“Fixed-rate mortgage rates have dropped 0.6% since November 2018 and today are lower than they were a year ago,” said CoreLogic Chief Economist Frank Nothaft. He predicts the slowdown in home prices will continue, estimating that home prices will increase by 3.4% in 2019, compared with 2018’s average of 5.8%. You may use our Mortgage Calculator to figure out your monthly payments.
TOP STORY: What Goes Up…?
We do have a habit of viewing the world by way of adages. Sometimes they are validated by reality, other times a closer look skewers them. For example, “What goes up must come down.”
Most of the time it holds true, after all there is that gravity thing. But when it comes to house prices, the statement requires a modifier. Something like “What goes up must come down – eventually.” Or a caveat like “It depends on your definition of up and/or down.”
An unshakable belief in the uni-directional nature of home prices persisted for a long time, and data backed it up. For 36 straight years the Existing Home Sales report from the National Association of Realtors (NAR) did not include a single annual price dip. The median price in 1968 was $20,000 and in 2004 it was $185,200. Sometimes the increase was nominal (0.2% in 1989) and in others the appreciation was dizzying; in double digits in six of the seven years between 1974 and 1980.
Altering the Adage
Over those 36 years the average gain was 6.8%, not far from today’s rate. Then in 2004 the market flattened and two years later gravity did kick in, hard. Values fell by 30% within eight years. Now we are back to and above those earlier peaks. Maybe we should modify the adage: “What goes up must come down. At least temporarily.”
But there is another way to look at it. Maybe home prices have not gone up as far and as fast as we think.
Lisa Smith, writing for Investopedia, pointed to some reasons the 6.8% increase in prices over a 36-year period, as well as the persistent pace over the last several years, might be a bit of an illusion.
First one must consider another gravity defying factor, inflation. If the cost of carrots and movie tickets are going up, virtually everything else is going to tag along including home prices. Using Smith’s 36-year reference point, we find that inflation averaged 4.84%, meaning the real home price average increase was 1.96%. There wasn’t a single year of deflation over that period. However, if we look post 2004, when home prices were losing an aggregate of 30%, inflation, while modest, only turned negative once. In 2009 it dipped a tiny 0.4%.
The influence of inflation can be confounded by mortgage interest rates. The financial website Seeking Alpha notes that inflation does push up housing prices along with other commodities, but if interest rates start to rise amid strong inflation, home prices start to fall.
Recent History
National home prices have been rising on the order of 4.5 to 7% over the last few years, against an inflation rate that has remained well under 2%. Inflation has played a role in new home construction (and new and existing home prices do pull each other up and down), with labor shortages driving construction wages higher in some locations and building supply prices increasing disproportionately, but the recent rates of appreciation have not been inflation driven.
Another reason prices rise is home size. Smith says the average home size in America was 983 square feet (sf) in 1950, 1,500 sf in 1970, and 2,349 sf in 2004. The most recent data from the Census Bureau puts the current average at 2,316 sf. The increased square footage becomes a multiplier when inflation is added in, boosting the price of every stick of lumber and drop of paint that goes into each additional foot.
Real Estate is Local Too
Since most indexes are focused on national and regional numbers it is easy to forget that a 5.5% to 7% national rate also masks a wealth of variations. There are cities like Seattle, San Jose, and Salt Lake City where prices have risen by double-digits for several years, compensating for cities such as Chicago at 2.7%, or Richmond, VA and Miami with gains in the mid 4% range. In other cities like Tampa, Phoenix, and especially Las Vegas, extraordinary increases are merely serving to regain the ground lost during the avalanche of distressed sales they underwent during the recession.
Removing size and inflation from the picture, and allowing the market some infrequent but notable downturns, there is still a solid history of home prices going up; remember, $20,000 in 1968, $185,200 in 2004, and $245,500 in the first quarter of this year. They just don’t go straight up, and they don’t rise at the same rate or to the same level in every metropolis, suburb, and wide spot in the road.
So, if prices do go up, (and as the recap shows, depending on what one means by “up”), why do they rise? Why are there such variations year to year, by locality, and along price tiers.
Every factor that effects home prices at the top of the housing market, the national, regional, and state levels, impact those on each lower rung, the local market, neighborhoods, individual listings, even buyers and sellers. The deeper one delves, the more factors that might be operating and interacting.
That Supply and Demand Thing
Most influencers of prices are, at root, issues of supply and demand. Demand is driven largely by the economy and population growth. The national economy, whether strong or weak, will affect employment, wages, and house prices everywhere, but as stated earlier, not every market will prosper or founder to the same degree or at the same time. There may be pockets of extraordinary growth, businesses flocking to the area, creating jobs and a demand for shelter or other areas that suffer unduly in a downturn. The Silicon Valley and San Francisco Bay area are two examples of the former. Each has become a magnet for certain industries, superheating the economy and the housing market. Job opportunities are invariably followed by an in-migration of workers and the demand for more. The latter pushes up wages as well, keeping rising prices affordable and allowing even larger increases.
The extraordinarily low interest rates we have enjoyed for the last several years have helped maintain affordability despite rising prices and this too has worked to keep demand high.
Population growth in an area isn’t always rooted in the economy. That 1974-1980 price bubble coincides with the bulk of Baby Boomers entering their prime homebuying years. That the even larger Millennial generation is finally establishing households has contributed to the post-recession appreciation as well.
EARLY START
After watching Millennial put off establishing households, defer marriage, and delay homeownership, the behavior of the youngest new adults is a bit of a surprise. More than 99,000 members of Generation Z, those born in 1995 or later, already own a home. Rob Dietz, chief economist for the National Association of Home Builders, is a little surprised to see those numbers. “The traditional life cycle is to rent, especially for younger consumers who might have student loans,” he says.
TransUnion says Gen Z’s homeowners have an average mortgage balance of $140,000 and are handling their financial responsibilities well. The 60+ day delinquency rate is 1.2%, lower than either Millennial or members of Gen X. Marketwatch.com
THE Place to Be
Demand in a local area can result from other factors as well, such as unusual ambiance, cultural, educational, or recreational opportunities. These are the drivers of extraordinary price gains in parts of Utah, Montana, and specific cities like Austin, Texas and Asheville, North Carolina. This type of demand can be self-perpetuating – a market becomes “hot” for a certain demographic; music lovers, artists, the retired, or, of course, Millennials. A benign climate can entice large numbers of residents, create job opportunities, even reduce building costs. A harsh one can limit economic growth.
Another demand factor is the wide accessibility of credit. We saw the effect of this in the rapid buildup of prices in the early part of this century and remember all too clearly what happened to demand – and prices – when it was drastically and quickly tightened in 2008.
QUALIFYING GIG-STERS
Fannie Mae says 175 of consumers are involved in the “gig” economy – driving for Uber, delivering food, and other “on demand” services. The company also asked lenders if they see applications claiming gig income, if they counted it when qualifying borrowers, and if they thought they should or wished they could.
Lenders overwhelmingly said they, see such applications, they expect to see more, and thought accepting such income would help first time and lower income “gig-sters” become homeowners. Most also cited the difficulty of counting the income because it is unreliable, unacceptable to many investors who buy loans, and can’t always be measured by existing underwriting standards.
It’s the Inventory
Sometimes the supply side is the greater driver. The current reluctance, for whatever reason, of existing home – owners to list their homes and the long path to recovery for the home building industry have led to tight inventories and bidding wars.
Then too, “Under all is the Land.” While Realtors mean those first words in the preamble to their Code of Ethics as an obligation of stewardship, it is also a supply factor. Where open land is scarce, home prices are typically high. In older cities, tearing down is often the only way to build anew. Building can be further constrained by wetlands, steep terrain, natural barriers like shorelines or mountain ranges, or a lack of infrastructure. Strict building codes, regulations regarding density and environmental protection, and rigorous permitting requirements will increase both the price and feasibility of building.
Drilling Down
Within markets, which are sometimes huge in area, there will be great variability in home price growth and an additional layer of reasons for it. There is often greater demand in areas close to the urban core or to job centers while outlying areas are less in demand because of the commute. Add in good public transit, and those differences narrow.
But that assumes all other factors are equal. A good school system (or at least the reputation of having one) can often compensate for an inconvenient commute. A low local tax rate can make an area more attractive as can the availability of community services.
On an even more granular level, neighborhoods next door to each other may appreciate at very different rates. Maintenance, walkability, home sizes and styles, are just a few of the factors that can create (or negate) demand.
FLYING BRICKS
Traditional Construction crews, which can build a small home in about four to six weeks, better get out of the way. The Hadrian X, a long robotic arm that mounts on a truck or crane, can lay 1,000+ standard bricks per hour. Using a 3D house model, it cuts the bricks, applies adhesive, transports the pieces by conveyer belt to the end of the arm and it puts them in place. The finish work, windows, plumbing, etc., are completed by human hands.
The machine, developed by Australia’s Fastbrick Robotics, started building its first home last year. Leanne Garfield, Business Insider
Synergy
One factor can multiply the effect of others. To again cite the extreme of Santa Clara County – home of Silicon Valley – which has become a Mecca for successive waves of high tech firms, from early computer and chip manufacturers, to the dot.com boom and bust, to its current role as a leading center for the digital revolution. The high paying jobs they create has drawn in well educated, largely young employees who have created their own culture, enjoy a benign climate, demand educational excellence for their kids, and have the money to pay the steadily escalating housing costs. The result? Data from CAR (California Association of Realtors) puts the median price in Santa Clara County at $1.17 million, the highest, by far, in the nation.
Alex Villacorta, Executive VP of Analytics at HouseCanary calls this “hyper – localized fluctuation.” He says home prices and sales trends are going to be more nuanced at the ZIP code, neighborhood, and even block level going forward. We also suspect that there will come a time when the economy pulls back, interest rates soar, or for some other reason the supply and demand, currently tending toward under-supply, reverses. When that happens, prices will probably stop rising at such a breakneck pace and may even fall back. View home prices and properties for sale in Three Arch Bay.
A few pundits believe the California housing market is well past peak. Yet economics, demographics, buyer demand (and last few months of sales stats) seem to refute that notion. After all, this is California! No other economy in the country is as diverse and dynamic. It offers opportunities that attract millions of newcomers to live and start businesses here.