Spring greetings from our humble abode here in Valmonte. After a bumpy start in the stock market, I write with the prospects of a great year ahead in both the overall economy, as well as the local real estate market. The Valmonte real estate market is coming off a strong end to 2017, and a robust start to 2018. In fact, in the last 24 months, no home in Valmonte has sold for less than $1,000,000! In the last year, homes sold for 98.3% of the asking price, and 1/3 sold over asking! Across the board we saw the days on market drop, and supply remained around 2 months or lower, especially for homes under $2,000,000. Bottom line: it’s still a seller’s market.
Are we in a Bubble?
The short answer is NO! Prices have risen for 5 straight years, but even in Valmonte, the price per square foot is only 1.4% more than previous highs set in 2007. But this market is different; here’s why….
- Relative Affordability – Despite the seemingly high prices, housing affordability is 2 to 3 times higher today than during the last market peak in 2006/07. Adjusted for inflation, the average sales price in Valmonte is still nearly $100k less than the last market peak.
- Buyers have skin in the game – The last market peak was supported by no-money down and stated income loans. Not this time; lenders typically require buyers to have 20% down payments.
- Low unemployment – Job growth is outpacing new housing starts, and even without new jobs, there is still a lack of supply to meet the demand for housing.
- Interest rates are still historically low – In fact, interest rates are 2 to 3 points lower in this market cycle than they were in 2006 and 2007. Keep in mind that buyers are buying a payment more than they are a house.
- Renting is expensive – Expensive rents are one of the primary drivers motivating first time homebuyers. Even with the reduction in deductible home ownership expenses in the new tax plan, first time buyers are motivated to buy a home.
What can we expect for 2018?
After a wild run to start the year in the stock market, followed by some crazy volatility, here are our predictions for the coming year.
- Interest Rates – Interest rates will continue to rise, but gradually. This is sort of a no-brainer, as it’s been predicted for the last several years. But higher rates are pushing hesitant buyers to get off the fence.
- Tax Reform – The effects of the newly passed tax reform won’t stifle home buying and selling as some have warned, but it will likely exert downward pressure on supply. Limited supply will make it more challenging for move-up buyers until baby boomers are ready to cash in on their equity.
- Price growth – Consumer confidence is at the highest level in over 17 years, and the consensus from economists is that home prices will increase moderately at around 4% in 2018. We expect higher growth at the entry level homes in the neighborhood while the top end will remain relatively flat – so far in 2018 this is the case.
- Support from the Bottom Up – The growth that led us out of the market bottom started on the high end with wealthier neighborhoods seeing massive price growth in 2013 and 2014. While those markets level off, the lower priced neighborhoods will continue to push the market up.
- Buy Investment Property – The new tax laws won’t hurt landlords; and in fact, it will likely help them. If rising rates and lower inventory reduces the number of first time buyers, landlords will continue to be able to raise rents. Even with a limited supply of multifamily properties and lower overall returns, owning investment property still remains a solid hedge on inflation and is a great way to diversity your portfolio.
If you are wondering how the changing economy affects you and your real estate, give me a call, I’m happy to help!
See you in the neighborhood, Kyle
