CALIFORNIA RENTER STATE BY 2025?

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When they presented the California Association of Realtors 2019 Mid-Year Market Forecast this month, C.A.R. senior vice president and chief economist Leslie Appleton-Young and deputy chief economist Jordan Levine announced as of July, the U.S. was officially 10 years into its economic recovery period. The country has experienced the longest period of economic expansion on record.

 The economy is healthy, with GDP reaching 3.1 percent in the first quarter of this year. Unemployment was at 3.7 percent in June — the lowest in 55 years, and job growth was at 1.5 percent. Consumer confidence has remained elevated. Interest rates are at an all-time low, hitting 3.75 percent in June. There is speculation that interest rates may be lowered even more.

 Given the strength of the labor market and income growth, the economists said the housing market should be stronger. Appleton-Young asked, “Why are the low rates not spurring even more home sales?”

 Levine speculated the federal tax code has removed the incentive for homeownership. Raising the standard deduction and capping the federal deduction for state and local taxes at $10,000 have undermined the motivation to enter the housing market and removed the financial incentives for homeowners to trade-up. Although inventory has increased, it is still constrained, so home prices remain at an all-time high.

“It’s still pretty brutal out there for the buyers who want to find homes,” commented Levine.

 Appleton-Young said consumer confidence is fairly volatile. People are jittery, even with a strong labor market. There is also uncertainty about what the Federal Reserve Bank is going to do with rates and the slowing of growth in Europe and China.

Despite these uncertainties and sluggish growth, the economists discounted talk of another recession looming. They said there are no obvious indicators to support a recession. Consumers have a reasonable amount of debt with decent balances on credit cards and auto loans. The lending environment and housing are very different today. They doubt there will be a repeat of 2008 because the fundamental imbalances then are not prevalent today.

C.A.R. forecasts a 2.4 percent GDP by year-end, an unemployment rate of 3.7 percent, a 2.4 percent increase in real disposable income. By year-end, C.A.R. projects home sales will dip 4.3 percent, the median price will increase 4 percent, and the 30-year fixed rate interest will be at 4 percent.

 The market is rebalancing itself. Despite low inventory, properties are moving, said Appleton-Young. She added, “It’s just absolutely critical to price the property correctly, and by that I mean don’t overprice it or you’re going to be following the market down. The price strategies that worked in the market in 2017 don’t work in the market in 2019.”

The C.A.R. chief economist maintains “low housing affordability is California’s Achilles heel.” California housing affordability is at 32 percent, compared to the country at 57 percent. Research shows the only employment field which affords you to buy a home in the state is that of a software developer earning $127,950.

 “If no one can afford to live here, it’s going to be an issue,” she said. “The lack of supply of housing will eventually create a situation where the demand moves somewhere else.”

The economists indicated 750,000 people have left the state since 2010. They fear the housing affordability issue is going to become an economic issue, as more millennials and Gen Xers than boomers move out of state to places like Texas, where there are no zoning or housing supply constraints.

Levine indicated more than 100 cities in California are already classified as “majority renter cities.” If things don’t change, it is projected that the entire state of California will become a majority renter state by 2025.

Jesse HernandezComment