Jan072016
Restricted supply and improving economy boost sky-high California rents
What do you get when you combine a strengthening economy with a chronic shortages of housing? Sky-high rents.
California began restricting growth in the 1970s with regulations like CEQA. Local opposition groups sprang up ostensibly to protect their quality of life. What started as a reaction to poorly designed and executed suburban sprawl devolved into an attempt by Nimbys to cast their neighborhoods in amber to prevent any future changes or development, even reasonable development. As a result of various growth restrictions, we simply don’t have enough housing stock to meet the needs of our growing population, either rental or owner-occupied.
When any commodity is in short supply, prices tend to rise, and rentals are no exception. There are not enough rentals to go around, so people substitute down in quality to obtain a place to live. We can tell how much of the increase in rent is due to an improving economy and how much is due to the substitution effect. Rent growth should exactly mirror wage growth because renters pay their bills out of current income. When rent growth exceeds wage growth, as it does today, that is a sign of downward substitution, a direct response to the lack of inventory.
My reports consistently say that housing is no more expensive relative to rent than it was in the 1990s; this isn’t supposition, it’s fact supported by data. The premise of my reports is that house prices are fairly valued due to their relationship with rent, and rent is always fairly valued relative to income. What if the second assumption is wrong? What if rents are not fairly valued relative to income? Is it all a bubble then?
We know house prices are 30% too high relative to income, but most of that difference is due to low mortgage rates. But what if house prices are actually 50% too high because rents are inflated and mortgage rates are too low?
Only time will give us those answers. What we know for certain today is that rents are rising rapidly, more rapidly than wages, so unless we approve and construction a great many more houses and rental units, rents will continue to exceed wage growth, and everyone’s quality of life suffers.
Rent growth is not unsustainably high, but it is certainly a signal to builders and developers to provide even more rental units. I imagine the Irvine Company is quite happy they overbuilt during the recession. They took a big risk, and they are enjoying the rewards.
The problem is even more acute in LA County.
Rent increases are pushing up into the unsustainable range.
In the post from New Year’s day, I talked about Alternate housing market price measurements. My reports use the $/SF metric to measure changes in rents and resale prices as it more accurately reflects what people are getting for their money.
Riverside County rents haven’t been rising quite as fast, but they are going up.
San Bernardino shows similar strength.
The trend is the same across California.
Apartment List California Rent Report
By Leo Rosett, 1/4/2016
Welcome to the Apartment List California Rent Report! California continues to be one of the priciest states in the country for rents, and in many places they’re still growing quickly. In this report, we’ll look at trends across the whole state as well as variations between cities.
California Rent Price
In California, 1 bedroom rents decreased by 1.8% and 2 bedroom rents decreased by 2.3% between November and December. They are now up 7.6% and 4.9% over the last year at median prices of $1500 and $1640, respectively.
Top 10 most expensive cities
- San Francisco: San Francisco once again claimed the highest rents statewide for both 1 and 2 bedroom units, averaging $3500 and $4610, respectively. 2 bedroom rents show growth of 3.7% since December 2014, while 1 bedroom rents have grown 5.5% year-over-year.
- Marina del Rey: Located on the California cost just 30 minutes from downtown Los Angeles, Marina del Rey was the 3rd most expensive city with average prices at $3940 for a 2 bedroom. A 1 bedroom there averages $3080.
- Berkeley: Right across the bay from San Francisco, Berkeley was the 6th most expensive city in California for the month of December. A 2 bedroom averages $3400 there, while a 1 bedroom goes for $2600.
Top 10 cities with the fastest rent growth
- Salinas: Salinas had the strongest year-over-year rent growth with an 15.1% increase over December 2014 for 2 bedroom figures. A 2 bedroom in Salinas costs $1520.
- Santa Clara: Santa Clara showed the 5th largest rent increase with 8.4% growth over December 2014. Rents in Santa Clara average $2740 for a 2 bedroom.
- San Mateo: This Bay Area city claimed the 8th strongest rent increase over last year, up 7.3% for 2 bedrooms. San Mateo also ranked as the 9th most expensive city in California for the month of December, averaging $3200 for a 2 bedroom.
We’ve discussed at length the problems likely to face the market when mortgage rates rise, but what happens if rent growth stops or we get declining rents as more supply comes to market? Could we see falling rents and falling house prices like we did during the housing bust?
While all these scenarios are possible, I consider a housing bubble based on inflated rents to be unlikely. Rents rarely go down, and almost never in the absence of economic recession. I doubt we will see declining rents during a period when the economy is improving and interest rates are rising.
High rents and high house prices are bad for families who must put more money toward shelter, but it isn’t the sign of a bubble ready to pop. Realistically, the only way we can get the growth of rent under control is to provide more supply. Rent control is not the answer as most socialist solutions to housing affordability problems really suck.
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Here it comes ….
http://www.bloomberg.com/news/articles/2016-01-07/global-markets-at-the-beginning-of-a-crisis-george-soros-says
And this is very bad news for Orange County housing which is still in a massive bubble. I think our housing market will start losing value this year and will completely collapse after the election. Lower than 2008 pricing.
“Collapse”? So, are OC house prices going to $0? Give us your forecast.
So then, by “collapse,” I’ll take it that you mean OC homes prices will stagnate over many years. Fair assessment.
That happened in the early 80’s.. Home prices were flat for about 5 years but inflation was double digits.
My grandparents retired in 1980 and they were loving the rates of return on their CDs. The party didn’t last though.
I can’t see a scenario where house prices crash. Even if a faltering economy causes widespread unemployment and large numbers of mortgage defaults, the banks will simply can-kick the loans until better days. Without the supply coming to market, sales may stagnate, but prices would only drift lower at best as discretionary sellers with equity decide to liquidate.
I do not think the banks will be as successful this time in preserving their perceived equity.
The reason housing prices fell in 2007-8 was the huge supply of distressed inventory dumped on the market. Since banks have figured out how to extend and pretend, this won’t happen again. Also, the distressed inventory arose from the multitude of unqualified borrowers saddled with debt they couldn’t afford.
The economic crisis in 2008 resulted from overleveraged investment banks going insolvent as asset values fell. Lehman Brothers had a 33:1 loan to asset ratio. So when asset values fell by 4%, they were insolvent. This spilled over into the CDS/CDO world taking down insurance companies like AIG. Credit markets seized, the stock markets plunged.
Contrast that with today’s situation where loans are based on the ability to repay, incomes are verified, larger down payments are required, and credit scores matter. Banks are also required to have greater capital reserves, so even if a similar crisis hit today the impact to the financial system would be muted.
The main effect of slower Chinese growth is lower commodity prices and a stronger dollar. This has the effect of increasing the US households purchasing power, while decreasing US exports to commodity producing countries. In this sense, slow Chinese growth is good for middle income Americans as it lowers their monthly expenses. Slow Chinese growth is bad for oil producing countries since the falling price of crude directly, and adversely, affects their GDP. As a result, wealth becomes less concentrated in the hands of oil sheiks and more distributed amongst the masses. Why is this a problem?
There is so much about our current circumstances that is unique, making it hard to draw lessons from history. Soros seems to be worried that lower asset prices will translate into lower economic output, and there is historic precedent to back this, but I don’t think that will be the case this time around.
Asset prices have been artificially lifted by low interest rates, and the world economy does not suffer from a lack of productive capacity. An asset price crash won’t prevent needed investment in productive capacity and hold back the world economy. An asset price crash would merely wipe out the net worth of wealthy individuals who benefited from quantitative easing. This won’t impact the underlying economy.
I can see why George Soros would be concerned because he has limited avenues of preserving his wealth, but the common man will still be working in the real economy. Ordinary citizens will be largely untouched by the upcoming volatility (collapse) in asset prices.
Larry … one thing I want you to think about regarding the economy, real estate and OC real estate … We (America) never resolved the problems that have plagued us during the prior decade.
Today we have more, TBTF Banks & Exotic Financial Instruments.
Ponzi Finance simply isn’t sustainable. I know you know this. The FED is out of bullets. They’re done and they lost!
Russ … a few simple points:
a) Buyers and Sellers do not set home prices, Banks do.
b) All home purchases are connected, no matter if it’s the wealthy Chinese family paying cash for the expensive Toll Brothers home in Irvine, or a Fireman who puts 20k down on a home that cost 5-6 times his annual income in Huntington Beach.
c) Debt destruction is deflationary.
d) Asset prices have been propped up by central planers.
e) Central planers have only delayed deflation forces which are larger today than in 2007-2009.
f) Assets that are leveraged higher, will suffer the most … think Orange County housing.
Lower than 2008 pricing.
I remember when Lee in Irvine would routinely predict 1998 prices, and now he’s resorted to predicting 2008 prices. It’s funny how history repeats.
Nevada saw 1988 pricing in 2011.
Yeah, I remember that. His 1998 predictions were OC specific.
Orange County real estate was bailed out (temporarily) by the Federal Reserve. Their attempted ponzi scheme has failed. Now we get to witness the conclusion …
tic, tic, tic
1998 Prices …. you bet, that could happen.
All you need to understand is this; Central Bank interventions have failed. For 30+ Years the FED has perpetually decreased interest rates to inflate asset prices. And then these bastards kept interest rates at ZERO for 6-years and blew-up their balance sheet to 4.4T. They are now a toothless vampire.
Once you understand the extremes that have been developed since Glass Steagall was eliminated that have propped up Real Estate, it’s easy to draw a line for OC to be routed as these ponzi financial instruments blow up.
Just a reminder from Bill Gross PONZI SCHEMES DO NOT WORK …
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Bill Gross Warns Of Demographic Doomsday
The Romans gave their Plebian citizens a day at the Coliseum, and the French royalty gave the Bourgeoisie a piece of figurative “cake”, so it may be true to form that in the still prosperous developed economies of 2016, we provide Fantasy Sports, cellphone game apps, sexting, and fast food to appease the masses. Keep them occupied and distracted at all costs before they recognize that half of the U.S. population doesn’t go to work in the morning and that their real wages after conservatively calculated inflation have barely budged since the mid 1980’s. Confuse them with demagogic and religious oriented political candidates to believe that tomorrow will be a better day and hope that Ferguson, Missouri and its lookalikes will fade to the second page or whatever it’s called these days in new-age media.
http://www.zerohedge.com/news/2016-01-07/bill-gross-warns-demographic-doomsday
I appreciate Bill Gross’ perspective, but he has sounded like a grumpy old man for nearly a decade who seems to always be talking his book.
This is why California isn’t building enough housing
California Supreme Court Delays Projects over Greenhouse Gasses
A California Supreme Court ruling requiring developers to do more to show their huge housing projects won’t significantly increase greenhouse gas emissions is likely to delay several big projects throughout the state, including the controversial Lilac Hills Ranch community proposed near Valley Center.
The Nov. 30 ruling found that an environmental report for a massive master-planned community along the Santa Clara River north of Los Angeles failed to properly explain its conclusion that the project wouldn’t significantly affect greenhouse gas emissions, which have been linked to global warming.
The 5-2 ruling states that while the environmental report had been prepared correctly under current guidelines, further studies and analysis must be done to ensure new large-scale construction won’t make it impossible for the state to reduce greenhouse gas emissions. The ruling doesn’t spell out how new studies should be conducted.
“It was a shocker around the development world and we’re all trying to figure it out,” said Randy Goodson, whose Accretive Investments LLC is the company behind Lilac Hills Ranch, which would add 1,746 homes as well as new commercial complexes to a semi-rural area off Interstate 15, north of Escondido. “Right now people still don’t know how to comply with it.”
“We are trying to determine how best to meet recent Supreme Court guidance and then we’ll look forward to proceeding to the board,” Goodson said.
Borre Winckel, president and CEO of the Building Industry Association of San Diego, said other developers are in the same boat.
“It is a very complicated decision requiring a very complicated answer,” he said. “How to address this is not easily found and requires a lot of head scratching as we try to figure out an answer to the Supreme Court ruling and greenhouse gas analysis and mitigation too.”
The Newhall Land & Farming Co. has for decades planned to build what amounts to a small city on nearly 12,000 acres along the Santa Clara River. The Newhall Ranch community would house 58,000 people and offer stores, golf courses, schools and recreational centers. Los Angeles County’s elected supervisors approved the project 12 years ago, but it has been vehemently opposed by environmental groups and has remained mired in lawsuits.
The problem is that zero emissions growth can only be accomplished by zero population growth. But the population will grow regardless and so will emissions. More people means more resources have to be expended to support them. Banning new developments won’t lessen emissions but merely displaces them to a different locale.
Meanwhile, economic growth suffers and quality of life gets worse for those packed into increasingly crowded living conditions. All in the name of progress. The difficulty in meeting the poorly defined requirements is intentional. Environmental groups don’t want anything built there. No matter what hoops the developers jump through, the amorphous conditions can never be met. You can’t nail jello to a tree.
I would like to see a developer offer a free zero-emissions car to every new home buyer. It would be pretty tough to argue an increase in gas emissions when everyone’s car emits no gases at all.
Million-dollar O.C. homes 4 times as hard to sell
Orange County’s million-dollar homes became harder to sell than cheaper residences as 2015 wore on.
Homebuyer thirst typically wanes during the holiday period. And the pricier the home, the longer it takes for a sale to occur.
ReportsOnHousing.com’s first tally of the New Year for Orange County home listings shows the seasonal slowdown in selling speed was more pronounced for housing’s upper crust.
By this math, it took 3.9 times longer to sell an Orange County home priced above $1 million than a cheaper residence as of Thursday – vs. six months earlier when it took 3.3 times longer to sell at the market’s high end.
Why did that gap grow? First, let’s look at the shrinking supply of homes available for shoppers to purchase.
There were 2,905 homes listed for less than $1 million last Thursday. That’s down 29 percent from six months earlier. A similar drop was seen in million-dollar-plus homes: 1,523 were listed last Thursday, down 33 percent from six months ago.
But demand, measured by new escrows, dipped to a greater degree for pricier homes.
New escrows involving homes listed under $1 million totaled 1,445 as of last Thursday, down 41 percent from six months earlier.
Not every stat makes sense, but this does. Houses are illiquid and expensive houses even more so.
Don’t Blame TRID For Housing Market Woes
A few days before Christmas, the NAR (National Association of Realtors) reported a 10.5% decline in Existing Home Sales for November. Lawrence Yun, NAR chief economist promptly cited the mortgage industry’s new TRID requirements as the primary culprit for the sharp drop stating that this result; “without a doubt was heavily impacted by new federal government rule regarding closing document situation.”
Mr. Yun also pointed out that; “Sparse inventory and affordability issues continue to impede a large pool of buyers’ ability to buy, which is holding back sales, however, signed contracts have remained mostly steady in recent months, and properties sold faster in November. Therefore it’s highly possible the stark sales decline wasn’t because of sudden, withering demand.”
Not so fast.
Pending Home Sales is a forward looking indicator that measures signed purchase contracts and these were down 1.4% in August, down again 2.3% in September and up just 0.2% in October. Fewer signed purchase contracts (“withering demand”), mean fewer purchase closings otherwise known as Existing Home Sales, just sayin’.
The media was quick to disseminate the TRID headline which was quickly followed by a chorus of mortgage industry leaders singing “I told you so.” But the NAR’s Chief Economist, the media and some of us in the mortgage industry are wrong. TRID in and of itself did not delay any closings in November. Not-so-good TRID deployment by not well enough prepared lenders hampered their ability to do what we knew was coming, and they dropped the ball.
Lenders failed to adequately implement TRID into their processing systems and work flows and they came up short. TRID is the excuse but lack of performance was the cause.
Two points of failure in this article:
1. How does a net 3.5% decline in pendings equate to a 10.5% drop in closings?
2. The author must not have an understanding of the new rule because TRID mandates delayed closings anytime a change in loan terms is made. If the borrower switches from a Fannie to a FHA, that’s a 3 day delay. If they switch from a 10% down payment to a 5% down payment, that’s a 3 day delay. If closing costs change by a certain amount from what was originally quoted, that’s a 3 day delay. These delays can stack, so an individual transaction can easily have multiple 3 day delays, depending on how fickle the borrower is, or how incompetent the originator is.
Agreed, with one qualifier – all of those changes must occur very late in the process (last week or two before closing) to cause mandatory delays.
Warmer temps no help: Pending home sales down 0.9% in November
Warmer-than-normal temperatures across much of the nation did nothing to heat up home sales in November. Pending home sales, a measure of signed contracts, not closings, fell 0.9 percent compared to an upwardly revised October reading, according to the National Association of Realtors.
They were 2.7 percent higher than November of 2014, but that is the smallest annual increase in over a year and November’s number was the third monthly decline in the past four months.
“Home prices rising too sharply in several markets, mixed signs of an economy losing momentum and waning supply levels have acted as headwinds in recent months despite low mortgage rates and solid job gains,” said Lawrence Yun, chief economist at the National Association of Realtors.
“While California closed out our latest ranking still firmly in control of the hottest markets, the Midwest and Florida are both seeing substantial improvement,” said Jonathan Smoke, chief economist at Realtor.com. “Pent-up demand and robust economic growth combined with limited supply will keep the California housing market tight in 2016, but more markets will challenge them as demand improves elsewhere.”
Rate Hike no Concern for Freddie’s Chief Economist
Freddie Mac is dismissing concerns of some analysts that the change in the Federal Reserve’s monetary policy may bode ill for the housing industry. The company’s vice president and chief economist Sean Becketti welcomed the New Year with an upbeat rebuttal of those concerns on Freddie Mac’s Executive Perspectives blog.
Becketti said that he does not share the worries about the December hike in the fed funds interest rates boosting mortgage rates, reducing home affordability, or reversing the recent improvements in housing numbers. He cites several reasons for his view.
The Federal Reserve is aware that the economic recovery remains fragile and has committed to a policy of gradual monetary tightening. They should be taken at their word, Becketti says, and we should expect only a few modest increases in short-term rates this year.
Further, the connection between short-term rates controlled by the Fed and long-term rates including those for mortgages is “tenuous.” He cites the example of the 17 consecutive monthly rate hikes made by the Fed in the mid-2000s. They had virtually no effect on mortgages rates which remained around 6 percent.
http://www.mortgagenewsdaily.com/cfs-file.ashx/__key/CommunityServer.Blogs.Components.WeblogFiles/jann.0000201601/2016_2D00_1_2D00_5-fred1.jpg
Will the Fed raise rates in 2016, and if so, by how much?
Earlier I posted some questions for next year: Ten Economic Questions for 2016. I’ll try to add some thoughts, and maybe some predictions for each question.
Here is a review of the Ten Economic Questions for 2015.
5) Monetary Policy: The Fed raised rates in December, and now the question is how much will the Fed raise rates in 2016? The market is pricing in two 25 bps rate hikes in 2016, and most analysts expect three to four hikes in 2016. However, some analysts think the Fed is finished, the so-called “one and done” view. Will the Fed raise rates in 2016, and if so, by how much?
For years I made fun of those predicting an imminent Fed Funds rate increase. Based on high unemployment and low inflation, I argued it would be a “long time” before the first rate hike. A long time passed … and last year I finally argued a rate hike was likely (although I thought we’d see more than one). Now it seems likely the Fed will raise rates further in 2016.
Tim Duy at Fed Watch expects four rate hikes in 2016:
And Fed Vice Chairman Stanley Fischer thinks four hikes is “in the ballpark”, from Bloomberg: Fed’s Fischer Says Four Rate Hikes in 2016 ‘in the Ballpark’
Of course the Fed will be data dependent and inflation is the key to the number of rate hikes in 2015. From the December FOMC minutes:
If inflation picks up, then four rate hikes is probably “in the ballpark”. If inflation stays low, then we will see fewer rate hikes.
I’ve seen several people arguing the Fed will be cutting rates by the end of 2016 – I think that is unlikely. Instead I think the Fed will be cautious – and they will not want to reverse course. Right now I think something around three rate hikes in 2016 is likely.
My prediction of no rate hike in 2015 was nearly correct
Fed minutes reveal December rate hike wasn’t guaranteed
While the Federal Reserve made a unanimous decision to raise interest rates in December for the first time in nine years, there were some concerns expressed by members about the future of the economy, according to an article in the Wall Street Journal covering the latest minutes from the Federal Open Market Committee.
From the article:
“Because of their significant concern about still-low readings on actual inflation and the uncertainty and risks present in the inflation outlook, [officials] agreed to indicate that the [Fed] would carefully monitor actual and expected progress toward its inflation goal,” the Fed said in minutes of its Dec. 15-16 policy meeting released Wednesday.
Some officials said they wanted to see confirmation that inflation was actually rising as they looked forward to additional rate increases in 2016, the minutes said. Some also said it was a “close call” as to whether they should move in December.
So far, the housing market has not experienced any significant dent from the Fed’s decision to raise interest rates.
The Freddie Mac mortgage rate report at the end of December said that despite some declarations that the FOMC’s recent decision to raise the federal funds rate was a “disaster,” the FOMC’s decision is having a limited impact on mortgage interest rates thus far.
While the most recent report from Freddie Mac shows that mortgage rates surpassed the 4% threshold for the first time in five months, Sean Becketti, chief economist with Freddie Mac, attributed the rise to Treasury yields jumped reacting in part to strong consumer confidence in December.
I’ll speculate that we’ll see one, maybe two, FOMC rate hikes in 2016. The probability of four seems very low (< 20%).
I agree. Four rate hikes would mean the economy is going crazy, and that just doesn’t seem very likely. Better? Yes. That much better? No.
Not only are they NOT going to raise rates 4 times, the FED will be back at ZERO before year end.
Beyond all the smoke and mirrors of cheap money and quantitative easing, America is in an economic depression right now. For Gods Sake, half of the US Population doesn’t go to work.<—THINK ABOUT THAT.
More hyperbole and political rhetoric…
Only an asshole would try to draw political fights with family members during the holidays, then proudly boast about it on a blog. I bet many of your family members (especially on your spouses side) dislike you.
I shouldn’t be surprised because many people on the left are condescending, arrogant and self righteous.
You are a political animal.
As for me, I hate politics and politicians, which is why I’m likely going to vote for TRUMP. LoL
You’re resorting, again, to ad hominem attacks.
Daily Dose of realtor Propaganda
The Housing State of the Union: We’re Back, Baby!
Next week, we’ll hear President Barack Obama’s State of the Union address. Here at realtor.com®, we think it’s also a great time to review the state of the nation’s housing market. Let’s go!
Once the final data on 2015 are complete and tabulated, I’m pretty sure that we’ll see that it was a great year of growth and improvement—one that sets the stage for a return to normalcy in the months and years ahead.
But not all parts of housing are close to normal.
On the sales front, there were more sales of both existing and new homes in 2015. Judging from the data reported through November, new-home sales were up 13% and existing-home sales were up 7%.
That higher volume of sales was supported by strong household formation (1.4 million households formed in the past four quarters ending in September) and another year of solid job creation (an average of 210,000 jobs per month through November). Normal, nondistressed sales increased among first-time and repeat buyers, and buyers who were relocating and/or changing jobs.
Not every type of sale increased in 2015—and that’s OK. Distressed sales declined, as did sales to second-home buyers, investors, and international buyers. Net-net, we got more of what we want and less of what we don’t want, so from that perspective, the growth in 2015 was especially good.
Home prices rose 5% to 7% nationally in 2015, depending on what metric you choose. Such appreciation helped owners see substantial gains in equity. Home values are close to being fully recovered nationally.
This level of price appreciation is well above a normal rate as a result of an imbalance in supply and demand that favored sellers. Indeed, on a year-over-year basis we saw lower inventory levels and faster-moving inventory every month in 2015.
Normally, such price appreciation and evidence of strong demand would see a substantial increase in new construction, but most of the growth again occurred in apartments rather than single-family homes. Even with more than 20% growth in total new construction, we will have created only a net new 900,000 housing units, which is less than 65% of the new households we created.
Most of the new households forming are renting households, and that’s where the demand-supply imbalance is most acute. Apartment vacancies are at multiyear lows, and correspondingly, rents are now rising faster than home prices. While it may sound like a real estate agent’s dream to say that it’s cheaper to buy than rent in more than 75% of the country, that sound bite doesn’t bode well for the future. When renting households are so burdened by making rent payments, they’re less able to save up to own.
Private sector posts strong results, adds 257,000 jobs
This really is good news for housing
Private sector employment grew by 257,000 jobs from November to December, according to the December ADP National Employment Report.
The report is derived from ADP’s actual payroll data and measures the change in total nonfarm private employment each month on a seasonally-adjusted basis.
According to Econoday’s analysis of the report, ADP is calling for unusual strength in Friday’s employment report since its estimate is far outside Econoday’s consensus at 190,000 and well outside the high estimate for 227,000.
“2015 had a strong close with December showing the largest job gains of the year,” said Ahu Yildirmaz, vice president and head of the ADP Research Institute.
“Overall, the average monthly employment growth was just under 200,000 for the year in contrast to almost 240,000 jobs per month in 2014. Weakness in the energy and manufacturing sectors was mostly responsible for the drop off,” said Yildirmaz.
Mark Zandi, chief economist of Moody’s Analytics, added, “Strong job growth shows no signs of abating. The only industry shedding jobs is energy. If this pace of job growth is sustained, which seems likely, the economy will be back to full employment by mid-year. This is a significant achievement, given that the last time the economy was at full employment was nearly a decade ago.”
We close escrow today on our over-priced Irvine house. If we assume 0% growth in its price and 0% growth in equivalent rents over the next fifteen years, along with an annual inflation rate of 2%, NYT’s Rent vs. Buy calculator suggests buying is better than renting by $1,600+ monthly.
The price growth may be tepid, but the comparative rent growth will likely remain high. The crossover point for you would depend more on how much (if any) of a premium you are paying over rental parity. If you pay no premium, you will benefit immediately from buying, irrespective of whether or not house prices go up.
Congratulations on your new home.
The problem with the NY Times calculator is that it depends too heavily on user’s ability to input realistic scenarios. 😉
Congrats on your new place! Hope you make many great memories there.
What I think is happening is that people are being forced to spend an increasing amount of their income for housing. Obviously something has to give. One thing that appears to be “giving” is retail sales. People don’t have the dough to spend at the mall, so they’re trading down to Nordstrom Rack or Ross (both of which are doing great). There’s only so much land and the competition to buy what little of it is vacant is fierce. Higher land prices drive up the cost of building, which drives up the rent needed to justify the cost of building. Buying is not an option for many people because they can’t save up for the down payment. For first time buyers the down payment is a bigger hurdle than the monthly payment.
Yes, for years I’ve harped on the idea that high housing costs are merely a tax that reduces disposable income.
Just wanted to clarify, you are talking about AVAILABLE rentals when you say there is a scarcity not TOTAL rental stock.
Rent control shields a lot of household from market oscilations in rent and steadily increases rent at a higher rate than property tax increases. The end result in Los Angeles is that median rent paid is way less than the “current median market rate”. Also people move less often. If you want to improve your matrix utilize the average rent paid on a propety of that type and not the current asking rate. Only then would your theory be correct that rents won’t go down without a recession. Even in Irvine the current rents are probably lower than asking rents since landlords don’t want to loose good tenants.
I also agree that to reduce housing costs more units need to be built. I disagree that they aren’t currently keeping pace and won’t be in the future. Its harder to build here, but not necessarily more expensive and the product return is higher here than the rest of the nation.