October 14, 2018
Private Capital Investments is a real estate lender providing privately funded loans for fix & flip, renovation, business, construction and land projects in California and neighboring states.
October 2018 Bay Area Housing Research Report
HVST Bay Area Summary Notes
- Home prices are still rising in the Bay Area, with August data showing prices up 12% over the same period last year; home sales appear overall stable without any notable non-seasonable drop off.
- National figures are still very strong with prices are on the rise; sales figures are stable and Days on Market numbers continue to fall which secures the broader economic strength indicators. Homes are selling fast once they are placed for sale.
- While the housing market is good it is nothing like it was from 2012 to 2014 with respect to the number of homes sold. That said the limited sales today versus the ’12 through ’14 time frame is more a function of limited inventory than any other measure.
- In a longer term quarterly average trend view, we had a pause in housing price growth between 2015 and 2017, but that metric clearly shows that prices are trending back higher again. So that metric suggests we’ll continue to trend higher.
- Previous 30 year unemployment trough lows in California were 4.4% in 2000 and 4.5% in 2007. We’ve now broken that level as we’re down to 4.3%, but this is a far different market than what we had back then. It’s amazing that those two years coincide with major market pullbacks with the tech bubble and the financial crisis respectively. Dare you suggest that we’re within two years of a crisis now?
- REIT equity prices have yet to price in a slow down in the Real Estate market, remember that equities trade a quarter or two (or more) ahead of current day numbers. Redfin’s housing market price data is based on backward looking spot housing price figures, so equities are an important area to watch.
- Default rates are low, but 2nd position real estate defaults have indeed been volatile, we’re not sure what this could be signally. But, the fact that 1st position mortgage notes are so low and trending lower gives us comfort in the stability of the current market.
- While interest rates are on the rise, they aren’t rising so much that Mortgage Back Securities are signally any impactful change in valuation. If market participants don’t see interest rates as a problem, then neither should you.
- The Fed Funds rate has of course had a significant impact on short-term treasuries, and they continue to climb. Long term mortgage Rates have set a new 6 year high, but the real impact on the market valuations has been minimal and their actual rate currently is only slightly higher than number we say back in 2013. These aren’t what you’d call uncharted waters.
- Credit spreads are on the rise over the last 6 years, we find this concerning. Some indicators show strength and complacency, but this indicator shows a tightening in credit worthiness expectations as markets continue to expand. The point being is that creditors will likely be tightening in the coming quarters to slow growth down a bit.
- Yes, it’s fun to talk about the impact of interest rates. But remember, it’s been a long time since we’ve actually seen an impact to housing prices as a function of interest rate spikes. We don’t expect this rate spike (which is really a trend that’s been in place over the last years) to be any different.
- From a purely quantitative and seasonal trend assessment, we believe that we’ll see a rise in Housing Prices over the next few months. This is merely based on our in-house proprietary system that exclusively reviews the price change momentum to project forward prices. It is used to validate or challenge the fundamental qualitative information presented by the many variables at hand.
- Conversely, using the equity markets as a forward looking barometer on the health of the real estate market as a whole-we believe that prices will come down over the next calendar quarter. This is due to the fact that the IYR Fund (an exchange traded fund tracking real estate sector securities) was down for the calendar quarter ending in Sep 2018. Admittedly, the index was only down a fraction of one percent, so that single is really one of a flat indication. Any interesting note, for the start of the fourth quarter we’ve seen a fairly significant pullback. But it’s far too early in the quarter to start projecting housing prices for the 1st quarter of 2019.
- Bonus; don’t let the talking heads on TV who point out that homebuilders are in a major correction (over 20% down for 2018) and are signally a pullback for the housing market. This sector has been on fire over the last six years, more than doubling the S&P 500 on the upside. This pullback is a small one relative to the overall outperformance it’s had since 2016. It’s a volatile sector that is down due to slower growth, not a total reversal. Relax!
- Looking at the Western Region building permits provided by the Census, there is no indication of a slowdown, especially when you compare the period to that of pre-recession figures.
- Consumer debt levels for both Real Estate related and other obligations remains well below the historical range of the last few decades. That said, consumer debt for non-real estate is trending higher over the last few years.
- Overall, we see a 56% chance of a continued positive housing market after taking into account both quantitative and qualitative variables.
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