North Bay supply of new housing not keeping up with demand, economist says

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Sales of existing single-family homes in California had a strong bounce back in February, with sales of 422,910 units (up 1.1 percent year to date year to date and up 5.4 percent year to year).

But sales declined in the lower priced segments of the market among homes up to $199,000 (down 23 percent), $200,000 to $299,000 (down 8.5 percent) and for homes from $300,000 to $399,000 (down 7 percent). Sales of higher priced homes increased in a range from up 3.5 percent for homes selling for between $400,000 to $499,000, up to 31.1 percent for homes over $2 million, according to Oscar Wei, senior economist with the California Association of Realtors. He presented his findings at the April 4 meeting of the Sonoma County Alliance.

Wei noted that a major negative on the supply side is the fact that new housing is not keeping pace with demand. In California, some 180,000 new housing units are needed each year. In 2017, only 112,886 units were built statewide and in 2018 it is estimated that only 121,320 units will be built. The 60,000-unit housing deficit is split almost 50/50 between single family and multifamily units.

The more underbuilding continues, the higher the price growth. That’s the conclusion of analysis by the state Employment Development Department, the state Realtors group and the Construction Industry Research Board. It focused on new housing permits, new jobs and existing median prices.

The real estate association found that state median prices continued to show strong growth in February 2018 to a high of $522,440 (down 1 percent month to month and up 8.8 percent year to year).

Wei said buyers now have more “skin” in the game. In 2017, 42.9 percent of buyers had 20 percent or more for a down payment, almost on par with the 43.2 percent in 2006, but down from 54.4 percent in 2012. The median down payment (as a percent of the price) was 17.6 percent last year, with only 6 percent of buyers offering zero down. Some 21.5 percent were cash buyers. And only 3.9 percent of buyers had second mortgages — up from 1.8 percent in 2012, but below the 43.4 percent in 2006. However, the number of buyers with adjustable-rate mortgages (ARM) increased from 3.5 percent in 2012 to 5.1 percent in 2017.

With monthly payments more affordable, Wei said there is less likelihood of default with the average 30-year mortgage rate at 4 percent in 2017 compared with 6.4 percent in 2006. Similarly, the median home price for existing single-family homes has also gone down from $556,430 in 2006 to $525,000 in 2017.

Median household income for homebuyers is up to $120,000 from $100,000 13 years ago, and monthly mortgage payments (on 1st mortgage) were down to $1,924 last year compared to $2,500 in 2006. Taken together, these indicators have moved the housing affordability index (HAI) from 12 percent in 2006 to 28 percent in 2017 after a sharp increase in 2012 (when housing affordability in across the U.S. peaked in Q1 2012 at 56 percent). The index shows the percentage of households that can afford to buy a median-priced home.

In Northern California, as of the fourth quarter of 2017, the percentage of those able to purchase a median-priced home was as follows in the following counties: Solano 44 percent; Mendocino 28 percent; Napa 25 percent; Sonoma 23 percent, and Marin 18 percent.

When mortgage interest rates increase, monthly mortgage payments also increase, along with the minimum qualifying income to afford a median priced home in California ($550,990) with a 20 percent down payment. At an interest rate of 4 percent, monthly payments average $2,104. At 6 percent, the monthly mortgage payment averages $2,786. In addition, at 4 percent interest, minimum qualifying income is $109,522 and at 6 percent it is $131,056, as examples.

In Sonoma County, (with a fourth-quarter 2017 median price of $655,000 with a 20 percent down payment), a 4 percent mortgage interest rate would require a monthly payment of $2,502, and at 6 percent the payment would be $3,142. At 4 percent, minimum qualifying income is $130,196 and at 6 percent it is $155,796.

With rising home prices, the home ownership percentage rate has dropped to 63.5 percent across the U.S. and to 53.2 percent in California (2016) — leading to a home ownership gap between U.S. residents as a whole and those in California, according to the U.S. Census Bureau, Housing Vacancy Survey.

Wei said if home ownership continues to deteriorate at a fast pace, ownership rates will follow the average decline rate of the last 10 years (2007-2016), decreasing on a year-over-year basis by slightly over 1 percent of the prior year’s rate. If, however, it deteriorates at a slow rate, the home ownership rate would most likely follow the average decline rate of the last five years (2012-2016), decreasing on a year-over-year basis by 0.5 percent of the prior year’s rate.

The October 2017 wildfires burned 245,000 acres in counties affected (Lake, Napa, Sonoma, Mendocino, Butte and Solano). Some 8,900 homes and other buildings were destroyed displacing 100,000 people. The death toll reached 44.

In the North Bay, homes sales activities were expected to drop in fire-ravaged areas, due to a supply shortage and potential buyers being discouraged. Sales dropped 24.5 percent year to year in Napa in October 2017 and 7.4 percent year to year in Sonoma. But sales increased 4.9 percent year to year in Napa and 13.1 percent year to year in Sonoma since then.

Home prices remained on an upward trend. Napa median price increased an average of 7.2 percent in the last four months, and Sonoma’s median price increased an average of 14.6 percent year to year in the same time frame. In Santa Rosa, empty-lot listings jumped 235 percent in March 2018, up from 69 in the same period the year before. In Napa County, empty-lot listings have risen 6.9 percent.

The housing supply is lower, with the number of active listings dropping an average of 6 percent year to year and an average of 9 percent year to year in the last four months in Napa and Sonoma Counties respectively.

In the long run, however, Wei believes that rebuilt homes in burned areas will gradually increase supply and could raise home prices in these neighborhoods, since these homes will be newer and improved compared with previous homes. This means that the cost of home ownership in the immediate affected areas could be higher, as homeowner’s insurance premiums may increase because of the catastrophe.

In the short term, average rental rates will pick up as displaced homeowners seek temporary shelter while their homes are being repaired — or rebuilt — pushing up demand for rental properties.

Statistics show that sales of existing single-family homes have been rising since late 2017. For example, in Sonoma County in February 2018, there were sales of 239 units, up up 9.3 percent year to date and up 3.9 percent year to year. The average year to year percentage change from November 2017 to February 2018 was 12.6 percent — while last October’s year to year percentage change was down 7.4 percent, compared to the average year-to-year percentage change from January 2017 to September 2017 was down 2.5 percent.

At the same time, Sonoma County’s median home price in February 2018 was $689,000, up 15.1 percent year to year, as the supply inventory of homes remained below the long-run average in recent months.

Prior to the fires, the long-run inventory average was eight months. Historically, the low supply mark was set in December 2003 at 1.2 months and the high inventory level of 27.9 months was recorded in February 1991. In contrast, within Sonoma County, the median time that homes were on the market as of February was 33 days.

The following are snapshots of real estate sales activity in three Sonoma County cities based on the latest data, from March.

SANTA ROSA

Sales of single-family homes in Santa Rosa in March 2018 included 142 units, up 4.8 percent year to date, and up 2.9 percent year to year. The median price of these homes that month was $665,500, up 5.6 percent Month to Month and up 15.7 percent year to year, according to Clarus Market Metrics.

For-sale properties in March included 355 units, down 12.1 percent for 2018 year to date, and down 10.6 percent year to year. For Sale properties represent the overall supply that exists throughout the entire month, including only listings that appear as “active” at any point in time during the month.

PETALUMA

Sales of single-family homes in Petaluma in March included 35 units, down 35.5 percent for 2018 year to date and down 48.5 percent year to year. The median price of these homes in March was $795,000, up 11.3 percent month to month and up 13.3 percent year to year.

For-sale properties in March included 110 units, up 20.1 percent for 2018 year to date and up 1.8 percent year to year.

ROHNERT PARK

Sales of single-family homes in Rohnert Park in March included 12 units, down 18.4 percent for 2018 year to date and down 36.8 percent year to year. The median price of these homes in March was $602,500, up 5.9 percent month to month and up 17.0 percent year to year.

For-sale properties in March included 110 units, down 13.0 percent for 2018 year to date and down 21.0 percent year to year.

“So far, the impact of the wildfires is mainly on the supply side, as sales and home prices continue to trend upward,” he concluded. “Our greatest need is to see 120,000 new homes built each year in our state.”

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