Mortgage Rates Will Rise Moderately
One of the biggest questions in residential real estate is whether or not mortgage rates will rise. This coming year, 30-year mortgage rates will rise very moderately from their year-end rate of about 4.00%. I predict a rise of about 0.25% with a maximum jump of 0.5% before The Fed would step in to get rates under control.
The reason rates did not rise last year, and why they will only rise moderately this year, is due to the fact that mortgage rates are impacted by demand for mortgage-backed securities. For the majority of last year, The Fed reinvested their principle payments and bought up the bulk of residential home mortgages. Starting in the Fourth Quarter of 2017, The Fed voted to SLOWLY purchase less mortgage-backed securities over an extended period of time. To read more about this, reference my blog post South Bay Real Estate – What’s Happening with Mortgage Rates?.
Bill Gross, formerly of Pacific Investment Management Company (PIMCO) and now of Janus Capital Group, known as “The Bond King” stated, “The Fed has to stop around 2 to 2.25% before it starts to bite (the housing market)” in an interview on CNBC. The Fed Funds Rate is currently at 1.25% to 1.5%, so the market can handle a few more rate increases, in my opinion, before mortgage rates will jump materially.
Tax Reform Hurts South Bay Beach Properties and Helps Inland Homes
Tax Reform will hurt the luxury real estate market and certainly property by the beach in the South Bay. By limiting state and local property tax deductions to $10,000 annually (and limiting mortgage interest deductions to $750,000), buyers will be much more sensitive about the price of their home. A study by Critobal Young/Charles Varner and Itha Lurie/Richard Prisinzano of Stanford University and the U.S. Department of the Treasury, respectively, stated that the elimination of local and state property deductions will create an effective tax increase of up to 5% for some top earners.
I believe the elimination of second home deductions will have a negative demand and price impact on the Manhattan and Hermosa Beach Sand Sections, the Redondo Beach Esplanade area, and Palos Verdes bluff properties. This will not occur immediately but the will begin in late 2018 and really hurt in 2019 as wealthy property owners look at their increased tax bills.
Manhattan Beach’s Liberty Village, most of North Redondo, Hermosa and Redondo Beach Condos/Town Homes, and Palos Verdes and El Segundo homes under $1.3 million will benefit even more now that buyers will be conscious of the cost of home ownership and loss of property deductions. All other inland areas in the South Bay should benefit immensely, i.e. Torrance, Lawndale, Hawthorne, Lomita, and Gardena, as new buyers will be price sensitive and median income homeowners will save on taxes.
Palos Verdes: A Tale of Two Markets
Palos Verdes will be fractured between two markets: Luxury vs. Affordability.
The high-end luxury market on The Hill has seen sales slowly decrease each year over the past three years. Look for that trend to continue and prices on the high end to soften. On the flip side, Millennials forming families will continue to increase the floor of the lowest priced properties in PVE, along with driving prices higher in the affordable Rancho Palos Verdes market.
Low Income Market Prices will Explode Higher
Low income home and income property values will explode higher this year due to a few factors:
- These areas tend to appreciate later in the cycle after the beach has made its run
- Rents have surged in areas like North and East Hawthorne, Lawndale, and South Los Angeles making home ownership more desirable and in some cases the more affordable financial option
- Rising minimum wage standards implemented by the state and local counties/cities.
The third point is by far the most important. Most residents know that the state is requiring an increase in the minimum wage every year on January 1st over the next five years ($11.00/hr. in 2018); however, not everyone realizes that the county and city of Los Angeles has implemented even greater increases.
The county and city of Los Angeles increased the minimum wage to $12.00/hr. this past July 1st from $10.50/hr. They will increase again to $13.25/hr. July 1, 2018 and then to $14.25/hr. in 2019. That will be a $3.25 increase in three years or a whopping 32.5% increase to minimum wage earners in low income areas. If you do not believe a 30% plus increase in wages to low income areas will not drive rents and prices significantly higher, then I do not know what will. I remain the most bullish on low income housing markets over the next 18 months.
When will the Real Estate Market Correct?
Bruce Norris, a professional California property investor and economist, has predicted a 5% to 15% correction in 2018 or 2019. The way I see it, low income areas will surge in 2018 and rates will not likely have a meaningful impact until 2019.
I tend to side with Bruce on this mild California price correction in real estate and I believe it will occur in late 2019 or even 2020 depending on housing demand and interest rates over the next 18 months. Read more on Bruce’s predictions in my February 2017 Has California Real Estate Peaked? Bruce Norris Answers.
Long Term Bet: 3-D Printed Buildings in Less Than 10 Years
Dubai in the United Arab Emirates has set an initiative that 25% of their buildings are to be 3-D printed by 2030. Some experts have predicted that labor costs will be reduced by 50-80% and construction waste will be reduced between 30-60% due to the efficiency of 3-D printing. Additionally, in some cases certain aspects of buildings can be built in 10% of the time required by traditional building techniques.
Of course the technology required to make 3-D printing a reality will be costly and take decades to perfect, but the long-term costs savings cannot be denied. Look for 3-D printing in the Los Angeles area to become the norm in the next 25 to 30 years. About double the estimated time for automated cars to become the norm in everyday life!