Wow we made it! Happy Holidays! 2017 was quite a year and with 2018 in sight, I want to take a look back at some highlights, and lowlights from 2017, and share what we can expect this coming year.
Some of my highlights for Southern California in 2017 include the Dodgers finally making it to the World Series, LA adding another pro football team, the drought ending, and overall improvements in the local economy (in non-academic terms, it just feels better out there). Nationally, the stock market hit new highs with the Dow just shy of 25,000, and unemployment rates are still falling. Sadly, but not abnormal for the golden state, California has suffered some of the worst wildfires in state history, and it looks like the Thomas Fire in Santa Barbara and Ventura Counties will burn until the new year.
2017 Real Estate Review – Are we in a Bubble?
The short answer is NO! Prices have risen for 6 straight years, but in some neighborhoods they only recently surpassed the previous highs set in 2007. There are several factors to consider when comparing this market to the last peak.
- Home prices to average income ratio – Despite the seemingly high prices, housing affordability is nearly 2 to 3 times higher today than during the last market peak in 2006/07.
- Buyers have skin in the game – The last market peak was supported by no-money down and stated income loans. Not this time! Lenders have required buyers to have a stake in their purchase, mostly in the form of 20% or greater down payments. It’s a lot harder to walk away from a home that you put your life savings into than one that you didn’t.
- Low unemployment – Job growth is outpacing new housing starts, and even without new jobs there is still a lack of supply to meet the demand for housing. The lower priced neighborhoods are seeing double digit price growth and the move up buyers are reluctant to sell for a lack of inventory in the next price tier. As a result, as longs as the job market remains strong, we expect continued price growth, especially on the lower end of the market, as buyers fight it out in bidding wars for the limited supply of affordable homes.
- Interest rates are still low – In fact, interest rates are 2 to 3% lower in this market cycle than they were in 2006 and 2007. It’s going to take more than a ½ point increase to negatively affect the the market, and even then, buyers typically adjust after a few months. Keep in mind that buyers are buying a payment more than they are a house.
- Finally, Rents are rising – Rents have been on a steady rise for the last decade, and there is little relief in sight. Increasing rents are one of the primary drivers motivating first time homebuyers, and even with the reduction in deductible home ownership expenses in the new tax plan for 2018, we see little reason that will steer first time buyers away from buying homes instead of renting.
High Points in 2017
Sellers – If you were a home seller in 2017, odds are you were one of the 60% of sellers that saw multiple offers on your home, or maybe one of the 30% who sold their home over the asking price. Across the board we saw the days on market drop, and absorption rates remained around 3 months supply or lower, especially in the markets under $1,000,000. On average homes sold for at least 97% of the original asking price in all markets. Bottom line: it’s still a seller’s market.
Market Leaders – Several neighborhoods continued to push new records. Manhattan Beach saw the average sales price increase 16% to $2.864m; South Redondo increased 15% to $1.415m; Hollywood Riviera was up 18% to $1.32m; and Southwood (Torrance) and all of Hawthorne jumped over 10%. The rest of the South Bay saw more moderate growth with slight price declines in El Segundo, Hermosa Beach, and Palos Verdes Estates.
Buyers – Buyers have seen the double edge sword of low interest rates. While lending requirements have eased over the last few years, the low interest rates have helped carry the rally in home prices. The joy that sellers enjoyed with 3 of 5 homes seeing multiple offers, brought anguish to many potential buyers. Until we see a significant increase in new inventory, buyers are going to have to put their helmets on and get ready to battle.
2016 Predictions – How Did We Do?
Well, we missed the mark in some respect as we thought inventory would increase with rising rates in 2017. Rates actually dropped from after the election from the low to mid 4’s to the high 3’s. Market wise just about everything was hot so a monkey could have probably gotten it right, but South Redondo Beach as well as West and South Torrance, in particular, really shined.
What can we expect for 2018?
After reading several economic forecasts, considering local market statistics, and interviewing several experts, here are our predictions for the coming year.
Interest Rates: Interest rates will rise, but gradually. This is sort of a no-brainer as it’s been predicted for the last several years. Why? The Fed needs some more bullets in the chamber if we have another recession, and with interest rates as one of the main tools to help an ailing economy, raising rates in times of economic growth is the only way to replenish the war chest. Think of this as making hay while the sun shines in terms of raising rates.
Tax Reform: The effects of the newly passed tax reform won’t stifle home buying and selling as some have warned, but it will likely have a negative impact on supply. With baby boomers facing potentially huge capital gains from selling a home, many will decide to lease their homes instead of selling, and as a result the ability for move-up buyers to find a home will be more difficult. This trickles down to first time buyers having limited options, and as a result, home affordability will continue to decline as prices hold steady or grow.
Price growth: The consensus is that prices will increase moderately at around 4% in 2018.
Support from the Bottom Up: The market growth that led us out of the bottom started on the high end with wealthier neighborhoods seeing massive price growth in 2013 and 2014. While those markets level off, the lower priced neighborhoods are going to push the market up. I recently did a Price Opinion for a client who bought his home in Del Aire for $400,000 in 2009. The median price in that same neighborhood today is $650,000, and some homes are pushing $800,000. The same goes for Lawndale, Hawthorne, and Lomita, which all recently surpassed previous market highs last seen in 2006 and 2007.
Buy Investment Property: The new tax laws won’t hurt landlords; and in fact, it will probably help them. If rising rates and lower inventory reduces the number of first time buyers, landlords will continue to be able to raise rents. Even with a limited supply of multifamily properties and lower returns, owning investment property still remains a decent hedge on risk and returns beat that of most conservative financial investments.
Hot South Bay Neighborhoods for 2018
With Manhattan and Hermosa Beach average home prices above $2 million, surrounding neighborhoods will continue to see price growth. Here are my top neighborhood picks for 2018:
- North Redondo – Redondo Schools are some of the best in the state, and with proximity to Manhattan Beach and easy access to the freeways, North Redondo will continue to see appreciation.
- South Redondo – If you want to live close to the beach, but you aren’t a Surgeon, CEO, or Pro Athlete, chances are South Redondo Beach is going to be your most affordable option.
- Hollywood Riviera – Where else can you find an one level ocean view home in the South Bay? Expect prices to see continued double digit growth in this Torrance neighborhood with a Redondo Beach address.
- South Torrance – Just behind the million dollar neighborhoods of South Redondo are nice starter homes, some with ocean views for under $1,000,000. I expect we’ll see this neighborhood cross into the 7 digit territory very soon.
- Hawthorne – With the SpaceX halo in full effect, this blue collar town has a rising industrial and research and development base. As one of the last affordable neighborhoods with homes in the $600k range, expect to see young families improving run down homes and bringing some new life into this re-emerging South Bay city.
- Silver Spur/Palos Verdes – This neighborhood is ripe for young families looking for homes in the low $1,000,000 range. Some homes have incredible city lights and ocean views, and most offer decent sized backyards with room for additions. Factor in the highest rated school district in Southern California, and there’s plenty of support for 5-10% price appreciation in 2018.
We have much to be grateful for here in Southern California, and 2018 should be another great year for the land of the Endless Summer (RIP Bruce Brown 1937-2017). We want to wish you a Merry Christmas and Happy New Year and look forward to working with you in 2018!