At the beginning of each year, articles about every business come out predicting what to look forward to in the new year. Real estate is no exception. I have been busy working with clients who want to get a jump on achieving their 2016 real estate goals, so I am a little behind on getting out my Los Angeles real estate predictions for 2016. So with an extra month to gauge the market, here is what I think the next 11 months will see in the Los Angeles housing market.
Prediction #1: Housing prices will stabilize
There will still be continuous growth in prices in the real estate market but many are saying it will be more of a return to normalcy compared to the double digit appreciation some areas have seen in recent years. Home prices in Southern California were up 6.8% in November compared with November 2014, according to CoreLogic. The Southern California numbers are higher than the national increase of 5.3%.
Economists expect further improvement in the housing market, though the predictions are that price increases will slow as fewer families can afford to buy into it — a trend started in 2013. "Affordability is dulling demand," said Leslie Appleton-Young, chief economist for the California Association of Realtors, which projects the state's median home price to increase 3.2% this year, about half the pace of the 6.2% gain in 2015.
Prediction #2: The rise in mortgage rates will not have a big effect in 2016
Basically, as mortgage rates increase the less the buyer can afford, since more of their monthly payment is going toward interest rather than principal. Economists are predicting the rise in interest rates in high-cost markets will result in fewer sales and many areas of Los Angeles are considered high-cost markets. While they say it will cause an impact, I feel it will be minimized as an increase in inventory keeps prices from continuing their drastic increase, thus offsetting the rising cost of a mortgage.
While you should not expect fixed mortgage rates to stay below 4 percent for much longer, a sharp rise is not likely either. Rising mortgage rates will eventually impact the housing market, but we will not see a significant impact in 2016.
Prediction #3: Luxury home sales will have a banner year
I know this prediction is going against the grain of every housing forecast you've read in the last month, but hear me out before dismissing this as pure optimism. First, let's look at high-end sales in a few price ranges during the first month of 2016 compared to January of 2015 (data pulled from the MLS):
For all the predictions of doom for the luxury market in 2016, the high-end market in Los Angeles is off to a healthy start. When combined with a 54% year-over-year 4th quarter jump for the price of a single-family home in Beverly Hills, the exclusive enclaves of Los Angeles are not showing any signs of slowing down from the record growth seen in the last few years.
Another reason for optimism in the luxury real estate sector is a new regulation from the Treasury Department that will have a six-month trial run in New York and Miami. The new initiative will require title companies to report the true identity of luxury home cash buyers hidden behind shell companies and LLCs. In Miami, homes in excess of $1 million will trigger the regulation, while the threshold in New York will be $3 million. The initiative will begin March 1, 2016 and run through August 27, 2016.
The regulation is, in part, the result of a New York Times investigation into the shell companies buying up luxury real estate in the United States. In its investigation, The Times found nearly half of homes nationwide worth at least $5 million are purchased using shell companies. In Manhattan and Los Angeles, the figure is higher.
While the regulation is only in effect for 6 months at this time, I expect the time frame (and geographic reach) to eventually expand. Los Angeles is already a destination for luxury home investors (both domestic and foreign) looking for a stable place to park their money. Los Angeles competes with New York, Miami, and San Francisco when it comes to ultra-high end sales to foreigners; with New York and Miami under the new regulation, look for investments to be diverted to Los Angeles or San Francisco when the buyer wishes to remain anonymous.
Prediction #4: Rents will increase
The Census Bureau released data last week showing the rental vacancy rate in Los Angeles was 2.7% in the last quarter of 2015, compared to 3.8% for the first quarter of the year. For comparison, the vacancy rate in 2010 was 6%. Greater Los Angeles has one of the tightest rental markets in the country with only three other major metropolitan areas having lower vacancy rates. Nationally, the vacancy rate is 7%.
While developers are attempting to ramp up construction of apartments, they still aren't meeting demand for rental units. The problem is exasberated further by neighborhood groups fighting the development and density needed to meet demand. Rents will continue to rise strongly.
More and more reports are coming out about the rental affordability crisis across the nation. More than 85% of U.S. markets have rents that exceed 30% of the income of renting households. In Los Angeles, 58.5% of renters exceed 30% of their income toward their rent. Without a correction in the gap between rental prices and employment wages, future buyers will not be able to afford to buy as they will put everything towards rent rather than having some funds to put towards saving for a down-payment. For example, 94% of renters under the age of 35 say they want to own a home, but 53% of all renters say they cannot afford to purchase a home (stats provided by National Association of Realtors).
Prediction #5: 2016 will be a great year for sellers to act
Many economists are saying 2016 is going to be a great year to sell across the state and the nation. Here in Los Angeles will be no exception. Economists are assuming Gen Xers and Baby Boomers will become a dominate force in both selling real estate and buying real estate as more financially stable Gen Xers will want to upgrade and Baby Boomers will want to downsize. With both segments selling, the result will be an increase of inventory for millennials to become first-time home buyers of starter homes.
Those first-time buyers will be aided as Fannie Mae and Freddie Mac working toward lowering the high credit bar potential buyers struggled to meet in recent years. By historical standards, borrowers still must achieve high credit score standards in order to secure a loan, but those requirements have finally begun to normalize.
Any increase in inventory will help stabilize the market and create opportunities for sellers who want to move but have nowhere to go. Additional inventory is needed as investors remain active in the market; According to a recent survey of investors released by Forbes, a majority of respondents stated they would likely increase their real estate investments in 2016.
In Los Angeles, if you were waiting, now is the time to sell. With rents increasing, buyers will have to put more towards rent and less towards saving for a down-payment. The sooner renters can turn into home buyers the better it will be for sellers. With a predicted invigoration of new buyers to the market, sellers will see more competition and a good climate to unload. Prices will start to level off compared to the exponential gains of recent years, so waiting for even more profits will require a much longer wait on the part of sellers. Sellers waiting for increased profits will be disappointed as rising interest rates reduce the amount of home buyers can afford.
Will any of this happen? No one is quite sure, but many people smarter than I say it will. What do you predict for the Los Angeles real estate market in 2016? Leave your predictions in the comments below and check back in with me at the end of the year to see how you and I both did.
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