Bruce Norris is joined again this week by Leslie Appleton-Young. She is the vice-president and Chief Economist of the California Association of Realtors, a statewide trade organization with over 200,000 members dedicated to the advancement of professionalism in real estate. Leslie directs the activities of the association’s member information group. She oversees the analysis of the housing market and brokerage industry trends, member communication, and membership development activities. She is also closely involved the association’s strategic planning efforts, and she is a well-known speaker in the California real estate community.
- How has low inventory affected sales volume and price?
- What are some of the questions CAR asks realtors in their survey?
- What is the attitude of both baby boomers and millennials in this period of time?
- What is CEQA, and how does it benefit housing construction?
- Which counties have not yet seen a price recovery, and what do they have in common?
- Why are we not seeing as man first-time homebuyers as before?
- What is our affordability number at, and how does this compare historically?
One of the things Bruce has constantly heard about over the last couple years is low inventory levels. Bruce asked how this has affected sales volume and price. He said he would think if inventory levels were really low and matched with a lot of capacity to buy, we would have really aggressive price increases. But, we are not seeing this. Bruce asked what this low inventory is really affecting. Leslie asked if in this context low inventory would be a spur for people list their homes. However, Bruce said they are not doing this and may not have the confidence level that they can be qualified. Therefore, we have inventory not showing up. The levels of inventory for about 4 months does not seem extraordinarily low.
Leslie said you have a data problem here, which is pocket listings. This could be one thing affecting this number. We started calculating unsold inventory in the 1980s, and it is very simple. It is a ratio of listings to sales. Currently, if inventory is around 4 it means if the current rate property is selling, you will be out of inventory in 4 months. Leslie said up until about 4 years ago, if you were to ask her what inventory was she would say 6-7 months’ supply. This was the long-run average. If you look at the last 4-5 years, it has been between 2, 3, and 4. She thinks this has been the structural change in normal inventory.
There are a couple different reasons, but she specifically mentioned the baby boomers. Demographics is part of this because they are a big group and either voluntarily or have to work longer than their parents did. Many of them love their jobs, and some of them are trying to recover from investment decisions that were made in the past. When you look at turnover rates, it varies with California housing stock. To pick out the late 70s, it was 8-9% a year. The last few years, we have been between 4 and 4 ½%.
Another data point is the survey CAR does every year where they ask California realtors about their last closed transaction. One of the questions is how long their seller has been in the home. The last two years the average has been 10 years, and this is the highest in the 38 years they have done the survey. Over 70% of the Californians over 55 have not moved since 1999. Boomers are not moving because they are working longer, are healthier longer, they want to stay in the game longer, and their idea of retirement is not necessarily going to a retirement community somewhere fancy. They also have children who need their help, so you hear more and more about married children with kids moving in with the parents. They will then inherit the house and help their parents as they get older, which sounds a lot like how Italy works.
CAR did a survey of the boomers, and ¾ of them said they were going to help their kids buy a home or already had. They realized if they do not help their kids get into housing in California, they will have to go somewhere else. The other component that Dr. Richard Greene at the Lusk Center talks about is the fact that people are not getting married like they used to. They are not getting married at all or are getting married later. If you look at homeownership and correct for age, ethnicity, and income, it is really marriage that is the bouncing off point for homeownership. It is a very complex situation, but the results are really clear. People are not listing their homes. They could sell it quickly and the prices are great; but the question is where they will go. Leslie heard a story from a realtor up in Pleasanton in Contra Costa County who said they had a client who rented out their big center hall colonial, and they moved to a senior apartment. This was the only thing that made sense for them in order to stay in the area. This is why it is a tough nut to crack.
When you talk to boomers, 64% of the ones they surveyed said they were not moving when they retired. They are going out horizontally and are not going to sell. It is a whole interesting change in the dynamics. They are not moving out of their home, and an even greater percentage will not be moving out of the area. They will be shifting the size of the house they have, but a lot of people stay within a pretty tight distance. It depends on where their children and grandchildren are, but there is definitely a desire to be close enough to visit.
Bruce said when he was young, the new builder was building the starter home. This was really a common thing, and now it is not. This whole thing on new construction is really tough, and there are a lot of issues. There are a lot of complications as far as why listings are so low, and the issue is why supply is so much lower than the demand. We have a “not in my backyard” culture in California, and you had decades of down-zoning. You have CEQA, which is a very necessary and well-intended law that is used to stop everything.
Leslie hears a heart-wrenching story from the LA City controllers. There was a lawsuit against a program where cats were rounded up, sterilized, and released back into their habitat. Under CEQA, they were sued because of the protection of birds. Now these cats are being euthanized. This was when Leslie thought that this had to stop. This law is used, and the defect litigation is also an issue. People go San Francisco, downtown LA, and other areas where you see a lot of new construction. You have to realize that for many years there was not much going on in terms of construction. On the demand side, we are swamping whatever is coming on the market.
Bruce asked about the counties that had not recovered in price, such as Riverside, San Bernardino, Kern, and Sacramento. They are construction-based economies, so a lot of the inventory would not pencil yet, especially if it was a small structure. Leslie said this is changing. She looked at the February data for job growth, and Fresno had the fastest growth in February at 3.7%. Number 2 was the Inland Empire at 3.5%, and number 3 was Modesto at 3.1%. What you will see is more movement of jobs out to areas where housing is affordable. This will put more upward pressure on prices, and you have a more business type of development-friendly environment because there is more land.
We are attracting jobs. When the builder looks at the expense of carving up a lot, and when they have gotten to the level they are at, they will push it as much as they can. The entry-level is really hard. CAR visited a community inside of San Jose, and the prices were from $700 to $900,000, and they were like 3-story town homes. This is like entry-level in an area adjacent to Silicon Valley, so it really makes you re-think what we mean by entry-level and who will be able to afford it.
Bruce said one of the charts showed median income below $50,000 and the median rent was $3 grand in Oakland. Bruce wondered how this was possible, and Leslie said it is likely gentrification. You have people leaving San Francisco and the peninsula and moving just across the Bay to Oakland, which is a beautiful community. They pick up properties that need some work and look affordable compared to the $1.3 million in San Francisco. The neighborhood’s character starts to change, and there is the usual kind of gentrification issues. For people living there and renting, it is $3,000 for the median rent in Oakland. Who can afford this? This is the equivalent to a lot of purchase of real estate. It is all about location. As discussed earlier, people are voting with their feet because they have to do it.
First-time buyers are certainly below their normal participation rate. Bruce asked if it is about affordability or if there is any lingering hesitancy about wanting to own something that was damaged in the last cycle. Leslie does not see any evidence of this. There may be, but the demand so far out shadows it that it is not visible. The data they have done both in their surveys and surveys others have done in this area shows that this is a generation that is very smart and know homeownership is a good bet. The issue all comes down to affordability. Leslie does not see any data that supports the idea that people do not want to own. It is something they want to do, they just do not always have the information to make it happen.
They started surveying generationally because they did hear 3-4 years what Bruce had said about people not wanting to go in because either they or their parents were burned. There is also the idea of mobility the fact of the shared economy and owning not being where they want to be. Leslie works literally ten minutes from downtown Los Angeles, which is in the biggest renaissance in the last 40 years in terms of condo and apartment development. It has a young vibe like she has never seen, so she does not see evidence of this anymore.
Our affordability number right now is at about 31. Historically, this is not low. It varies by region, so if you are in the Bay Area/San Francisco, it is 10%. You have pockets of plenty of affordability, even above their norm. Even Riverside would be above their bottom if you looked at 1989 and 2006 and 2008, they will probably be way higher. When we say we have an affordability problem, the question is whether that is the payment ratio or because we cannot get a yes answer from the lender under the current circumstances.
Leslie thinks it is because we cannot find the home. We are buying the median-priced home, you can afford it, so the question is where it is located. One of the charts Leslie used looks at the mismatch between job growth and units. In LA County from 2010 through 2016, there were 190,000 new jobs and less than 100,000 new units. There is a mismatch between where the jobs are being created and where the housing stock is. The affordability is really a methodological construct when you compare today to other periods. You look at whether it is tighter or looser, but it does not look at the issue of inventory directly and what is available for sale. You cannot really find that median-priced home in the areas where the job growth is strong. This is really the conundrum.
One of things that has changed in this cycle where we have had good price run-up is the conservative nature of the owner. In 2004 and 2005 you had a credit and equity line put on your home, and you might be buying two other houses. This time, that has not happened because we have not borrowed money out. Leslie does hear rumblings about equity loans and how household debt is recovering. She thinks people have short memories, but we are still in that short memory period. She hopes this is true because one of the things people do not talk enough about is the rule of the cash-out refis played out in the disaster we all experienced. She hopes this is something that is not attractive again.
Bruce would not want them to outlaw a cash-out refi or a credit line since you can be entrepreneurial with a credit line. However, you must be smart about it, and a lot of people were not. They cashed out, bought a boat, went to Italy, and left no cushion for a downturn. One of the things they had not talked about that may not be as big an influence at this point is how cash buyers were a dominant player for quite a while. It would have been very difficult to compete if you were an FHA buyer. There is still some of that. Investors are not quite as active as they were a few years ago. China has made it harder to get money out and are really enforcing that $50,000 cap. That has made it a little more competitive for first-time homebuyers. That is very positive for them.
Bruce asked Leslie if there were any surprises from 2016. She said she was surprised that we continue to have such a static market in terms of sales. When people ask her if they are at the peak of the market, they are always asking about price while she is always thinking about the number of transactions. We bottomed in the fall of 2007, and we came roaring back with Inland properties selling for less than replacement cost and first-time and repeat buyer tax credit. If you look at the last five years and consider the rebound and jobs incomes, household formation, and record low rates, Leslie said she thought we would have seen transactions be 20-25% higher than they have been in the past. This is why she spends so much time talking about inventory and supply constraints as well as housing affordability.
Leslie is surprised we are still stuck and with how traumatic the migration data is. The migration data within and going out of California is a housing story. Bruce said that with the charts they have, instead of looking at 400,000 sales we should be looking at 500,000. He thinks this impacts the lack of aggression on price in general since there is not the push that should naturally be there.
Bruce asked Leslie what her feelings are on the overall economy going forward. Bruce said with every chart he looks at, during some point in the next two years we due for a recession. However, he does not know what the direction is for it. Leslie thought this year was the seventh year we were due for one. She kept telling people that in order to have that cycle work, you need to have a much stronger recovery. Unfortunately, we have had a very lackluster recovery, so there is a lot of uncertainty. The Trump administration is looking at a 4% growth rate, while most economists are saying they do not see how he can get there given the demographics of the labor force. It is older and less productive than we had hoped, so there are a lot of unknowns.
The concerns Leslie has are long-term and have to do with jobs. Housing, household income, and household formation really lives upon a foundation of a good job. When you look at the rust belt in Appalachia and see what happened to that area of the country, you look at the jobs here too. Leslie is looking at things like artificial intelligence and robotics. She applauds job creation in any form, but bringing in low-paying jobs back to the United States is not the solution. It is about education and teaching. Leslie thinks every tech company should open an office in Appalachia and teach the kids to code while they are in middle school. They are smart and need to be part of this future in which we are all living. This is one of the biggest uncertainties that Leslie has.
She has faith that there will be other jobs. 30 years ago, no one thought the cell phone industry would look like it is today and be as large as it is. She recommends the book by Berkley professor Enrico Moretti called The New Geography of Jobs. This book explains where jobs grow and why. What has stayed with her is the introduction where he talks about a guy in 1969 who is trying to decide where to move and buy a home to raise his family. The two cities he is looking at, Menlo Park and Visalia, are very comparable. Today, in 2017, you do not understand this. However, in the late 1960s they looked very similar in terms of income, education, school quality, and crime. This is the bouncing off point for his thesis on what happened in Silicon Valley and what we can learn to foster job growth in other parts of the country. To Leslie, it is all about housing; but before this it is about jobs.
Thank you for joining us for the radio show with Leslie Appleton-Young.
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