Southern California Chapter of the Appraisal Institute 23 rd Annual LA/OC Market Trends Seminar January 2016
OUTLINE • INTRODUCTION • CAPITAL OUTLOOK • ECONOMIC DEMAND DRIVERS FOR HOUSING • TRENDS AFFECTING HOME OWNERSHIP • HOME SALES OUTLOOK • O.C. / L.A. NEW HOME MARKET REVIEW
CAPITAL OUTLOOK
U.S. Dollar Has Strengthened The U.S. dollar has strengthened in recent years as the U.S. economy has rebounded. Investors buy strengthening currencies and sell weakening currencies. Foreign currencies have weakened as other countries try to reduce the cost of their exported goods to support their domestic industries. 4
Capital Is Flowing Out of Emerging Markets Emerging market (EM) capital flows have reversed since 2013 which sends billions of dollars back toward the U.S. and other developed economies. 5
The Value of The Dollar Impacts Capital Flows U.S. Dollar compared to the value of the Chinese Yuan. Recent signs that the Chinese currency may still be 10% - 20% overvalued has roiled international stock and bond markets. Chinese companies and U.S. Dollar rising rapidly households are trying to get against Chinese Yuan their money out of the Yuan and into other currencies. 6
Chinese Capital Reserves The Chinese government doesn’t want a rapid depreciation of their currency and has sold dollars and bought Yuan to counteract the trend. Chinese Foreign Exchange (FOREX) outflows were $108 BILLION in December 2015 alone and will approached $1.0 TRILLION for Year 2015. 7
A Look at Chinese Capital Flows Investors know that China’s export based economy relies on an inexpensive currency. China’s neighbors have been devaluing their currencies to support domestic industries. This motivates China to These outflows migrate around the world in devalue their currency to search of stable currencies / investments. maintain competitiveness. The weakening in Chinese economic activity accelerates capital outflows. 8
Why Do Capital Flows Matter? Companies, venture capital, governments, individuals and hedge funds want to control their exposure to weakening (or strengthening) currencies. In the last few years there have been massive capital flows into dollar denominated assets including stocks, bonds and U.S. real estate. Article from Wall Street Journal, December, 2015 9
Some Foreign Capital Ends Up In U.S. Real Estate At the same time the Coachella Valley is suffering from the departure of Canadian buyers. 10
ECONOMIC DEMAND DRIVERS FOR HOUSING
Californians Carry More Debt Rapid escalation of debt levels occurred during the subprime era. The smaller “correction” in California debt levels indicated a stronger and quicker rebound in housing values. High debt levels have slowed the pace of this recovery. 12
Long Term Trends in “Real” Household Income (U.S.) Although “nominal” incomes have been rising, “real” incomes adjusted for inflation have been stagnant. This is another reason why the current housing recovery has been modest and so reliant on foreign investment. 13
Household Configurations are Changing Changing household dynamics are channeling more demand into floor plans and designs other than the traditional family style house. These trends are also supportive of rental demand. 14
Household Formations are Lagging For Sale housing market conditions are likely to be better in the 2020-2024 period than they are at present, as delayed household formations accelerate. 15
Rentals are Taking Market Share From Owned Homes 16
Long Term Mortgage Rate Trends 30-YEAR FIXED RATE MORTGAGES Increasing interest NATIONAL AVERAGES rates tend to NOVEMBER 2015 strengthen a 12% currency, thus 10% 5-Year Forecast drawing international capital. 8% 6% However, over time U.S. housing and 4% other assets become 2% 10.1% more expensive to 9.2% 8.4% 7.3% 8.4% 8.0% 7.8% 7.6% 6.9% 7.4% 8.1% 7.0% 6.6% 5.8% 5.8% 5.9% 6.4% 6.3% 6.0% 5.0% 4.7% 4.4% 3.7% 4.0% 4.2% 3.8% 4.2% 4.6% 5.3% 5.7% 5.8% own. 0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015est 2016prj 2017prj 2018prj 2019prj 2020prj 17
Long Term Trends in Household Income (Orange Co.) MEDIAN HOUSEHOLD INCOME When household Anaheim-Santa Ana-Irvine, CA MD incomes are increasing NOVEMBER 2015 and interest rates are $100,000 $90,000 declining this creates a $80,000 tremendous tailwind $70,000 for housing prices, as $60,000 we have seen since the 5-Year $50,000 Forecast 1980’s. $40,000 $30,000 $46,411 $47,292 $48,350 $49,491 $50,670 $51,468 $53,033 $55,102 $56,865 $58,451 $60,173 $61,573 $62,999 $64,032 $65,299 $67,914 $71,621 $74,095 $73,605 $71,414 $71,528 $72,151 $72,982 $74,503 $75,800 $78,300 $80,400 $82,900 $85,500 $88,300 $91,100 $20,000 $10,000 $0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015est 2016prj 2017prj 2018prj 2019prj 2020prj 18
Stock Markets Are Weak in 8 th Year of Presidential Terms Financial market volatility undermines consumer confidence, especially in highly discretionary buyer profiles, such as mature households. 19
TRENDS AFFECTING HOME OWNERSHIP
Why Is California A Destination Of Choice? 21
Changing Immigration Patterns 22
Who Is The New Home Buyer? 23
Changing Trends In Household Formation and Homeownership 24
Student Loan Debt Isn’t Being Paid Like Other Loan Types 25
Time For A Correction in Educational Costs? 26
HOME SALES OUTLOOK
National Existing Home Sales Remain Above Normal Levels Home Sales, 1968- Aug 2015 (Thousands) Highest 9,000 Annualized Rate Since 2006 8,000 7,000 3.88 million 45 year average excluding the subprime era 2002-2006 4.18 million 6,000 5,000 4,000 3,000 2,000 1,000 0 Jan-68 Apr-69 Jul-70 Oct-71 Jan-73 Apr-74 Jul-75 Oct-76 Jan-78 Apr-79 Jul-80 Oct-81 Jan-83 Apr-84 Jul-85 Oct-86 Jan-88 Apr-89 Jul-90 Oct-91 Jan-93 Apr-94 Jul-95 Oct-96 Jan-98 Apr-99 Jul-00 Oct-01 Jan-03 Apr-04 Jul-05 Oct-06 Jan-08 Apr-09 Jul-10 Oct-11 Jan-13 Apr-14 Jul-15 28
(Includes For sale and rentals) New Home Supply Is Growing Slowly 29 Source: Census Bureau; Real Estate Economics 1,000,000 1,500,000 2,000,000 2,500,000 500,000 0 1991 1,219,692 1992 995,212 1993 1,090,077 1994 1,199,650 1995 1,355,736 1996 1,363,233 1997 12-MONTH CHANGE IN TOTAL HOUSING SUPPLY 1,423,713 1998 1,452,991 1999 1,608,283 2000 1,666,697 2001 1,586,496 2002 1,613,705 UNITED STATES 2003 JANUARY 2016 1,706,272 2004 1,878,557 2005 2,068,959 2006 2,097,335 2007 1,789,580 2008 1,330,081 2009 901,792 2010 623,053 2011 554,670 2012 568,098 2013 745,519 2014 924,671 2015… 989,468 2016prj 5-Year Forecast 1,088,530 2017prj 1,248,889 2018prj 1,367,593 2019prj 1,430,201 2020prj 1,442,127
New Home Sales Are Below Historical Norms Numerically 30
New Home Sales Are Below Historical Norms By Population 31
People Saying They Plan to Buy Exceeds Actual Buyers 32
What Do Buyers Want? 33
And Yet New Homes Are Losing Share To Resale Homes! 34
Rental Rates Are Growing Much Faster Than Incomes 35
Rents Are At Historic Highs 36
Resale Homes Are Old And Lack Modern Features 37
Buyers With High Credit Scores Dominate the Market 38
Construction Cycle Times Are Increasing 39
Construction Trade Sequencing Problems Free copy of a Real Estate Economics Residential Economic Report for the first person to identify the problem here! ($995 retail price!) 40
2016 Housing Market Heating/Cooling Trends 41
ORANGE COUNTY HOUSING VALUES & SUPPLY / DEMAND
Orange County Housing Valuation Trends MEDIAN ANNUAL HOME PRICE Anaheim-Santa Ana-Irvine, CA MD NOVEMBER 2015 $900,000 In Orange County $800,000 prices have exceeded $700,000 the subprime peak. $600,000 $500,000 $400,000 $300,000 5-Year Forecast $241,100 $239,217 $233,292 $216,025 $212,758 $209,217 $213,733 $230,800 $255,442 $282,842 $319,775 $357,000 $420,525 $499,733 $631,758 $695,517 $707,350 $691,683 $527,250 $481,392 $524,067 $511,330 $548,543 $654,362 $688,125 $728,525 $764,700 $781,075 $790,033 $791,408 $792,325 $200,000 $100,000 $0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015est 2016prj 2017prj 2018prj 2019prj 2020prj 43 Source: CA Association of Realtors; RealtyTrac; various county recorders offices; Real Estate Economics
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