The recession is officially over. It's been strong for a couple of years now and there is no crash in sight. Ignore the naysayers - the market keeps getting stronger and stronger. Sellers? Rejoice. Buyers? Read this.
This year, prices are nominally the highest they've ever been. Median and average home prices have officially broken records across the board. For those of us who remember, it’s been a long time coming.
Remembering Where We Came From
The recession was devastating, especially in Los Angeles. People had taken strong home prices granted for decades. People lost so much equity during the crash that they were “underwater” on their loan. This meant owing much more than it was worth.
At the time, many naive home buyers did not understand the risks associated with purchasing a home. Loose financing laws allowed people to purchase homes with essentially (or in many cases, actually) zero dollars down. This was very enticing, bringing demand for home loans in droves.
As prices dropped and people lost equity, it became harder to make their home payments.
This was partly because so many people had been so confident in our long history of strong real estate. Home purchases with little to no margin for failure had become commonplace for some time.
2017: Stronger Than Analysts Expected
By the end of 2017, prices had risen to a median of “$643,783, around 7% percent rise from a year ago.” (1) This beat the former record, a median home price of $671,500 in 2007 (not adjusted for inflation).Growth is averaging around 5% per year. Analysts refer to this as the “goldilocks zone”. Essentially, growth is strong, but not unsustainable. It is due to high demand and low inventory, as opposed to shady lending practices leading up to the recession.
With inventory in 2017 at a 13-year low, prices crept up. Combined with the Feds keeping interest rates astonishingly low for another whole year (3.75%), home demand has been able to grow healthily.
2018: Low Inventory, High Demand. Again.
It's not just the average homeowner that is doing well, but all individual neighborhoods are very strong in their own right.
Arleta and Pacoima, which had a hard time recovering, are now experiencing new developments and remodels. Both areas are quickly gentrifying, and local businesses with jobs to offer are thriving. These two factors have a symbiotic relationship that we predict will result in a great place to buy and live in 2018.
Areas like these that, in the past, were not seen as strong investments, are now gentrifying. These are great areas for those looking for a fixer-upper or something on the cheaper end.
2017 was expected to be a good year by most analysts at this time last year, but it turned out to be even stronger. This year, analysts are expecting that momentum to continue through 2018.
The growth will definitely not be as strong this year as it was in 2017, but strong growth could continue into 2019.
Competition for Buyers
With prices going through the roof, some may start to talk about how this could be difficult to buyers. So far, we have started to see this with high-end houses, which are getting less demand. “Lower-quartile prices” continue to be highly sought after.
2018 in the Valley is certainly going to be referred to as a “seller’s market” again. While prices for buyers are high, there are some good things for them to look forward to. High prices means that sellers are more likely to sell, indicating the potential for more inventory. With the market looking to stay healthy, we predict more inventory in 2018.
A New Tax Plan Means New Incentives to Buy or Sell
The main reason expensive homes will get less demand is because of Donald Trump’s new tax law. It takes away some of the incentive to higher-end home buyers. Sellers should be prepared to wait some time on the market with a more expensive home.
They have decreased the mortgage interest deduction, which lowers taxable income by the amount of mortgage interest that they pay, up to a certain point - which used to be $1 million. “Beginning in 2018, the [mortgage interest] deduction is scaled back to interest on debt up to $750,000, instead of $1 million, for people who buy homes on or after Dec. 15, 2017.” (2) This will certainly affect the market for houses up to $750,000.
Once again though, this is not a massive change. No one is going to give up their dream home over a small change in tax write-off.
“Beginning in 2018, the deduction is limited to a total of $10,000 for the cost of property taxes, and state and local income taxes or sales taxes.” (2) You used to be able to reduce your taxable income by whatever you paid in property tax that year. Now, that reduction has been capped at $10,000.
The next thing that they changed was the home equity deduction. “The former tax law added a deduction for interest paid on home equity debt “for reasons other than to buy, build, or substantially improve your home.” So, for example, if you borrowed from a home equity line of credit to pay tuition, the interest you paid was tax-deductible. Starting in 2018, the deduction is eliminated for interest paid on home equity debt.
Ultimately, it’s not too big of a difference. For people who want a good investment, they will probably try to stay under that new marker. The change to property tax reduction may also slow demand for higher-priced homes.
Up through 2017, you could deduct interest on up to $100,000 of home equity debt ($50,000 if married, but filing separately). This has been entirely eliminated. Previous legislation removed deductions on moving expenses.
It is predicted that this will affect the San Fernando Valley, but not remarkably. People come here looking for a lifestyle, not just a good deal. Our ever-increasing prices make these tax changes look miniscule when all prices are so high already.
While it seems like these changes may slow down demand, the laws weren’t meant to hit the market too drastically. It will not have too much of an effect and for most low-price home buyers, they won’t even know its existence.
Also, by slightly slowing the demand, there is more likely to be continuous years of growth, instead of a rapid climb that could lead to a bubble.
Low Inventory Means Higher Prices
Many analysts are predicting that the housing market will have lower inventory. In general, this just goes along with the prediction of a strong demand that will drive up prices. People are reluctant to put houses on the market for a variety of reasons.
Many people at this point will be forced to continue renting, which means less buyers will flood into the market. With the great increase in prices in 2017, many renters are probably still figuring out their budget status.
How Will This Affect Our Economy?
Once they make that change and get settled, people tend to wait until a good investment shows up. Many experts say that if professionals are not able to find affordable housing, they may decide to move elsewhere. This will hurt local businesses as well as other support industries that serve professionals.
Los Angeles has such a strong pool of talent to draw on, that this is not anything to think of in predicting 2018. As the year plays out, it will be something that people will have to consider when deciding where to buy. In general, these are all gradual long-term effects, but we feel it would be incomplete to only say that lower inventory is good for sellers.
Cryptocurrency and Blockchain: Future of Transactions
Introduction of cryptocurrency technologies will come into play more in 2018 than ever before. The main effect that this technology will have is increased transparency. This is less of an issue today than in the past, but with so many middlemen that can come into play with real estate, it still makes a difference.
It will certainly lower operating costs for financial institutions that are handling the large amounts of money, like banks and credit unions. It will also make the job of the escrow company easier. Eventually, these new technologies could actually eliminate banks and other financial institutions.
By being so trustworthy, yet also cost-effective to use, it could lead to title insurance no longer being necessary. It is not likely to be eliminated by the end of the year, but we will be much closer.
Costs will likely be affected by this by the end of the year, but not greatly. It will also help research into market patterns which will in turn make the industry more efficient overall.
The strong accuracy of the information will lead to much lower costs of doing the research. This will make that information much more accessible to people. Having open access to information will make it easier for institutions to be trusted.
It will also speed up the time of these transactions and make them much less risky. People will be able to ask for simple proof that money is in the right place or that funds even exist. These effects will all help the industry in a positive way. Some of the most affected by this will be people who are coming from far away, by decreasing the costs and hassles of moving.
It will also help investors with large portfolios by eliminating a lot of extra work. They will no longer require as much money for costs unrelated to the value of the home itself. Real Estate as an industry will be much more focused on the buying and selling of houses and not on other associated services.
The lowering of these costs within real estate will allow people much more access to the industry. Easier access to funding in general and lower operating costs will drive this trend.
Mortgage Rates - Still Low
Mortgage rates have gone up, but they are still barely above 4%. (EDIT: now in the mid 4’s). This will make it easy for most people who have decent credit to get financed. Interest rates are predicted to increase over the year, settling in the high 4’s. With that in mind, it is actually driving many home buyers into the market to take advantage before the rates go up.
Low sales volume may encourage buyers to wait for better deals.
In costlier areas, many younger people will likely opt to rent as opposed to buy. This happens a lot in areas like Woodland Hills where there is a great job market but not much low cost housing. With that said, rent prices will be high as well, which is good for people who want to buy a second home as an investment. This is partly because of Donald trump’s new tax law, which makes it more expensive to own a home in high-priced areas and areas with high state and local taxes.
California is known as having especially high taxes, so this will noticeably affect Southern California. This is because with home prices already being high, California will notice the effects much quicker.
Millennials Joining the Market
Millennials have had a somewhat different experience with housing than previous generations. They have been known as a generation that begins buying later. At this point, this trend has turned around completely. Millennials are actually more likely to own a home than other generations were at the same age.
They are only buying houses that are in the lowest price quartile (The lowest 25% of of prices). This is mainly for the reason that the economy was slower to recover for them. Even Millenials who have a lot of money may be skeptical after growing up during the housing crash. Some of this anxiety may also come from being first-time home buyers.
It is also becoming more a part of the millennial culture to be minimal. This is partly for the aesthetic, but it is also stems from other desires.
The first of these is to not feel tied down with high bills. Millennials want to travel and vacation more than previous generations. To do so, the logical sacrifice has been to be cheaper about where they stay when you are not on vacation.
The other desire is to be more kind to the environment. They do this mainly by having a lower physical footprint and less utilities being used (Often times called your environmental footprint or, more specifically your carbon footprint).
Millennials have actually helped to drive a rapidly-growing movement in real estate called tiny houses. These micro-sized homes are guaranteed to be more common in 2018, the San Fernando Valley being no exception.
Although the Valley has long been characterized as having large lots, overcrowding is beginning to become an issue. Don't be surprised to see the sprawling mid-century homes replaced by tighter more efficient tiny houses.
A tiny house is technically just a really small house. There are many qualities that have been come to be associated with tiny houses. These include foldaway furniture/appliances, portability by trailer, renewable resources, and self sufficiency.
2018 is going to be a very interesting year for real estate, but with a fairly predictable buyer and seller market. The market will be great for sellers especially those with more affordable listings.
Buyers will likely have to make several offers to get a home, and they will not be able to haggle very much. Nonetheless, there aren’t shady lending practices this time around. Interest rates are still historically low. And thankfully, at least buyers aren’t paying Northern California prices yet.
For more information from the SFV two most dedicated Realtors, reach out to us at 818.390.3265.