Looking Ahead in 2018

Posted by Mike Michalski on Wednesday, February 7th, 2018.

-- It's tough to make predictions, especially about the future.   
    Yogi Berra

What’s in store for the housing market in 2018?  Here are some of our thoughts (and some expert opinions) on the subject.

Rising Interest Rates

As you’ve probably surmised from the recent gyrations in the stock market, interest rates are on the rise and this is causing some consternation with investors.

“Rates keep climbing,” said Freddie Mac’s deputy chief economist Len Kiefer. “The 10-year Treasury yield reached its highest point since 2014 (2.84% on February 2nd, the day the stock market - which doesn’t like higher rates - dropped 666 points), reflecting expectations of broad-based economic growth.  Mortgage rates, in turn, followed the surge in Treasury yields.”

In fact, 30-year fixed-rate mortgages have climbed back over 4%  and look to be headed toward 5%, a historically low number but high by recent standards.  In fact, locally - as we were writing this article - the jumbo 30-year home loan rate had moved up to around 4.4%.

Side note:  A panel of more than 100 experts surveyed by Zillow last year predicted that rates would rise, on average, to 4.5% by the end of 2018 (but, as you can see, we’re almost there now).

The strong economy, coupled with tax reform, is partly to blame.  Says Aaron Terrazas, a Zillow economist, “Each new wave of economic data points to a tight labor market and steady GDP growth.  These rosy fundamentals, combined with the larger federal borrowing as a result of tax reform, are putting upward pressure on mortgage rates.”

Housing Inventory

Nationally, inventory remains tight, as can be seen from the graph below.  This is the lowest inventory in decades, which is also reflected in the months supply of available existing homes, currently just 3.2 months (ie, without new inventory, the existing stock of homes would be completely depleted after a little over three months).

According to Matthew Gardner, an economist at Windermere Real Estate, "We continue to be stuck in a ‘chicken-and-egg’ situation, whereby would-be sellers know they will likely have no problem selling their existing home, but they will not list until they have found somewhere to buy, and if they can’t find somewhere to buy, they won’t list.”

Locally, the available residential real estate for sale is also at very low levels.  As we went to print, the inventory of single family homes, condos and townhomes stood at 54 in Manhattan Beach and 41 in Hermosa Beach. 

Of course, when the market turned after the Great Recession, we saw inventory shrink to below 30 units in Manhattan Beach at the beginning of 2014 while Hermosa saw a multi-year low of 22 homes at the beginning of 2015.   Still, historically-speaking, the current figures are low.

Will inventory increase as we get further into 2018?  Seasonal factors will come into play, with the post-Super Bowl selling season absolutely certain to bring an influx of new inventory.  And there are a number of new home projects either on the market or slated to hit the market shortly. 

But with the largest source of inventory being existing homes and with existing homeowners increasingly feeling constrained by the lack of inventory to stay put, it would seem that, unless demand tails off, available inventory will continue to be a thorn in the side of brokers, agents, homebuyers and homeowners who want to trade up (or down). 

Demand

The confluence of moderately higher mortgage rates and the enactment of new tax legislation that threatens to chip away at property values (particularly with the new $10,000 limit on the deductibility of state and local taxes, including property taxes) could dampen demand for homes in 2018.

We are also coming off a year that saw existing home sales hit an 11-year high and prices rise to their highest level ever in many areas of the country (and certainly locally here in the South Bay). 

So high prices may also restrain demand.  As David Blitzer with S&P Dow Jones Indices noted, “Since home prices are rising faster than wages, salaries and inflation, some areas could see potential home buyers compelled to look at renting.”  He cited the West Coast cities as being particularly susceptible on this score. 

Appreciation

So, here in the beach cities, which will win out - the tight housing supply that will have the effect of pushing home prices higher or the demand headwinds that will have the opposite effect?

We believe that, after a year that saw double digit gains in the townhome and condo market across the board (Manhattan, Hermosa and Redondo) as well as solid gains in the single family home segment, we’ll see more appreciation this year as the supply issue, coupled with strong consumer confidence, is likely to take precedence.  However, we think the gains this year will be more muted - in the mid-to-low single digits.

 

This entry was posted under Market Conditions, and South Bay Real Estate News.