My Take on Real Estate
By DAVID GIRLING
This is the first of a two-part series as we welcome David Girling of Girling Real Estate Investment Group as a new contributing columnist. He’s counting down his Top 10 Economic Factors Affecting Real Estate. Here’s the first edition, with his countdown from 10 to 5.
10. The Trump Effect
President Trump conveys different messages about real estate. Some are optimistic while others are pessimistic and still others fall somewhere in between. Since the election, mortgage rates have climbed anywhere from 0.50 percent to 0.625 percent and I think we can expect that trend to continue. President Trump’s policies on trade, infrastructure, tax rates and immigration will lead to bigger deficits and higher inflation which translates to higher interest rate. And the Federal Reserve is signaling that it will be raising the Fed Funds rate in 2017 as well. Combined with statements that the administration will attempt to dismantle much of the regulatory safeguards (e.g., Dodd-Frank) that have been put in place since the 2007 translates to a great deal of uncertainty associated with the effect a Trump presidency has on Housing. All in all, the news thus far has created a great deal of uncertainty in the markets and the ultimate effect it will have on housing. It will be interesting to see how this plays out in the coming months.
9. Interest Rates
For the past three or four years, mortgage rates have been at historic lows because the Federal Reserve employed a monetary policy that kept rates low (see below). Since the election, rates have climbed but they are still near historical lows. The impact may be positive in the short term because home sales in the short term may increase as a result of buyers wanting to take advantage of today’s rates before mortgage rates climb higher.
8. Housing Inventories
Low housing inventories have added support to home values and they will not improve significantly for some time because:
Some homeowners still have negative equity and cannot sell.
Higher property taxes for someone selling one property and buying another or just downsizing.
Capital gains taxes could be significant.
Some homeowners may be reluctant to give up their low mortgage rates.
New construction is not meeting demand, and homebuilders are underperforming.
A fear of not finding an adequate replacement because of low supply and/or high rents.
Some homeowners affected by the 2007 crisis are unwilling to sell.
7. Housing Affordability
Affordability is certainly one factor about which most economists are concerned. In California, the percentage of home buyers who could afford to purchase a median-priced, existing, single-family home as of the third quarter of 2016 was 31 percent according to the California Association of REALTORS® (CAR) Housing Affordability Index (HAI). The number was even lower for Orange County at 23 percent.
6. U.S. Homeownership Rate
Across the United States, the homeownership rate currently stands at 63.7 percent, peaking at 69.2 percent in 2004, reaching its lowest level of 62.9 percent in the second quarter of 2016. Sadly, California is 49th in homeownership according to CAR.
5. Dow Jones Industrial Average
The low rates created by the Fed’s monetary policy forced investors to look elsewhere for yield, and both real estate and stocks benefitted. However, the increase in rates since the election may see investors look more closely at fixed income investments as an alternative. This may have an impact on real estate values going forward. While real estate prices have leveled off, the Dow Jones Industrial Average continues to soar, and has surpassed 20,000. Unlike stock prices however, not all home price levels have reached 2007 peak levels. And there are some who suggest that both real estate values and equity prices can no longer be supported, and may be overinflated.
In 2008, David Girling formed the Real Estate Investment Group (Girling REIG) with his father, Bing. He serves as a Commissioner for the Newport Beach Harbor Commission and followed in his father’s footsteps serving as President of the Newport Beach Association of Realtors (NBAOR) in 2015 and as a director on the NBAOR Board through 2016.