The
Real Estate Digest
A California Real Estate Newsletter
Edition 11, July, 2016

Interest Rates



  • Fed rate hikes can increase borrowing costs. The Fed has been waiting for the job market to improve to increase rates. Lower than expected job growth led to a delay in a rate increase in June, however once job growth improves, it is likely that rate increases will follow.
  • Mortgage rates are largely influenced by global capital flows. With large inflows of foreign capital, mortgage rates have been low because there is an inverse relationship between bond prices and yield. Economists predict that mortgages will remain around 4% through the end of the year. 


Home Prices 
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  • A combination of tight supply and high demand in the Bay Area has resulted in upward pressure on housing prices. Mid-home prices in the Bay Area are particularly elevated compared to other regions of California, with the medium home prices around $1.4 million as compared to the state average of $518,376. Median home prices are $805,000 in Santa Cruz, $1,118,000 in Santa Clara, and $550,000 in Monterey. 
  • Overall, California home prices are 6.3% higher than last year. There are the prices highest we've seen since the Fall of 2007, however they are still 15% below the pre-crisis peak level.
  • Home price to income ratio in California is around 7%, however in Santa Cruz it is closer to 8.4% and up near 9% in San Francisco. 
  • Economists predict that home price increases will continue to slow. The double-digit growth we have seen in past years is most likely due to catch up. As the economy reaches full employment, things are expected to normalize. 


Inventory

 

  • There is low inventory. In part, this may be due to persistent hesitation of Baby Boomers to sell. A low tax base supported by Prop 13, the fact that they will face a sellers market when trying to buy, and the threat of high capital gains tax due to large increases in housing prices are all possible reasons for this hesitancy. 
  • There has been additional construction, however not enough to keep up with the rising demand. While much of the construction has been multifamily, a good amount has been for the higher end of the housing and rental market.Therefore, the supply of affordable housing remains low in relation to demand. 


Consequences: A Sellers' Market and Affordability Issues



  • It is clearly a seller's market, with high demand and low supply. Knowing that interest rates will rise soon, sellers may be more motivated to sell. In doing so, they can take advantage of low rates when looking to move to new place. 
  • Demand is strong and growing in the affordable housing market. However, supply is tight leading to an affordability issue in the Bay Area and other hot markets such as Orange County.
  • As housing prices remain at high levels, people are migrating to more affordable areas such as the East Bay and areas surrounding Sacramento or out of California altogether. Therefore, we can expect to see robust growth in these locations. 
  • A recent press release by a Harvard research team reveals that nationally, more people are facing rent affordability issues as well. Due to an overall lower level of homeownership after the crisis, rentals are in high demand. However, as noted above, much of the construction is geared toward the high-end market. As a result, the number of "cost-burdened renters" hit 21.3 million in 2014 and 11.4 million of these households paid more than half of their incomes for housing. This is a record high. 
  • Source: www2.realtoractioncenter.com


Renovation: Making More Out of Less

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In This Issue

Christine's Corner




 BREXIT and Real Estate

There are various reasons BREXIT supporters provide for leaving the EU. These include:
  • The EU threatens the United Kingdom's sovereignty.  Supporters of this viewpoint reference the trend of an increase in EU authority over the past few decades. For example, in matters of competition policy, agriculture, and copyright & patent law, EU laws overrule national laws. 
  • The EU is able to impose regulations on its members, some of which BREXIT supporters claim are overly burdensome and cost the British economy up to $880 million a week (though this figure is disputed).
  • Some supporting the BREXIT desire immigration reform. EU law guarantees that citizens of one EU country have the right to travel, live, and work in any other EU country. After the financial crisis of 2008, the Eurozone has struggled economically, and workers from other countries have poured into the UK looking for work. Supporters of this argument claim that this has undercut the native working population. 

Source: http://www.vox.com/2016/6/22

 

Proponents of remaining in the EU argue the following:
  • The EU is in a stronger position to negotiate trade deals with non-EU countries than the UK is on its own. 
  • Some manufacturers have threatened to leave the UK if it is outside of the EU.
  • The UK risks losing foreign direct investment from non-EU countries. Additionally, it is easier for companies in the UK to operate due to a lack of capital restrictions and a single legal framework across member countries.
  • EU supporters quote studies that show that EU migrants are net contributors to UK public finances and that there is no evidence that immigrants take jobs away from UK-born workers. 
  (The link directly above is an info graph that depicts reasons for both staying and leaving, if you would like to learn more). 

How will this impact the U.S. economy and real estate market?
  • The FED will likely delay raising interest rates due to the ensuing uncertainty in financial markets. 
  • The U.S. has and will continue to see an influx of foreign capital. United States treasury bonds are considered very "safe" and it is expected that foreign currencies will become more volatile.  As the result, there is an expected increase in the demand for U.S. dollars. This will cause the dollar to appreciate, making U.S. goods less affordable and tourism in the U.S. less attractive. However, this will also decrease long-term interest rates, which are expected to be low in the foreseeable future. 
  • Historically low interest rates may drive up sales in the U.S., including residential real estate. However, uncertainty in financial markets also tends to hamper long-term investments. 
  • Additionally, this desire for a safe haven may drive foreign investors to purchase more U.S. real estate. This is predicted to largely impact cities like New York, Los Angeles, San Francisco, and Chicago. It is uncertain if this will affect first-time homebuyers. Some claim that the increase in demand will largely be in the luxury home market. However, others claim that an influx of foreign buyers could trickle down into the lower-end of the market and first-time buyers, who usually need a mortgage, will have a hard time competing with all cash foreign buyers. 

Sources:



In summary, opinions about the BREXIT are varied amongst professions, ages, and nationalities (click here for graphics depicting voter characteristics). However, most economists claim that in the long run it will have a negative impact on the British economy. The U.S. will likely face unstable financial markets due to increased uncertainty, which would hamper short and long-term investments. Low interest rates may however increase investment, especially in commercial and residential real estate. 


 



Schneider Estates, Inc.
Christine Schneider, Broker
831-600-6550
www.schneiderestates.com
cs@schneiderestates.com
BRE# 01749537

Issue 11
July, 2016