Prices Are High, but Everyone Needs Housing. Renting in LA Is Popular, but Very Likely a Poor Financial Choice
After writing and reporting about the housing market for over a decade (and commonly getting it right except for interest rates), predicting 2020 is childsplay. We know that there are eight major factors at work that tend to set prices: Inventories, affordability, interest rates, population trends, projected new housing, current pricing, the economy, and the rent vs buy equation. Another factor has also played a part at times - investors, including foreign buyers.
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If you take a quick look at each of those, seven of the eight
would bode very well for continued increases in prices and flat-to-increasing
sales as inventory allows:
- Inventory is still very low
- The economy is still red hot
- The population is bursting with new families
- New housing starts in the pipeline are generally insufficient to meet overall demand
- Interest rates are low, and likely to continue low through 2020 into 2021.
- Increasing housing prices in LA are now about even with increases in wages
- Investors are back, looking to capitalize on excellent rental markets
- Foreign investment is the only questionable issue. Chinese investment slowed in 2019, and isn't likely to return unless trade agreements are signed.
A huge factor doesn’t really fit with the above. This would
be the rent vs buy equation. Generally, as rents rise, tenants consider buying.
Of course, as rents rise, investors are willing to pay more for rental
properties, and builder are attracted to build more. Lots of moving parts
there. The reality is that very, very few markets have anywhere close to enough
affordable housing when you combine owned and rented units, and there isn’t
enough being built to catch up with population.
Overall, there is still a huge squeeze on tenants to afford
apartments, and many are doubling up who don’t prefer that arrangement. Thus,
this 9th issue would point towards more demand for purchased housing.
If these were the only factors at work, you might expect a slight uptick, and that seems to be what we have right now. But, a fantastic article
in the NY Times in 2018 provided a few nuances. Moreover, in a shocking
development, the letters to the editor provided significant insights, too. Here are some fascinating elements to consider. Each, on
their own, would not have much effect on the market, but taken together they
might give hints as to future trends.
- Grandma still isn’t selling – This is huge and is reducing inventory. But if she sells, she still needs to live somewhere and there is no rental property available at reasonable prices.
- Millennials are still living at home – Most reporting after this article suggest that millennials are starting to buy, with the national figures showing 30% of home purchases to mellenials.
- Student debt a huge problem – For some professionals this debt is six figures and hurts their ability to borrow or pay. For some middle-class young people, the debt is less substantial, but still cuts into what they can afford.
- Very little affordable housing being built – You will hear that new home sales are down, and that homebuilders are despondent. The reality is that they are not building the homes that new families want. This is partly due to the reality that building a smaller home isn’t as profitable, given all the regulations and the cost of land. Affordable housing predicted to go from 20% of new builds to 30%.
- Earnings are just starting to improve. Through the first nine years of the recovery, earnings have been very flat. With unemployment so low, it would be odd to see earnings not respond, and now they are. This will improve affordability.
- Immigration will increase – legal and illegal. Every nation with low birth rates must increase immigration or their economy will stagnate. One way or the other the US will see more immigrants moving here due to our huge demand for labor. This will increase demand.
- Doubling and tripling-up – Singles are commonly living with roommates who would rather not be. This is, of course, due to the cost of rentals. As these individuals find a better job, they will be adding to demand.
- End of mortgage deduction - The changes in the tax law that increased the amount of the standard deduction, eliminated a major advantage to ownership. This is a factor right now, but will play itself out.
- Massive housing wealth – Those who owned their home 10 years ago are now sitting on massive amounts of home equity. If these individuals choose to move, they have substantial down payments, whether they are moving up or downsizing.
- The millennials and Z gen are not that different than the boomers or X gen that went before. Their folks and other relatives are likely to be needed for down payment help. The good news is that the older generation has massive equity, and may have also created additional wealth through the soaring stock market.
- Concentrations in major urban areas – In the major tech cities, prices are high due to lack of new places to build. Los Angeles, San Francisco, Boston, NYC, and other such cities can only build up. While these areas may see some relaxation in rental pricing over the next two or three years, it will only be a pause.
- Lower expenses in other home budget areas beside housing – This is a huge factor in the last 25 years. We are spending less and less AS A PERCENT OF TOTAL INCOME on food, cars, clothes, entertainment, travel, children, and almost every other category of expense. This frees up dollars to be spent on housing. The result is that the average individual or family has more money to compete in the market.
For instance, if a family used to spend on
average 70% of their $50,000 a year income on everything but housing, they
would have $15,000 a year to spend on housing. If their cost for everything
else dropped to 50%, then they have $25,000 to spend on housing. This provides
more buying power, and therefore more competition for scarce resources. Put
another way, we aren’t spending 50% on housing because we have to. We are spending
50% because we can.
2020 Housing Forecast
Where does all this leave us? What might 2019 bring in sales
and prices in 2019?
- Location, location, location – Real estate will still be about location in 2020. Crazy high rents and prices for luxury apartments and condos in some major cities are likely to soften. The same can’t be said for middle and affordable housing. This will likely be steady to up. There is some indication of softening in the very high-end luxury market.
- In Los Angeles, January activity in 2020 is already looking like March with multiple offers.
- Areas with lots of building, such as the Inland Empire in Southern California, may see slackening demand for resales, but the demand is great due to outward migration from the urban and suburban areas where prices are much higher. Therefore, don’t expect much downward pressure on pricing, and rents will continue up.
- Suburbs that are fully built out will likely see continued increases if the business climate holds.
- Sales will follow established patterns. Activity will bounce up in March with excellent sales in the Spring. However, by Spring their might be the lowest inventory levels ever.
- The Fed is unlikely to move up or down on interest rates. Once the reality of historically normal interest rates has sunk in, some buyers will move off the sidelines.
- Days on market will decrease to historic lows.
Maybe you have a very different opinion. Please leave your comments
below.
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354-5325. Bill specializes in tailoring a mortgage to fit your
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many, many products on the market, and one size does not fit everyone. Call
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