Lao Tzu says that “Those who have knowledge, don’t predict. Those who predict, don’t have knowledge.” Maybe, maybe not, but as someone who’s been in the hard money lending business for 13 years as a lender, real estate agent and a real estate investor and knows the California housing market inside out, I’d like to have my turn.
Most forecasters say that 2016 will see sales and home prices rise by 3% to 5% in California. A few plucky individuals buck the statistics by a percentage or two, but the consensus opinion largely follows that of the last few years. (It rarely diverges). If you want to know what to expect the coming year here’s one thing that may help you –
It’s all about interest rates
The state of the housing market in 2016 is going to pivot on mortgage rates. Affordability is going to be the major issue. Houses in California are already miserably unaffordable. As of the beginning of December 2015, all reports show that the Federal Reserve is planning to raise its rates. Higher rates are hardly going to mean lower prices. On the contrary, if prices do drop, the inventory will dry up (since there will be fewer sellers), sales volumes will drop, and prices will be forced up by competition among the few active buyers.
On the other hand, the good news is that the Fed only intends to raise its rates to an extent that will keep mortgage rates below 4.5%. This means that sales will remain low while prices drift slowly upwards but the housing inventory will retain air.
In 2016, demand for housing in California is going to grow. At the same time, houses will continue to be built for professionals who can afford it and for wealthy foreigners. Housing prices will continue shoot. many loan modifications will re-default. Many individual lenders such as hard money lenders who lend loans based on property – called home equity line of credit (i.e. HELOCs) – will also see their loans can-kicked. Some hard money lenders have become stricter about who they lend to. More tend to scrutinize credit history as well as value of collateral, but since many (particularly newer agents) focus emphatically on collateral, lenders may let a few penurious borrowers slide past and experience bad loans. Forecasters predict that this may happen a lot, but assure that it won’t get out of control. The most optimistic forecasters insist that the market is relatively affordable despite high prices. They persist that California is not, and will not, experience a housing bubble, and that housing prices will remain somewhat affordable (whatever that means) for those who have the means to afford Trump-bombasted housing. (Small solace for the rest of us… )
Real estate predictions for 2016 for the nation as a whole
Redfin, a residential real estate company that provides web-based real estate database and brokerage services, sees a fairly uneventful housing market next year. Here are Redfin’s five housing market predictions for 2016:
1. Prices and sales will grow half as fast
According to a recent report from RealtyTrac for more than a third of the nation’s major metro areas, home prices have reached all-time highs in 2015. California is one of these places.
The coming year promises an increase. Sales will grow about half as fast as they did this year and prices will rise at a more normal 3.5% to 4.5%, down from almost 6% this year. Of course, some states (such as California) will see higher prices than ever, whilst other states (such as Detroit) will experience slouching prices. Declining markets may slump further. Others may boost themselves.
2. Easier Credit
Americans, for whom mortgage has been out of reach in the past, may have a better shot at getting a house in 2016. Conventional and unconventional lenders will fiddle around with new ways of measuring credit. True, conventional lending institutions will be as recalcitrant as ever, but the trend is already in play where credit reflects households rather than personal history. For example, lenders will evaluate credit scores by reviewing a person’s rental history and utility bill payments. More loans will allow buyers to include income from room rentals, live-in parents and extended-family members.
More significantly, a historic bill was recently introduced in the House of Representatives that would allow Fannie Mae and Freddie Mac to consider credit-scoring models in addition to or other than the FICO credit score that traditional lending institutions currently use when determining what loans to purchase. The times are a-changing.
3. More (and older) first-time buyers
Redfin expects a new and ready market of first-time millennials who have been saving up and will give the market a shot this coming year. Reasons are simple: More credit options and slowing of price growth. Prices are high, but that should be no problem for this year’s impending crop of millennials who have saved for their investment. In the Mortgage Bankers Association’s housing report that looks at the future decade, Lynn Fisher, MBA’s vice president of Research and Economics, said, “Improving employment markets will build on major demographic trends – including maturing of Baby Boomers, Hispanics and Millennials – to create strong growth in both owner and rental housing markets over the next decade.”
4. Slower market, slowing closings
Redfin is optimistic about the future. It expects the market to slow in 2016 as government-backed loans become more common. There will be low inventory but a lower ceiling on price escalation as 2016 buyers won’t be willing or able to go as high as buyers have in recent years.
5. Continuing inventory shortage
2016 will see less homes for sale than in 2015 particularly in the affordable sector. This is a growing pattern. Redfin found that the number of homes for sale shrank from 2014 to 2015 in 45 of the 60 metro and that inventory across all 60 metros is down 4 percent from a year ago.
Housing across the nation will experience growing priciness. Costs will be curbed by slight increase in interest rates. This, in turn, will stultify the market. On the other hand, more millennials are going to become first-time homebuyers largely because there may be more credit options for them to sample.
As an experienced hard money lender, my predictions for California the coming year are that it will experience the same situation on a micro-scale and 2015 will crawl into 2016 with little changes. Situations that are particular to California are that housing demand will grow and property in both commercial and residential areas will continue to be constructed. Relatively few people of average means, however, will be able to afford most (if any) of these houses. The Fed’s slight increase in interest rates may curb prices slightly but only – if so – by a meagre percentage or two. Private money lenders may have to tighten restrictions since the amount of bad loans is predicted to increase. On the whole, experts insist that – gloomy predictions aside – California is in no housing bubble and that buyers may still be able to locate affordable homes.