What do you believe will most influence real estate sales in 2017?
- Interest rates. (64%, 132 Votes)
- Mortgage bankers and lenders. (12%, 24 Votes)
- Buyer-occupants. (10%, 20 Votes)
- Sellers. (7%, 14 Votes)
- Investors. (4%, 8 Votes)
- Builders. (3%, 7 Votes)
Total Voters: 205
California’s real estate market continued on its long path to recovery and expansion in 2016. This article reviews some of the new laws real estate professionals need to be aware of for 2017, trends that took shape in the housing and mortgage markets in 2016 and a forecast for 2017.
New real estate laws in 2016
California real estate law is an ever-changing landscape. Dozens of new laws impacting the real estate profession were passed in 2016, and the most noteworthy laws are included below. To stay up to date on new laws, see first tuesday’s New Laws section.
New, gender-neutral language has made its way into the CalBRE lexicon. Beginning January 1, 2017, a CalBRE sales agent can refer to themselves as either a salesperson, salesman or saleswoman. [Calif. Business and Professions Code §10013]
New identification requirements will be required for real estate advertisements and purchase agreements.
The California legislature has clarified how brokers are to be identified on signs and advertisements requiring a responsible broker’s identity. Effective August 29, 2016, the broker may be identified by the:
- broker’s name under which they are licensed and do business; or
- both the broker’s name and CalBRE license number. [Bus & P C 10159.7]
Beginning January 1, 2018 — which gives real estate professionals a year to update their materials with the new requirements — licensees will need to provide their name, CalBRE license number, Nationwide Mortgage Licensing System (NMLS) ID number, if applicable, and their employing broker’s identity on advertisements and certain other materials. Read more here. [Bus & P C §10140.6]
Of interest to anyone who has been disciplined by the CalBRE, beginning January 1, 2018, CalBRE licensees may petition the CalBRE to remove the licensee’s disciplinary action from CalBRE’s public record’s page if:
- the disciplinary action has been posted for at least ten years;
- the licensee provides the CalBRE with proof they no longer pose a risk to the public; and
- the licensee pays a fee to the CalBRE with the petition, in an amount to be determined by CalBRE Regulations.
All disciplinary actions will remain on record with the CalBRE and continue to be shared with other licensing and regulatory agencies. [Bus & P C §10083.2]
CalBRE-licensed brokers and sales agents renewing their real estate license now need to fulfill an additional course requirement. The new requirement applies to agents and brokers with licenses that:
- expired on or after January 1, 2016; or
- have previously expired and are within the two-year renewal grace period.
These licensees will need to take either a(n):
- three-hour office management and supervision course; or
- eight-hour survey course which includes office management and supervision. [Bus & P C 10170.5]
Editor’s note—All first tuesday 45-hour continuing education (CE) course enrollments automatically include the mandated three hours of office management and supervision.
To stay up to date on changes at the CalBRE, see our CalBRE Watch page.
Legal aspects to watch in 2017
New legislation is introduced throughout the year in the California senate and assembly. Legislation pending at the end of 2017 includes:
- a tax deduction for amounts contributed to an individual’s homeownership savings account and a tax exclusion for interest income earned from money in this type of savings account [A.B. 53];
- the issuance of $3 billion in bonds to finance existing housing programs, infrastructure and affordable housing grant programs [S.B. 3];
- establishing a $75 fee on the recording of every real estate instrument to fund affordable housing developments. [S.B. 2]
To view the full list of pending legislation that may impact your real estate business, see our Pending Laws page.
Further — not a law change, but still important to our readers — the California Association of Realtors (CAR) found itself in hot legal waters in 2016.
PDFfiller, a digital document management company, has filed antitrust allegations against CAR, claiming CAR is guilty of:
- creating a form monopoly;
- unlawfully tying CAR real estate forms to zipForm® software;
- conspiracy in restraint of trade; and
- violating the Cartwright Act and the Sherman Antitrust Act.
This comes after CAR initially sued PDFfiller for copyright and trademark infringement by use and distribution of CAR forms. CAR has long restricted access to its form library to paying members, only. This exclusivity is why many real estate agents think they are required to be members of CAR (some brokers require it of their agents). However, CAR forms are not mandatory to use. In fact, Realty Publications, Inc. (RPI) publishes over 400 real estate forms that are fully legal for use in California. Read more here and search the full library of RPI forms — free to download — here.
At the time of this writing, PDFfiller and CAR were attempting to settle the dispute outside of court. Stay tuned to first tuesday in 2017 for the outcome.
Interest rates rise
The average 30-year fixed rate mortgage (FRM) rate in California rose from its four-year low of 3.37% in October to nearly 4.2% at year’s end. For a homebuyer with an average household income in California, this represents a loss of $37,000 in buyer purchasing power. In other words, buyers are now able to qualify for significantly less mortgage principal — or need to make up the difference with higher mortgage payments.
The 30-year FRM rate was at an all-time low in 2012, when it was 3.25%. It has remained relatively low since then — until the rapid increase experienced at the end of 2016.
Rates remained low for the past four years primarily due to global economic uncertainty. Facing a lack of safe investments elsewhere, U.S. and foreign investors turned to the safety of U.S. Treasuries. All these Treasury purchases kept Treasury rates low, and in turn FRM rates stayed low, too.
What caused the sudden rate increase in November 2016?
The unexpected election of a Republican caused bond market investors to shift their outlook for future interest rates. Rates tend to inch higher under Republican administrations, and the bond market is preparing for this by demanding higher rates now. To a lesser extent, expectations of the Federal Reserve (the Fed) acting to increase interest rates caused rates to rise, too. The Fed increased the target short-term rate from 0.25%-0.5% to 0.5%-0.75% in mid-December 2016 and projects further, gradual increases ahead.
Forecast — FRM rates will continue to rise going into 2017. But long-term rate movement is less certain. The rate increase might slow when the incoming government increases infrastructure spending. It also might slow if economic progress declines. Either way, don’t expect a return to historically low 30-year FRM rates anytime soon.
Home sales, prices slow
California year-over-year home sales volume was on an upward trend in 2014 through most of 2015. After year-over-year sales volume peaked at 17% in mid-2015, it reversed direction while still remaining positive through the first half of 2016.
The last few months of 2016 saw fewer home sales than the same time a year earlier. However, since the year started off with a higher (though declining) sales volume than 2015, the sum total of 2016 sales volume was level with 2015.
Home price movement tends to follow sales volume movement within 9-12 months — the delay is due to the “sticky price” phenomenon, when sellers continue to demand yesterday’s prices in today’s market. Therefore, while sales volume began to falter in mid-2015, home prices started to level off in mid-2016.
While fourth quarter (Q4) numbers aren’t in at the time of this writing, in Q3 2016 prices remained 9% higher than a year earlier in low-tier sales, 6% higher than a year earlier in mid-tier sales and 5% higher than a year earlier in high-tier sales.
However, on a month-to-month basis mid- and high-tier prices have displayed little to no upward movement in the second half of this year.
Forecast — When this slowing trend continues, prices will decline below their point a year earlier likely in mid- to late-2017— 9-12 months following the sales volume decline into negative territory.
Ahead for 2017
It’s been over a decade since the housing market went south, with sales volume dropping in 2006 and prices following in 2007. Since then, we’ve been in recession or recovery mode. 2017 will be no exception, and will likely to be another modest year for home sales.
When will the recovery turn into the next housing boom?
Obstacles to a sustainable recovery include:
- deregulation of mortgage lenders;
- rising mortgage rates;
- insufficient residential construction to meet the demand for housing in California’s urban areas; and
- home prices which have increased at a rate far higher than raises in income.
Deregulation of mortgage lenders is likely in 2017 and in the years to follow as the next administration makes its political mark. President-elect Trump has indicated he will take down the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2008, including dismantling the Consumer Financial Protection Bureau (CFPB). If he is successful, agents need to be extra vigilant to protect their clients against the poor lending practices and bad mortgage products that led to the Millennium Boom and bust that occurred following the last era of deregulation.
When mortgage rates continue to rise in the coming years, prices will be pulled down to meet the decrease in buyer purchasing power. For homebuyers desperate to qualify at today’s prices, the price drop will be largely counteracted by higher mortgage rates. Thus, home sales volume will continue to struggle immediately following the rate increase and price decline.
However, some light is on the horizon. California’s jobs recovery continues at a healthy pace going into 2017. We surpassed the number of jobs held prior to the recession in mid-2014. But with the intervening working-aged population increase of 1.2 million individuals, the real jobs recovery won’t take place until around 2019.
At that time, the next generation of first-time homebuyers will have gained enough confidence in the market and savings to make the leap into homeownership. Also at the end of this decade, Baby Boomers will begin to retire en masse, seeking to downsize and buy replacement homes that are more manageable and more centrally located — condominiums will likely receive a surge of interest.
The California legislature and local city councils will need to prepare for the next wave of home sales by allowing residential construction to reach its full potential. Currently, outdated and over-restrictive zoning regulations are keeping builders from responding to homebuyer demand. This is part of the reason why housing costs have outstripped incomes in California’s desirable coastal cities (San Francisco’s housing crisis quickly comes to mind).
Some of this effort is already underway in California, with accessory dwelling units and granny flats having a particularly good year in the 2016 legislature. Expect to see more zoning changes in the coming years to keep housing costs from expanding out of the reach of first-time homebuyers.
Continue to check in with first tuesday throughout the year for a heads up on changes to your real estate practice and California’s constantly shifting housing market.