When they presented the California Association of Realtors 2019 Mid-Year Market Forecast this month, association senior vice president and chief economist Leslie Appleton-Young and deputy chief economist Jordan Levine said that as of July, the U.S. was officially 10 years into its economic recovery period, the longest period of economic expansion on record.
According to the economists, the economy is healthy, with gross domestic product reaching 3.1% in the first quarter of this year. Unemployment dropped to 3.7% in June – the lowest in 55 years – and job growth totaled 1.5%. Consumer confidence has remained elevated. Interest rates are at an all-time low, dipping to 3.75% in June. There is speculation that the U.S. Federal Reserve may lower rates even more.
Given the strength of the labor market and income growth, the economists said the housing market should be stronger. Levine speculated that the federal tax code has removed the incentive for homeownership. Raising the standard deduction and capping the federal deduction for state and local taxes at $10,000 have undermined the motivation to enter the housing market and removed the financial incentives for homeowners to trade up. Although inventory has increased, it is still constrained, so home prices remain at a record high.
Appleton-Young said consumer confidence is still fairly volatile. People are jittery, even with a strong labor market. There is also uncertainty about what the Fed is going to do and the slowing of growth in Europe and China.
Despite the uncertainties and sluggish growth, the economists don’t believe the country is headed for another recession. The lending environment is different today. Consumers have decent balances on credit cards and auto loans.
The California Association of Realtors forecasts a 2.4% GDP by year-end, an unemployment rate of 3.7% and a 2.4% increase in real disposable income. By year-end, the association also projects home sales will dip 4.3%, reaching 385,460, the median price will increase 4% to $593,000 and the 30-year fixed rate interest will total 4%.
Although inventory is low, properties are moving, added Appleton-Young.
“It’s just absolutely critical to price the property correctly, and by that I mean don’t overprice it or you’re going to be following the market down,” she said. “The price strategies that worked in the market in 2017 don’t work in the market in 2019.”
Appleton-Young maintained that “low housing affordability is California’s Achilles’ heel.” State housing affordability is at 32%, compared with the rest of country at 57%.
“If no one can afford to live here, it’s going to be an issue,” she said. “The lack of supply of housing will eventually create a situation where the demand moves somewhere else.”
Levine indicated that more than 100 cities in California are already classified as “majority renter cities.” If things don’t change, he said, it is projected that the entire state of California will become a majority renter state by 2025.