The Fed: No more rate increases in 2019

After its March meeting, the Federal Reserve decided to leave short term interest rates unchanged and announced that no changes are likely for the rest of the year. This is after raising rates for five successive quarters dating back to late 2017.

Analysts noted that it is possible that interest rates might actually be lowered at some point this year.

Federal Reserve Chairman Powell said that the economy is “in a good place” although he mentioned that it is slowing compared to previous years and is likely to slow even further in 2020.

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The recovery is far from complete

With the booming real estate markets in the Bay Area, particularly San Francisco and San Jose, it’s easy to overlook the fact that nationwide, areas that experienced the highest rate of foreclosure during the previous recession have still not fully recovered. In fact, across the largest 35 metro areas, only 39 percent of homes in sections with the most foreclosures have fully recovered.

Overall, 21 of the largest 35 metro areas have recovered their pre-recession peak median home values. Nationwide, median home values are approximately 9.8 percent above what they were at the bubble’s peak. Yet, many economists are concerned that a significant number of homes will not recapture their pre-recession value before the next downturn eventually comes.

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Economic forecast: Good news

A recent talk by Lawrence Yun at the Realtors Conference & Expo highlighted the need for new housing inventory and expressed confidence that the real estate market would remain strong. He predicted that around 6 million home sales by the end of 2018 and slightly more in the next few years.

Moreover, home prices will continue to increase but at a modest rate: 4.7 percent this year, 2.1 percent in 2019 and 2.7 percent in 2020.

Yun saw no signs of a housing bubble as the overall economy is strong, the quality of mortgages remains high and there is no danger of overbuilding as in 2008.

The one caveat is the risk of a full-scale trade war which would hurt economic growth and lead to higher interest rates which could move the economy closer to a recession.

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The changing demographics of homeownership

The days it seems as if everything is changing when it comes to homeownership. According to a recent study by the Stanford Center on Longevity, millennials are waiting until 30 or so to get married. This means they are having families later and buying a home later.

Currently, the homeownership rate at age 30 is approximately 36 percent whereas 49 percent of baby boomers had purchased a home by age 30.

Of course, the reasons are many. Young adults are now saddled with an average of $30,000 in student debt, housing prices continue to rise and, although the economy remains strong, wages are not commensurate with home appreciation.

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Good news on unemployment; wages not so much…

As the unemployment dropped to its lowest rate since 1969 – 3.7 percent – wages only increased 0.2 percent after inflation. This is not considered the norm as when the jobless rate reaches 4 percent – considered full employment – real wages generally climb faster than inflation.

One explanation is that the unemployment rate only accounts for those actively looking for work; it does not include those “discouraged workers.” When looked at in this light the percentage of the population ages 25 to 64 that is working is still lower than it was in 2007 and considerably lower than in 2000.

One ramification of this dichotomy is that while consumer spending is increasing at a fast pace, incomes are not, forcing consumers to borrow more and save less.

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Inflation, Wages & Prices

The current state of the residential real estate market is marked by three factors: inflation, wages, and the price of homes. Currently inflation is rising at 2.9% (U.S. Labor Department); wage growth is up 3.2% (Federal Reserve Bank); and home prices are up 6.9% (S&P CoreLogic Case – Shiller). So while inflation and wages are increasing at approximately the same right, home prices are rising over two times as fast. This means, of course, that prices are continually pushing homes out of reach or more and more potential homebuyers.

Ideally, supply and demand will come more into balance. While homes will still be out of reach for many, hopefully wage growth and home prices will run closer to parallel. Analysts will also continue to be concerned about inflation which will effect the amount of income available for home purchases.

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Top Quality of Life? Not California, Not Even Close

Believe it or not, a new report published in the US News & World Report states that California has the worst quality of life in the nation!

Taking into account everything from the cost of living to the quality of drinking water to air quality and the total toxic chemical pollution to community engagement and social support, the op states included Mississippi, Wisconsin and Minnesota.

Overall, North Dakota was ranked number one for Quality of Life.

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Tax Reform Will Hurt California Housing Markets

Although the final bill has yet to be approved, the proposed Tax Reform bill looks to have severely detrimental effects on the California housing markets:

  • Deduction of state and local taxes to be capped at $10,000 (including property taxes)> Currently, Californians average deductions of $16,000.
  • Mortgage-interest deduction to be capped at $750,000. Currently the cap is at $1 million.
  • New buyers would love approximately $25,000 in the first year of buying a home priced at $1.2 million. The bill hurts new homebuyers more severely than existing homeowners.
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Job Gains Continue

November, 2017 was the 86th straight month of job growth with 228,000 positions added and unemployment remaining at 4.1 percent. The manufacturing and health care sectors lead the gains while the information sector – including broadcasting, telecommunications, motion pictures, sound recording, and publishing lost jobs, continuing the trend for the past year.

While employment rains strong, wage growth was lower than expectations although many analysts do anticipate an acceleration of wage growth during the coming year.

Finally, the value of household real estate is now $24.2 trillion, a higher mark than even the bubble peak of 2006.

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Bay Area Cities Recession-Recovered

Rising home prices along with rising incomes in the Bay Area are key factors as a number of area cities have made a strong recovery from the recession a decade ago.

According to an analysis by SmartAsset, Oakland is the country’s third “most-recovered” city from the downturn. Meanwhile, Fremont placed number 6 while San Jose ranks number 9.

San Francisco didn’t make the top ten but it’s 44.7 percent income gain since 2010 is the most of any city.

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