Our outlook for this year varies dramatically by market and price point. At a high level, there are three major markets on the upswing, one is holding its own, and two are showing signs of slowing.
Markets on the Upswing: Stronger Momentum Heading into the New Year than at This Time Last Year
Major indicators are trending positive. Housing demand is up thanks to increasing job growth (current +40k YOY vs. +31k at this time last year), declining unemployment (current 4.8% vs. 6.0% a year ago), and rising wages (current +2.1%). Demand drivers are once again pushing increasing home sales. After 16 straight months of declining YOY resales through June of this year, YOY resale activity turned positive in July and has been increasing every month since then: July 2015 +3.7% YOY, August +6.6% YOY, September +7.5% YOY, October +8.0% YOY. Rising YOY sales activity and a YOY decline in listings is pushing resale prices up. The Burns Home Value Index™ for resales was up 6.4% in November 2015 YOY compared to a 4.6% increase at the same time a year ago. In the new home market, lack of supply continues to keep total sales down. As of the end of the 3rd quarter of 2015, there were just 79 actively selling new home projects in the entire county, 62% below the average of the last 27 years (206 projects).
A strong rebound in job growth this year (+6.7k YOY as of October vs. +3.8k at the same time last year), declining unemployment (currently at 5.4% vs. 6.4% a year ago), and one of the highest rates of wage growth in Southern California (+2.8% YOY) are driving the demand for housing. Resale activity was up 15% YOY in October, and resale prices were up 5.9% YOY in November compared to 5.2% a year earlier. Lack of supply is holding sales back in the new home market. There are currently only 15 actively selling projects in all of Ventura County compared to a historical average of 71 active projects since 1988.
Inland Empire (Riverside and San Bernardino Counties)
A continued widening of the gap in home prices between the less expensive Inland Empire region (median resale $280k) and the pricier Coastal Southern California Counties (LA: $505k; Orange: $662k; San Diego: $503k) is starting to push more prospective home buyers to the Inland Empire. Lower gas prices are also helping ease the burden of longer commute times and are starting to help reignite some of the “drive to qualify” markets such as Beaumont, Perris, and Hemet. After 22 straight months of declining or flat resale activity from October of 2013 through July of 2015, YOY resales started to rise in August of this year (+2.6% YOY) and have been increasing at a growing rate since: September at +3.8% YOY and October at +4.1% YOY. At the same time, the supply of resale listings has dropped 8.2% YOY. Partly thanks to an increase in the supply of active new home projects compared to a year ago, total new home sales activity has been rising for the last six straight months and is on pace to hit the highest level of sales since 2009 (although still substantially below peak levels). Note: Improving conditions exclude the Coachella Valley.
Holding Its Own: Trending Similarly Heading into the New Year as the Same Time Last Year
Lack of new home supply is holding back overall sales in both the new home and resale markets (the number of resale listings was down 10% YOY in November). This lack of supply is in turn is putting upward pressure on prices and is resulting in the lowest housing affordability ranking of all Southern California Counties. However, strong job growth continues to fuel the demand for housing. Job growth currently stands at +85k YOY compared to +93k at the same time last year. In comparison, only about 22k building permits have been pulled over the last year, for a job growth-to-new housing ratio of 3.9. With continued strong demand but low supply, resale prices are up 6.8% YOY (BHVI), following a 6.9% increase at the same time a year ago. Resale volume is up the last four months after having trended downward for the prior 17 straight months. Like in San Diego and the Inland Empire, resales are rising at an increasing rate and were up 4.8% YOY in October. New home sales are flat, partly due to a lack of supply, but they also have been impacted some by affordability. The recent denial of the Newhall Ranch EIR will further exacerbate new home supply issues in the short term.
Slowing: Fundamentals Not as Strong Heading into the New Year as a Year Ago
The rate of job growth is down (currently +41k YOY vs. +47k a year ago), the number of building permits issued is up slightly (+1% YOY), and new home project counts are up substantially over the past two years (currently 111 active projects vs. just 69 in 2013, although still below the long-term average of 136 active projects). At the same time, new home builders have had to push prices to cover high land costs, and the median new home price in November was up 12.7% YOY ($900k). High prices have impacted affordability levels, and issues in China have caused Chinese buyers to pull back on new home purchases. As a result, despite an increase in the supply of new home projects, new home sales were down almost 21% YOY as of October (latest month available). Slower total sales are resulting in slower project-by-project sales rates and pricing weakness heading into the new year. Some OC projects are reportedly offering as much as $100k in incentives at this time; however, most official incentives remain in the $5k to $30k range. On the other hand, with much lower average price points in the resale market ($662k in October) vs. the new home market ($900k), resale activity has been rising the last few months, and resales in fact resales in October were up 8.4% YOY.
There are three main market segments in the Coachella Valley: primary home buyers (driven by local employment growth) second-home or vacation home buyers (driven by the health of the Southern California housing market and equity in existing homes), and retirees/age-qualified community buyers. The only segment showing any signs of strength at this time is the retiree segment, which is expected to be a growth market over the next decade. The second-home market likely needs Southern California home prices to rise at least another 10% to 15% before equity levels start to reach the point where owners feel comfortable pulling out equity towards a second-home purchase. The primary market was fed in the 2000s by construction and the opening of several Indian casinos, something not happening today. New home sales have been flat at right around 850 to 900 sales per year for the last three years, but the number of active projects has increased from about 35 in 2013 to about 45 in 2014 and about 55 today, resulting in slower project-by-project sales rates and pricing weakness.
John Burns Real Estate Consulting tracks housing market trends in over 60 market areas throughout the nation.