What is Happening in Northern California?

Regional (Sacramento, California) Housing Forecast 2016

October 20, 2016

Speakers:

Michael Neal, Senior Economist, National Association of Home Builders

Dr. Jeffery Michael, Director, Center for Business and Policy Research, University of the Pacific

Dr. Dean Wehrli, Sr. Vice President, John Burns Consulting, Inc.

Sponsored by the Building Industry Association, the target audience for this forum was homebuilders but many from adjacent industries, such as me, were in attendance. This forecast covered a lot of territory and included extensive economic research expressed on both a national and local basis. Also presented were demographics and how changing socioeconomic trends might change housing needs. Speakers even discussed projected mortgage rates into 2018 with some differences of opinion.

First, Michael Neal, Senior Economist at the National Association of Home Builders (NAHB) spoke about housing costs and supply. His biggest concern for the building industry was on the supply side. Home builders in this area have been constrained by labor shortages for several years now which is one reason that we still do not appear to have an oversupply of available homes. At the beginning of the housing recovery, there were still plenty of finished lots left over from the crash for builders to purchase, but those have been soaked up in recent years so the limited or availability of ready to build land will restrict the speed and quantity of new homes which can be built. The final constraint on supply is regulation. Neal indicated that a whopping 24% of the cost of a new home is regulatory! This makes lightly used or recently remodeled homes steep competition for homebuilders since it is frequently more affordable to purchase an older home and add updates than to purchase new. These factors combined have prevented an excess supply which, because of healthy demand, has led to pricing increases. My personal observation is that marketing times for both new and used homes are still short but pricing increases have moderated.

Mr. Neal also discussed the Federal Funds Rate and its impact on mortgage rates going forward. His organization predicts about a 1% increase in the FF rate in both 2017 and 2018 resulting in a FF rate of 2.3% by the end of 2018. He anticipates this would translate to mortgage rate of 4.9% at that time vs. 3.5% now. This was higher than subsequent speakers predicted and Michael clarified that his prediction is contingent on his assumption of further improvement in GDP, employment, and wages.

Dr. Jeffrey Michael works out of Stockton, CA and studies regional economics. His presentation focused on job growth studies for the region and dissected further into Bay Area and Central Valley cities including San Francisco, San Jose, Stockton, Fresno, Bakersfield, East Bay, Sacramento, and others. Job growth since 2007 has been a strong 20.6% in San Francisco which has obviously contributed to steep pricing increases for housing on both the rent and buy side. While “experts” have been predicting a slowdown in this rate of growth for some time, it has been much more gradual than expected. Jobs are still growing, but the pace has slowed; most credited to limited availability of space. So far, this appears to be forming a soft landing rather than a bubble burst in this technology heavy job market. In contrast, the Sacramento area including Placer, Nevada, El Dorado and Yolo Counties has experienced much more gradual job growth. Major industries in this area are government, healthcare, finance, education and hospitality. While a bit more diverse than the Bay Area, these industries are not experiencing the same growth rates and government jobs, while stable, are nearly flat and projected to remain so. Sacramento has finally recovered the pre-recession number of jobs and is predicted to add 12K to 18K jobs annually over the next few years.

Dr. Dean Wehrli of John Burns Consulting is based in Sacramento and has extensive knowledge of the Northern California markets. He had some interesting observations about demographics as well as studies comparing affordability. Wehrli predicted a slower increase in interest rates factoring in global pressures on economic growth and other outside factors. This coupled with wage increases in the tightening job market, should keep housing prices affordable for the near term. He does believe that we could see an end to the current housing cycle near the end of 2018 or early 2019 which is more distant than some other experts have guessed. His demographic studies were interesting, pointing out that women now outpace men in obtaining college degrees and 38% of women earn more than their spouse. Roles have significantly changed over the past couple of decades which should be considered in marketing programs. Perhaps the most valuable insights he offered were analysis of growth and price increases in local neighborhoods. These are his observations: Rocklin, Roseville, and South Placer County in general is expected to continue growing. Good schools and job centers here will support demand and allow for moderate price increases. The Natomas area is close to downtown and has been restricted by moratorium until recently so although building is booming, we should continue to see an increase in both building and prices. The Rancho Cordova area, also convenient to downtown, is maturing but is somewhat plagued by congestion and infrastructure issues. Although these factors will minimize both growth and price increase, the area is affordable and is likely to continue a healthy improvement. The Folsom area has an undersupply of buildable land therefore construction activity will not improve much until the South Folsom area gets started. This undersupply will continue to put an upward pressure on prices at least until building can commence hopefully late next year. The Elk Grove area has been popular with Bay Area migrators and few new projects are planned. Although there will still be some growth, this area is expected to see increased pricing as well. The El Dorado Hills area is meeting current supply demands mainly with the newer Blackstone master plan. This translates to fairly level pricing in the near term.

I enjoyed the opportunity to hear the opinions of these experts alongside some of my financial and construction industry colleagues. While it is easy to form opinions from day to day experiences and anecdotal stories, it was useful to see charts and graphs siting actual statistics. Some information was eye opening and other portions simply validated what I already sensed. I hope you can personally use some of this information to improve your personal situation or your business.   

I'd love to hear your personal thoughts and impressions of the California market.  Please comment below with your city and if you think it is going to be stable, increasing or declining in the coming year?