2015…better than we think?

For 15 years I have started the New Year with a review of the previous year and some trends I am noticing that will affect the year ahead in Real Estate. Before I write to you, I read and study a lot of information before summarizing what I think we may see. It always strikes me how easy it is to argue either way. I’ll skip to the good part. I expect 2015 to be better than a lot of experts think, and even better than I would have thought 4 or 5 months ago – and it isn’t just because of low oil prices and interest rates staying at rock bottom.

First though, a synopsis of 2014 and why the Wall Street Journal described housing as “the biggest disappointment of the economy in 2014”. There were a lot of expectations for 2014, and in many ways it wasn’t as good as expected. First, transactions were down about 10% from 2013. This is true for Santa Clarita and California as a whole. Many would be sellers had to reduce their prices to sell, or gave up entirely. Homes took much longer to sell, painful for sellers and agents alike. Prices didn’t rise the way some sellers hoped. Low interest rates failed to attract the first time buyer to the market. Candidly, of these, only the lack of the first time buyer concerns me. Transactions were down because foreclosures are almost back to pre 2005 levels – that’s a good thing. If you want price stability, or appreciation, foreclosures are the enemy. Sellers having trouble selling had to do with confusion about “real” value (honestly, Zillow is rarely a proper estimate for your home’s true value) and simply not understanding that this market still does not have enough real buyers in many price points to justify asking continued higher prices, UNLESS it is of superior condition or location. The homes that didn’t sell in 2014 weren’t.

The lack of the first time buyer is worth our attention, though, especially in Santa Clarita where this buyer has always driven multiple transactions for people wanting to move up or out. Dubbed the “millennial,” this buyer is 25-34 years old and less than 40% of them own a home. Tellingly, over 90% of them WANT to own a home. Paying increasingly high rents (predicted to go up another 4% this year), or living with mom and dad has lost its glamour. The problem is, most can’t afford today’s prices, even at the lowest interest rates in our history. Because my children are entering this demographic, I am keenly aware that it isn’t just student loan debt or lack of a proper down payment, it’s affordability keeping them out. Consider, in 1997 the median home in Santa Clarita cost about $240,000. Today it is close to $500,000. Further, though the cost of a loan is much less (it better be!), incomes are still actually below what they were in 1997 in relative terms. So homes cost twice as much with not quite as much income to afford them. That is why you are reading about Obama reducing the cost of FHA loans and new products like 3% down low-cost loans being approved by Fannie and Freddie – we need them. And I have no doubt this will stimulate the condo market in 2015. Lower cost means more purchasing power, means more buyers, and means strength in that market. Affordability is still a concern, but strength in the lower ranges where first time buyers start can stimulate the middle and higher price points of our valley. Even if it is just a small percentage of them able to now buy.

So why optimism? Let’s start with something that isn’t always easily quantified – confidence. The news is all about how the economy is improving and consumer confidence being up; though this doesn’t mean everyone can or will buy a house, the psychological impact is important. Buyers want to know that their purchase will retain or improve its value. I can tell you just from answering the phone, buyers have this confidence. Further, they seem to have more urgency than in 2014 – they want to buy IF they can find the right thing before prices or interest rates go up. Also, though 2014 didn’t set the world on fire in terms of volume or price, it did signal to everyone the end of the distressed market and clear stability with pricing. Buyers don’t worry about that anymore. Further, if people need confidence to get into the housing market, we have that with an all time high in the Dow (hello fatter 401k’s), and unemployment at its lowest levels in 6 years. Employers are saying that incomes will rise in 2015. In my 25 years of selling homes, nothing changes a market-up or down-like job confidence and income.

Next, as some of you know, low interest rates are key to affordability and stimulating the buyer pool. For years after the financial meltdown the federal government pumped money into a bond buying program to keep rates artificially low. Many of us were concerned for what would happen when it finally went away. Well this happened in 2014…and rates went down! There are many reasons for this, but nothing points to interest rates going up in the short-term, especially if the US economy leads the world, as it does currently. Last, inventory started going up in 2014….and stopped. Traditionally, higher inventory means flatter prices but I can tell you there are plenty of price points and neighborhoods in which we don’t have enough for sale and demand is there. There are only 527 homes for sale in Santa Clarita and if we can get a few hundred more good things are certainly possible. Those sellers that listed quality properties in the last 4 months of 2014 experienced some of the strongest sales in years in Southern Oaks, Westridge and Sand Canyon. Nothing crazy, but the beginning of what may be possible in 2015. Currently we don’t have enough inventory for the buyers ready to purchase! In the over 1 million price point, there are currently 28 homes for sale, half what it was a year ago. Simply stated, high quality homes are ready to get back to values that will cause owners to sell if properly staged and marketed.

Finally, Santa Clarita as a whole will continue to attract buyers from outside the area and people who want to continue to live here. Once again, we are named one of the safest cities in the US. Tax revenues are up – filming alone was up 31% in 2014, with more to come. Expect the expansion of the medical and high-tech industries to continue in 2015 and beyond. New construction is drawing attention again, stimulating activity and putting new listings on the market from move-up sellers. In fact, if all of these trends continue and people that have wanted to move finally put their homes on the market, it wouldn’t surprise me to see both the number of transactions and prices go up across the board in 2015.

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