Happy New Year to one and all,
This month I will forgo my Real Estate only Update in favor of highlighting a few important tools and numbers, from last year – numbers important for those of us who own or invest in real estate. Hopefully this is helpful, as we anticipate Year 2019. Call me to talk more.
With a good amount to cover, let’s begin:
Employment: Across all metrics, 2018 saw the lowest unemployment rate, whether by gender, or underemployed, or by race and age groups. For 2019: My research shows no end to these low numbers, with perhaps slight improvement.
Wages: In 2018, a number of locales enacted higher minimum wage rates. At the same time, the tight labor market is bringing additional wage growth. Even the 'New NAFTA' with Mexico will bring higher minimum wage standards, in order to import into the US. Expectation: Wage growth in 2019 should likely continue, in the 3% or even 4 % range. A long time in waiting.
Property Values: For all of 2018, 5% was the norm for value appreciation. Here, we saw a slowdown from the 28 % increase in 2017. Expectation: Tight supply of labor, great wages for tech workers, and a strong overall economy could keep us on the path of mid - single digit appreciation.
Federal Reserve: In 2018, Fed raised rates 4x for a total of 1 %. They were much anticipated, with each a steady and slow change. They believe the economy can support additional bumps and see these as positive. Others argue our US dollar is high, inflation is below target, productivity is increasing, EU is slowing as is China, and loss of value in 401(k)’s is a growing concern. Expectation: Fed will move more cautiously in 2019, while yet watchful of US / corporate debt levels. I am with the group thinking we will have 2 more bumps. Keep watch!!
Mortgage / Interest Rates: Long-term rates are surprisingly low compared to year-end expectations. Reason: World-wide cooling of major economies, social unrest, and politics. This makes the USA a safe and more secure place to park cash. As for tomorrow, it's tough. However, lower oil prices should help, as should newly negotiated trade deals. Expectation: We expect little change, as we watch yield curves and US dollar index, as indicators.
Rents: 2018 was another good year. Though many think low single digits is boring, I tend to like boring. For high-end rental, it is soft, as it is the one area with new supply. Increase in “renters” by necessity category, are probably in the low single digits. Expectation: Rent increases for 2019 will depend upon: Jobs and wages growth, along with overall population.
Savings Rate: 2018 revealed a strong 7 % savings rate. This is good news. Expectation: With concerns of instability, this number should hold true for 2019. Increased tax-home pay, plus stronger savings, is healthy long-term.
Housing Supply: In 2018, supply seemed to keep up with demand, though there seems a current imbalance between the higher end vs. the lower. This was true for both homes and apartments. Expectation: With changing Bay area demographics, is seems likely builders will begin to shift to homes having smaller footprints. This will help 1st time homebuyers. Yet, this needed shift may stall due to the costs of government regulation – a cost factor increasingly more harmful than the actual cost of the unit. Moreover, if such fees are based upon “units” – and not square footage – inadvertently the building industry is incentivized to build solely for the higher end. Thus supply needs of the overall public will not be met.
Stock Market: In the face of current market instability – politics, emotion, and insatiable desire to chase bright shiny objects – who knows. On the positive: Company fundamentals are great with strong cash positions, tax revisions have proven positive and helpful in bringing off-shore cash back home. Yet the lack of new IPO's seems a good indicator of world-wide uncertainty, along with an unmet need for cutting more red-tape. If you were a computer, you might have a better crystal ball. For those in stocks, seek proven advisors able to see beyond the headlines. But for me, real estate is my first love.
Debt: For personal debt, good news. 2018 ends with one of the lowest percentages relative to GDP, seen in many years. As for corporate and government debt, both saw increases, expecting more revenue. What may not have been anticipated was the bump in rates causing unexpected higher interest costs. This may become troublesome, especially when it comes to financing and refinancing US debt. This added expense increases our overall federal debt and further limits future options. For sure, this is not happening in a vacuum.
Summary: The marketplace for real estate is in a transition stage. No one knows for sure if the recent downturn is part of a normal seasonal downturn or something more permanent. The recent fires in Northern California may expand the demand for housing in the Sacramento and surrounding regions since the Bay Area continues to be much higher priced homes. If the downturn is more permanent, the Bay Area may experience a downturn but at a much smaller rate than other areas since the area is land locked and does not have much room for new housing.
There still remain a lot of opportunities in housing but stay tuned and just be aware of what is going on in this market before pulling the trigger.