with permission from the AOA (Apartment Owner’s Association)
California’s median price rose to $550,200 in May. That represented a year-over-year gain of 5.8%. It’s common for prices in the summer to be the highest price reached for the year.
At $550,000, California is now only $44,000 off its peak price in May 2007 of $594,530. In our report, “2% Interest Rates, $40 Trillion in Debt and Other Surprise Endings,” it was my prediction that $550,000 would be the peak price reached for this cycle in California for 2017.
In that report, I also predicted a recession in the second half of 2018 which would be met with the Fed having to drive short-term interest rates into negative territory. I still stand by those predictions.
What’s interesting this time around when you consider median price, is that only two counties have exceeded their past peak price and those are the two most expensive counties. San Francisco County and Santa Clara County have far exceeded their past median price. This does add to the skewing of California’s median price. Most of the lower-priced counties like Riverside, San Bernardino, Kern, and Sacramento have room to increase before they pass their former peaks in price.
Prices have been further skewed as the fastest sales growth has been in the $2,000,000 price range and above. The second fastest category of sales growth has been in the $1,000,000 to $2,000,000 price range. It will be interesting to see how long that can continue.
Despite some healthy price gains, the affordability chart still reads 32%. It has been hovering around the low 30s now for the past four years. One of the telltale signs of an over-priced California market is the affordability number heading to 17%.
We are nowhere close to getting to 17% anytime soon unless we were to experience an interest rate hike that bumped the mortgage rates to about 6%. I somehow doubt the current economy is strong enough to absorb aggressive rate hikes by the Fed. I stated in the report that I doubted California would get to the 17% affordability mark this cycle. I just think there are too many other factors that will prevent either aggressive lending hikes or aggressive price movement.
Sales in California have been steady but not spectacular. It has been a long time since California sales were over the 500,000 mark and we haven’t come close to touching the exuberant days in 2005 when sales reached 600,000 for a short time.
What’s standing in the way of sales exploding? The biggest problem continues to be lending. On the panel at the “I Survived Real Estate” this year’s event, will be a couple of people who can definitely provide some insight on how lending will evolve over the next couple of years. The event is sold out but we’re working on live streaming options with HousingWire so anyone that would like to watch can do so from the comfort of home.
I’m looking forward to finding out from Doug Duncan from Fannie Mae when he feels investors will be offered more loans. I think the step that makes this possible has to be Fannie Mae becoming a privately-owned company once again.
David Kittle is back with us again this year. He is the past president of the Mortgage Bankers Association and currently the President of The Mortgage Collaborative. I will be very interested in his take on what’s next for regulation in lending. Is Dodd-Frank about to be dismantled? If so, will it be replaced and by what?
One of the problems for sales is the lack of single-family home construction in California. On the panel again this year will be John Burns, author of “Big Shifts Ahead” (the best demographics book I’ve ever read). John will be asked why the builders have moved out of California and are going gangbusters in places like Texas and Florida. Also, what level of participation can we expect from the hedge funds moving forward? Are the hedge funds ready to unload what they bought? If so, what would be the impact on the California market? John Burns is President of John Burns Consulting and his clients are the hedge funds as well as national and local builders.
Two of our panelists will be very helpful in taking us to the future and seeing what’s next for both real estate information and how technology will change how Americans work. I always look forward to the panelists, limo ride every year because I get to ask Sean O’Toole what he thinks about the future. He was the one that introduced me to 3D printing six years ago. “What’s 3D printing?” I asked! Incredibly, he had already purchased his young son a 3D printer the year prior.
Sean was also the one who shared that we would soon be driving next to driverless cars way before it was on anyone’s radar. That’s why I like Sean, he’s way ahead of the curve. Last year, he made this statement: “America’s biggest problem in the future will be how to have a society where 50% of the people don’t need to work.”
I just read an article last month that talked about that very subject related to our specific market. This is the title of the article in The Press-Enterprise dated July 9, 2017: “Automation Threatens More Than 60% of Inland Jobs”.
I’m very interested in Sean’s take on what’s next. Are we going to build houses with 3D printers that significantly lower the cost of construction and greatly reduce the cost of housing? That might just be good to know!
Bruce Norris is an active investor, hard-money lender and real estate educator. A talk show host in his hometown of Riverside, Calif., Norris is a frequently quoted in financial publications and a speaker at investor club meetings throughout California. His latest study, The California Comeback 2, was released in July 2013 and provides the statistics that substantiate his predictions. More information about Bruce Norris, his research and his investment seminars are available at www.thenorrisgroup.com.