2018 California Real Estate Outlook
Let start with the below listed top15 takeaways from the 2017 LA Residential Real Estate Market.
Some of those factors will continue to drive our local housing economy in 2018.
“At some point, a supply problem becomes a demand problem” — Joel Singer. Low inventory remains one of the biggest threats to our local economy. Currently, there is about a 3 month supply of homes across the state. Inventory peaked in 2008 with a 16 month supply.
The SoCal market remains ultra-competitive. 60% of properties receive multiple offers, average 14 days on the market, and 28.5% sell above asking price. In 2005, the average home received 5 offers. See infographics at the link below.
Los Angeles County remains the most underbuilt county in California when comparing the number of jobs vs. new building permits.
Only about 28% of Californians can afford to purchase a home.
Cash buyers make up 22% of all California sales.
California remains an extremely tight labor market with unemployment at historic lows. Is it time to ask for a raise? Possibly. Job growth is slowing likely due to the lack of available workforce and skilled labor.
During the recession, 1.3 million jobs were lost in CA. Since January 2010 until approximately now, 2.4 million jobs have been added to the state economy.
The median price in LA county spiked in September 2007 at $625,812. Currently, it is floating around $565,000 or 8% below its previous peak.
From 2016 to 2017, the average amount of available homes between 1M- 3M fell about 10%. However, the number of available homes above 3M increased 1.3%.
The cap of the state and property tax deduction in the new tax reform bill increases the cost of owning a home, which could lead to fewer sales transactions as the tax incentives of being homeowner diminish. This may lead to further tightening of the housing supply in California. However, this may be offset by the reduction in Federal income taxes and increase in standard deductions. Consult your tax advisor.
Sellers are not moving as often. The average seller lives in their home for 11 years, which is down from 5 years in 2005.
76% of investors purchasing real estate in California are choosing to rent out their investments while 24% are fixing and flipping.
Turnover rates remain at historic lows both in the US and California. In 2006 the turnover rate was 7%. It is currently about 4.6%. Homeowners are choosing to stay put due to fewer incentives or capital gains, higher interest rates, low property taxes and the “where do I go?” problem.
Sales volume increased by 3% from 2016 to 2017.
The median sales price in LA was up by 10% in 2017 when compared to 2016.
The Dow Jones Industrial Average superseded 25,000 for the first time in history.
Somewhere between 400k – 700k of potential housing units, which used to owner-occupied have now been converted to rentals as owners are choosing to rent instead to sell.
International buyers are now 3% of the market vs the peak of 8% in 2013.
Net cash gain to sellers is averaging about $200k per sale, which is comparable to the previous 2005 peak.
The rate of Californians moving out of the state is the highest since 2007, which is about 28% of the market.
What to expect in 2018?
US economic and job growth expanding.
Rates continuing to rise in response to growth and FED policy. (They shot up this week)
Affordability challenges for first time and repeat buyers.
Baby boomer generation likely staying put and not moving or choosing to lease their residence vs. selling. Further constraining inventory.
California millennials leaving the nest and state due to affordability issues.
Listing inventory and new construction units continuing to remain low.
How will the housing supply shortage be solved or addressed?
Due to affordability constraints and price appreciation in premier areas, look for spillover/gentrifying areas to be the next “hot” neighborhoods. This is already happening in areas, no longer a secret, like Highland Park, Eagle Rock, West Adams, Baldwin Hills, etc. Once a city, zip code, or neighborhood begins to exceed affordability, the halo effect will begin to take place. To read about the Real Estate Halo effect and how to identify it, click here.
Higher density and key investments in public transportation. LA must build up and average more units per lot. If you look around to you see any expansive pieces of empty/vacant land? No. At the state and local LA level, this is already being addressed by allowing owners to build granny flats and investment in public transportation like the LA Metro Rail. Homeowners are now allowed to build a secondary accessory dwelling unit, even if their lot is zoned R1. To read more about ADU’s and city requirements click this link.
On the private level, we are already seeing key investments in the market by developers and even NY Brokerage firms, familiar with high rise buildings and or small lot subdivision and development, expanding operations in LA.
What does this mean to you?
Well, the answer depends on a myriad of possibilities, but mostly on what you’re short and long-term goals are, how constrained your budget is, the specific micro-market you want to purchase or sell in, and what your ideal living location looks like. If you’re thinking about trading up or down, there is no better market to list in and dictate your preferred terms.