Friday, January 8, 2016

2016 Real Estate Outlook

Week one is done already! Welcome to 2016 and watch out because 2017 will be beating down the door before you know it. What is the outlook for 2016? Real estate has multiple trend lines to consider. There are national trends and local trends and they can be very different at times. There are leading markets and trailing markets as well spread out over the whole of country.

Wall Street Journal
California continues to be a leading trend for the western U.S. Here in the Pacific Northwest we should always keep an eye on California trends as they tend, and the operative word is "tend" to lead our market by several months up to a year or two. If California starts to slow down, the Pacific Northwest may continue robustly but will likely follow some months later.

National market conditions are a good starting point for long term analysis but short term is too local for the national trends to really matter. An exception would be a major national economic shift either positive or negative, such as the financial crisis and subsequent recession from late 2008 till late 2009.

This Case Schiller chart was part of an article by Renee Lightner, Andrew Van Dam and Nick Timiraos of the Wall Street Journal. The chart is interactive and allows for several major US Cities to be activated or deactivated, I chose to compare San Francisco and Portland. The dashed line represents the national average. This chart shows cumulative growth as a percentage not as a price value. Note that the point where San Francisco and Portland cross on the chart does not mean that home values were equal but rather that the relative value compared to the starting point in 2000 was the same. So a SF house that started at $500k in 2000 would be $825k in 2008 where the two cities cross. Likewise that same house in Portland may have been $300k in 2000 and it would be at $495k at the crossing point in 2008. The same relative cumulative increase in value. At no point in this period did actual median home values in Portland exceed those in San Francisco, not even close, really.

Here you see the typical California excess of rapid growth and hard falls and that the Golden State tends to lead our market This chart shows the San Francisco market peaking in late 2005 where as Portland peaked in the summer of 2007. The Bay Area had a rapid hard crash whereby Portland had a moderate crash and a slower decline that eventually caught up to San Francisco. There was even a little teaser growth that occurred after the 2009 bottom climbing a bit till mid 2010, and then another decline that nearly matched the 2009 bottom in 2012. San Francisco's second bottom came early in 2012 and Portland's first bottom followed a few months later. Once again a huge steep rebound has occurred in SF, where Portland has had a moderately steep increase. San Francisco is starting show a flatter curve and that may indicate a slow down in Portland within a year.

Wall Street Journal
More locally and in specific, Clark County, WA, we have something a little different than our southern neighbor, the Rose City. We have a booming new housing market. In the $300-$400k price range new construction is keeping a lid on resale growth.The sub median market remains fire hot as builders are not building much in this lower price range and sellers seem to be hanging on to the properties in the sub-median range. Meanwhile in built-out Portland the resale market is much stronger. There isn't much new housing going on in Rip City.

The crazy rental market certainly is playing a role in the entry level housing market as investors are hanging on to cash cow rentals rather than taking profits on sale. This creates demand as renters want to own but owners want to hold. This is not sustainable. Right now $225k buys a very modest house but $260k buys something much more substantial in the resale market.

The bottom will have to slow down soon unless the middle and top start to grow at a similar rate, I don't see that coming. National statistics on home sales by unit volume show that we are actually pretty healthy and somewhat sustainable. But locally we are seeing some price fatigue as buyers at the entry level are once again becoming priced out. Economic faith is not strong enough for middle income buyers to gamble on the 'big house' like they did in 2004-2007. Lenders are not quite as flexible either, so the middle high end is not growing as fast as the bottom. The bottom end has a price ceiling based on the middle. All else being equal buyers, will not pay $240k for a 3 bed 1 bath home if $245k buys a 4 bed 2 bath. Here in Vancouver USA we are getting close. I just listed and sold a 3 bedroom 1 bath house recently remodeled, so it was clean, for $225k and there are nearby listings in the area for nice 4 bedroom homes with 50% more living area selling at $250k. The bottom has grown much faster than the middle and we are nearing the point at which either the bottom stops rising or the middle has to pick up momentum. I don't foresee any drastic changes for 2016. Presidential election years tend to be flat economically and housing will likely continue to mosey along at a nice clip. Lending rates may see some increases but honestly I have been predicting that for 4 years and still rates are low. What the heck is up with that? This market can easily continue to function well with a rate increase from the current 4% 30 year fixed to 5.5%. Historically anything under 6% is a GREAT rate. If rates were to hit 6% the bottom of the market would probably see a slight decline as a fair percentage of buyers would be eliminated and that would reduce the stress on the entry level. The middle and high end market would likely be fine however.

I think we will see a continuation of appreciation in the market place but at a reduced rate in the 3-6% year over year range. This is a healthy condition and allows housing to remain in reach. More than six percent increase leads to bubbles as incomes rarely rise at that kind of pace. So as the politicians tear each other apart, real estate will likely just be-bop along.

That's my take anyway, check out the Wall Street Journal article these charts came from, it is a good read.    

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