anywhere in the state
2. Ongoing efforts at pension reform could impact retirement plans for an estimated one-quarter million California state employees.
3. National politics, from the Russia investigation, to congressional elections, and projected battles over changes to Social Security and Medicare may impact the economy and the housing market.
Traditionally, anticipation of presidential elections causes some folks to slow down their decision-making process until after Election Day. But off-year elections such as this one rarely have much impact. Given the divisiveness in the country, this year may be different.
4. Changes in international trade agreements could have unintended consequences. Already China has clamped down on currency leaving the country, which meant fewer Chinese nationals purchasing real estate in California and other states. In 2017, the percentage of homes sold to international buyers was the lowest in 9 years, at about 3 percent of transactions.
5. War and peace – how relations with North Korea unfold as well as ongoing tensions in the Middle East could have unpredictable impacts on our economy.
For information about what’s happening now in real estate for your neighborhood, contact your local Realtor today.
Cher Wollard is a Realtor with Berkshire Hathaway HomeServices Drysdale Properties in Livermore.