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All Good This Year and Next Year – Thank You!

I don’t know about you but when I am reminded that we are in our 6th year of economic recovery, I have to pinch myself to believe it. The “improvement” over the first 2 years of the cycle was so imperceptible that most people thought that we were still going the other way…. At least, now, we can all agree that we are doing well. If you consider (as you should) that the real estate activity is a reliable measuring tool of the economic wellbeing and a barometer of things to come, relax and enjoy.

As we are nearing the end of the year, economic & market outlooks/forecasts are multiplying all over the land. I got to go to a couple of them this month, both very informative and optimistic. The first, starring one of my favorite people, Leslie Appleton-Young, the chief economist for CAR (California Association of Realtors) and the other with highly respected Lawrence Yun, the chief economist for the National Association.

California is not necessarily representative of all of the US as it pertains to the real estate picture and the US is too big a country to generalize, but no matter who you listen to, the assessments and predictions about the market are similar. And positive they are, in spite of a global slowdown. Our economy may still be sluggish but compared to the other countries, we are doing terrific. “We are the cleanest shirt in the dirtiest laundry”, as Lawrence Yun puts it.

The job situation is a good indicator of our national state of health. The job creation is still going strong (closing in on a low 5% unemployed)…. Although the employment rate is not rising since a lot of people are no longer on the labor force radar. Sweet & sour. One good omen to celebrate: after 10 years straight with a weak GNP growth (2% more or less), 3% is in the cards for 2016. Can’t wait to get there.

In the real estate arena, nothing major on the horizon. Sales will increase a bit in the country (3.4%), thanks to continued job creation and rising wages, but the lack of inventory of both existing and new homes (new construction is especially weak) will continue to push prices up next year. In California, Leslie Appleton predicts a 6.3% increase in existing home sales and a 3.2% median price jump next year. That’s half of what we are likely to see in the state this year (6.5%) but it goes in the right direction.

Of course the price surge was a lot more significant y/y through Summer in some hot markets like the Silicon Valley, which has been leading the state in job creations. FYI, the increase was 12.5% in San Mateo County, 23.4 in Santa Clara and 26.9 in San Francisco!

A few factors, on a national or regional (California) level, are slowing (or shall we say “moderating”) the continued growth in both number of sales & price appreciation). Let’s name a few:
Slight decline in number of trade up buyers, due in part to drop in the home ownership rate. Only the 50 & over group (age of household head) is not declining. I guess it pays to grow older.
The share of cash buyers is going down for the third year in a row (21% this year in California).
The share of international buyers is down as well: only 4% in California (all price ranges) in 2015, half of what it was in 2013 and 50% less than in 2014. The reasons are obvious: the US is doing better and better while the rest of the world is weak, flat or in the red… And has to pay more for US real estate because of a stronger dollar. We should however note that the picture is quite different at the high-end, a segment which is dominated by foreign buyers (principally Chinese) in the most expensive areas.
The cost of mortgage money can only go up, and it will… Finally…. At some point in time before year-end, but so long that it does not go over 5%, it will make no difference to speak of.
People stay in their home longer. The length of ownership has gone up 6 years straight in California. It stands at 10 years in 2015. It was 5 in 2009.
In a way, we may look positively at the above moderating factors. If they were not in play, we can only imagine how fast & furious the market would be next year. Then it would probably be correct to talk about a price bubble in the making. No worries, none are in sight.

Alain Pinel

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