The global economy is in dramatic flux once again. This of course affects California’s real estate market; but for better or worse? The short answer: it’s complicated.
Fortunately, we’ve connected all the dots so you can figure out how your real estate practice will fare in 2015 and beyond.
Jobs — and mortgage rates – set to rise
February’s national jobs report just came out, and the news is good: more jobs have been added and the national unemployment rate has finally fallen to 5.5%, the official benchmark of a healthy unemployment rate.
The release of California’s February’s jobs report comes behind the national report. But as of January 2015, California had 15.769 million individuals employed. This is a very strong improvement of 3.2%, or 488,400 jobs, over a year earlier.
On the surface, the latest jobs report is great news for California’s housing outlook. So what lies beneath?
More individuals employed axiomatically equals more household formations, greater home sales and support for home prices. However, the Federal Reserve (the Fed) has their finger on the economy’s pulse, and when it feels the economy has regained its strength, it will withdraw the support we’ve been receiving since the beginning of the Great Recession. This support took the form of money injected into the economy (most recently observed through quantitative easing (QE)), and currently exists in rock bottom, zero-bound interest rates.
Based on prior conduct and comments made by Fed Chair, Janet Yellen, the Fed will increase the short-term rate later in 2015 – or perhaps in early 2016. It’s tough to say exactly when, but with each consecutive strong jobs report, we come closer to the day the Fed makes its inevitable move.
The precise timing is complicated by the rough state of the global economy, perhaps most apparent to us in the U.S. in the low gas prices experienced since late 2014. That is, despite the healthy unemployment rate, global economic chaos might persuade the Fed to keep the short-term rate low a little longer until the dust settles.
What happens when the Fed decides to raise interest rates? Members of the bond market attempt to anticipate the Fed’s move by first increasing mortgage rates, in order to maintain profits when the Fed bumps up the short-term rate.
February’s good jobs report has sent stocks tumbling as investors show their concern about interest rate movement. This activity leads us to wonder: will mortgage rates rise sooner than expected?
Until we hear concrete reassurances from the Fed, it’s anyone’s guess whether the bond market will jump the gun, as happened when mortgage rates bounced in mid-2013. But one thing’s for certain: mortgage rates are set to rise in 2015, the start of an upward trend set to last for years.
Buyers want to return to the market, but face obstacles
Despite the significant job gains of the past year, future homebuyers still face financial obstacles. These include:
- stagnant incomes, which have been slow to catch up to pre-recession levels;
- high levels of student debt, particularly among members of the next first-time homebuyer class, Generation Y (Gen Y); and
- quickly rising rents in California, which limit potential homebuyers’ ability to save for a down payment.
This makes it difficult for today’s buyers to take advantage of low mortgage rates. When mortgage rates do rise later this year, homebuyers will become even more discouraged.
The good news is that cash-heavy investors – speculators – have largely flocked away, abandoning the home buying market. This means less competition for owner-occupant homebuyers.
Home sales volume stays down; pricing maintains momentum
California home sales volume finished 2014 7% below the prior year, a loss of 31,000 sales. Is there any chance we might see a sales volume recovery in 2015?
The chances are slim. The most significant problem for home sales volume in 2015 is home pricing.
Prices topped out across most of the state in Q3 2014, but they refuse to fall. Further, as home prices fail to drop within reach of most would-be homebuyers, most will choose to wait out the market. In turn, sales volume will stagnate.
Pricing usually follows home sales volume movement within 9-12 months. Therefore, when sales volume began to fall at the end of 2013 and continued to drop throughout 2014, forecasters naturally expected prices to fall by the end of 2014. However, falling mortgage rates threw a wrench into the cycle. You see, when mortgage rates dropped, bottoming around 3.5% in February 2015, buyer purchasing power rose. This increase in buyer purchasing power gave prices the boost they needed to stay afloat — good for sellers, but difficult for those waiting for prices to drop before they buy.
Expect pricing to remain mostly level throughout the majority of 2015, rising slightly by the end of the year. Then, roughly 9-12 months following the rise in mortgage rates, prices will finally dip, likely by late 2016.
The timing all depends on mortgage rates, which we will watch closely.