Having fun yet?

Well, yesterday was election day across the state and not much changed really. There will obviously be a bigger impact in November but even that isn’t likely to change much locally. Our IE economy is doing pretty well, albeit slowly. At our annual SRCAR Breakfast with the City Managers, the CM’s from 8 cities shared their progress and vision at meetings in Murrieta and Hemet. There’s a lot going on here including commercial and retail development, transportation and infrastructure improvements and somewhere in excess of 15,000 new housing units either under construction or in the planning stages. Very encouraging.

Our local housing market has had its share of up’s and down’s so far this year. Sales down, prices down; sales way up, prices down; sales way down, prices up; what’s next? In January our month-to-month (mtm) sales dropped 25% from December and our median price fell 1%. February sales picked up 1% but prices fell another ½%. March spiked up 29% in sales and prices increased 4%. For some reason, April home sales dropped 9% in what has traditionally been a growth month. April sales were slow across all of California even though they were very strong in most of the rest of the country. Historically, local sales should increase every month from now thru July or August. This year? Who knows?

May sales picked up 14% and medians were up 4% mtm. That puts our year-to-date sales volume 2% ahead of 2015 (4,302 / 4,396) and keeps our median price 7% ahead of this point in 2015 ($295,647 / $316,510) for the region. Individual cities may vary.

You already know the Fed has waffled on raising interest rates this month. We talked about that a couple months back – just when the economy appears to be getting strong enough to weather a rate hike, some part of it tanks again and we’re reminded just how fragile and potentially illusory our recovery really is.

The jobs report for May was dismal. Even the cooked books of the Labor Department could only find 38,000 new jobs in May. And that was after they ‘adjusted’ March and April numbers down 59,000 jobs. Here’s three different reads of the same report – using terms like ‘Drastic’ and ‘Bleak’, one department said “That 38,000 jobs is the fewest since 2010”. The department across the hall said “But the unemployment rate dropped to 4.7%, the lowest it’s been since November, 2007. Isn’t that great?” Then another department chimed in, “We only got to 4.7% unemployment because 458,000 more Americans gave up trying.” Pick your own spin on this one.

While consumers seem to be spending more, consumer confidence was down in May and GDP results so far this year have been underwhelming. Housing remained a bright spot in some ways with the National Association of Realtors® reporting home sales at a 10 year high across the country and prices rebounding to within 4% of their pre-recession level. Of course that’s for markets that only declined 30%. In markets like ours that dropped 60%, there’s still a ways to go.

Two problems with the housing market to keep an eye on. One problem is that low inventory and decent demand is driving prices ever higher reducing affordability. That is keeping a lot of people out of the market as first timers just can’t afford a home and people who lost their homes before are getting priced and regulated out. Investors left long ago. Inventory remains very low - 6 of our 9 cities currently have an inventory of less that 2 months! Only Canyon Lake has an inventory that would be considered ‘normal’ by normal standards – 6.2 months.

This is creating a second problem that is just starting to be explored in many areas. More builders are building homes for the upper end client – expensive homes that are selling well and more profitably to people who have actually benefitted from the Obama economy, and not enough lower end homes for people who barely qualify and where the profit margin is slim. Even in our area many of the homes in the pipeline would qualify as moderate and higher developments – and why not? With higher coastal prices continuing to drive population our way in search of affordable homes, is it any wonder our local ‘affordable’ homes are pushing the marginally qualified even further inland? Or out of state?

The good news is – only 5 more months until this interminable campaign season ends.

SW Market @ A Glance

Southwest

California Reporting

Period

Current

Period

Last

Period Year Ago

Change

from

Last

Period

Change

from

Year

Ago

Existing Home Sales

(SFR Detached) May 2014 1,110 951 1054 14% 5%

Median Home Price $332,044 $317,968 $306,077 4% 8%

Unsold Inventory Index

(SFR Units) 2,159 2,006 2,271 7% 5%

Unsold Inventory Index

(Months) 2.4 2.7 2.6 11% 8%

Median Time on Market

(Days) 60 65 69 8% 13%

Source: CRMLS

0

50

100

150

200

250

300

Temecula Murrieta Lake Elsinore Wildomar

0

50

100

150

200

250

Menifee Canyon Lake Hemet San Jacinto Perris

Southwest California Homes I-15 Corridor

Single Family Sales

Southwest California Homes I-215 Corridor

Single Family Sales

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

$500,000

Temecula Murrieta Lake Elsinore Wildomar

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

$500,000

Menifee Canyon Lake Hemet San Jacinto Perris

Southwest California Homes I-15 Corridor

Median Price

Southwest California Homes I-215 Corridor

Median Price

April 2016 Transaction Value*:

Temecula $78,702,089 Lake Elsinore $29,324,802

Murrieta $73,195,291 Wildomar $13,429,386

Menifee $51,440,384 Canyon Lake $5,226,000

Hemet $33,973,793 San Jacinto $14,890,825

Perris $20,002,005 Total $320,194,991

* Revenue generated by single family residential transactions for the month.

May 2016 Transaction Value*:

Temecula $77,380,227 Lake Elsinore $34,705,296

Murrieta $90,097,629 Wildomar $13,107,797

Menifee $63,752,546 Canyon Lake $8,179,400

Hemet $41,970,559 San Jacinto $16,843,138

Perris $27,697,791 Total $ 373,734,628

* Revenue generated by single family residential transactions for the month.

May Median Price:

2015 2016 %

Temecula $390,450 $415,000 6%

Murrieta $355,500 $395,000 10%

Menifee $295,000 $318,000 7%

Lake Elsinore $297,000 $325,000 9%

Wildomar $345,000 $359,950 4%

Canyon Lake $421,250 $350,000 17%

Hemet $196,000 $219,000 11%

San Jacinto $207,500 $242,000 14%

Perris $247,700 $264,450 6%

0

50

100

150

200

250

300

350

400

450

500

On Market (Supply)

Pending Closed (Demand) Days on Market Months Supply Absorption rate *

3

8

6

2

3

3

2

1

1

5

6

1

.

8

1

4

3

%

4

8

2

1

9

3

1

6

8

6

2

2

.

9

8

5

%

3

3

4

2

6

0

1

8

9

5

3

1

.

8

1

3

5

%

2

9

6

2

2

2

2

1

1

5

1

1

.

4

1

4

3

%

2

0

8

1

3

1

1

1

0

7

2

1

.

9

1

3

1

%

1

1

8

1

0

8

7

3

5

4

1

.

6

1

2

2

%

1

1

3

1

2

7

9

0

6

4

1

.

3

2

0

9

%

1

4

5

1

5

2

2

7

9

6

.

6

6

1

%

7

7

5

6

3

6

4

8

2

.

1

8

2

%

Murrieta Temecula Hemet Menifee Lake Elsininore San Jacinto Perris Canyon Lake Wildomar

* Absorption rate - # of new listings for the month/# of sold listings for the month

0

500

1000

1500

2000

2500

3000

1/12 4/12 7/12 10/12 1/13 4/13 7/13 10/13 1/14 4/14 7/14 10/14 1/15 4/15 7/15 10/15 1/16 4/16

Inventory Sales

Southwest California Region

Inventory v. Sales

May Demand On Market 7% Pending Sales 1% Closed 14% Days on Market 8% Months Inventory (2.7 – 2.4) 11% Absorption (109% - 123%) 11%

Month over Month

May Market Activity

By Sales Type

Standard Sale Bank Owned Short Sale

Active

% of

MKT Sold

% of

MKT Active

% of

MKT Sold

% of

MKT Active

% of

MKT Sold

% of

MKT

Temecula 465 96% 160 95% 3 1% 2 1% 16 3% 6 4%

Murrieta 366 95% 198 94% 2 1% 3 1% 9 2% 7 3%

Wildomar 70 91% 33 92% 1 1% 1 3% 5 6% 1 3%

Lake Elsinore 185 93% 102 93% 3 2% 2 2% 10 5% 6 5%

Menifee 273 69% 199 94% 4 1% 3 1% 11 3% 5 2%

Canyon Lake 140 97% 22 100% 2 1% 0 0% 3 2% 0 0%

Hemet 306 92% 173 92% 10 3% 9 5% 13 4% 7 4%

San Jacinto 100 85% 66 90% 6 5% 3 4% 12 10% 2 3%

Perris 97 86% 78 87% 5 4% 1 1% 7 6% 7 8%

Regional

Average

2002 89% 1031 93% 36 2% 24 2% 86 4% 41 4%

Let’s talk prices. Last year I switched out reports of average price to true median price. Average price of a home is derived by dividing the transaction value for the month by the number of homes sold. Depending on the mix of homes sold there can be quite a delta between average and median price, as when an area starts to sell more higher end homes. That can skew the average price pretty dramatically as when I used to caution that ‘a $million plus home sold in the Wine Country, La Cresta or Canyon Lake, may tweak the average price upwards disproportionally.’

The median price is the point at which half the homes sell for more, half for less. It is a more reliable barometer of housing prices, less volatile and, in some cases, far less dramatic. For example, in Temecula there were 3 homes sold over $1 million last month including one at $2.7 mil. (That one originally listed for $3.9 by the way.) The median price in Temecula last month actually dropped from $417,755 to $415,000 but the average price increased from $457,823 to $460,597. Similarly in Murrieta with 4 homes over $1 mil, the median rose from $390,000 to $395,000 while the average price went from $390,748 to $427,003. Average prices are more fun!

Adding to our inventory problem is the fact that we are selling houses faster than we’re listing new ones. Six local cities had absorption rates in excess of 100% last month with Murrieta and Menifee selling 143% of new listings (1.4 homes sold for every new listing) and Perris selling more than two homes for every new property to hit the market (209%). Hard to build inventory that way.

Homes were also staying on the market a little less time – 60 days compared to 65 the previous month. Lenders have learned to handle the timeframes of the TRID disclosure forms introduced last October. Initially this caused an increase of nearly 2 weeks to every closed escrow but now that they have a handle on it we’re back down.

Finally, as indicated below, distressed property sales continue to decline as a percentage of the market with most cities back to pre-bust levels averaging around 4%.

Courtesy of

And now… A few words about those pesky Millennials who are destined to be the savior of the housing market and the general answer for questions about anything plaguing the environment to household formation to the reason people #FeelTheBern.

Millennials are staying at home.

According to a new study by the Pew Research Center, millennial men are more likely to live with their parents than with a spouse or partner, with 35% staying with mom and dad and just 28% living with a significant other.

Millennial women are less likely to live at home than with a partner, but not by much. Thirty-five percent live with a significant other, while 29% live with their parents. This is the smallest gap for young-adult women ever recorded by Pew.

In fact, more millennials (ages 18 to 34 as defined by Pew) are living at home than in any other living arrangement. This is the first time a plurality of young adults in that age bracket have lived with their parents, rather than on their own or with a partner or roommates, in American history, according to the Pew analysis. A grand total of 32.1% of millennials are living at home.

There could be a few reasons for this shift, according to Richard Fry at Pew, but chief among them is that young people just aren't settling down the way they used to.

"This turn of events is fueled primarily by the dramatic drop in the share of young Americans who are choosing to settle down romantically before age 35," Fry said in a post on the study.

"Dating back to 1880, the most common living arrangement among young adults has been living with a romantic partner, whether a spouse or a significant other. This type of arrangement peaked around 1960, when 62% of the nation's 18- to 34-year-olds were living with a spouse or partner in their own household, and only one-in-five were living with their parents."

Fry also noted that some of the difference between men and women may be driven in part by changes in economic status.

On the one hand, the percentage of young men employed in the workforce has dropped from its all-time high in 1960, and wages for the cohort have declined.

Millennials are more likely to live at home than any other young adults in American history

On the other hand, young women have steadily been increasing their employment since that time. So much of the divergence, Fry said, comes from women delaying cohabitating with a partner because of improved job prospects for them and declining prospects for men.

Underlying these trends could be a variety of economic factors including student debt, the high cost of first-time homes, and slower-than-expected wage growth over the past few years. Add those all up and there are more than a few economic deterrents from getting out of the childhood bedroom.

The study also notes that educational attainment and ethnic or racial background can influence living situations. For example, those with bachelor's degrees were much more likely to not live at home than those with less education.

Whatever the reasons, it's clear that more and more young adults are crashing with mom and dad.

It’s true: Kids Today are more dependent on their parents than Kids Yesterday.

At least when it comes to housing.

Nearly a third of Americans age 18 to 34 were living with their parents in 2014, according to a new analysis from the Pew Research Center. That’s the highest share since the Great Depression.

It was also the first time since at least 1880 that young adults were more likely to live in their parents’ homes than in their own households with a spouse or other romantic partner.

Crusty old pundits will surely declare this a sign of millennials’ failure to launch. They will bemoan young people’s insistence on mooching off of beleaguered boomer parents rather than going into the real world and getting their own grown-up jobs, spouses and mortgages. Millennial basement-dwelling — along with millennial musical tastes, millennial slang and millennial fashions — is thus clear evidence of a generation-wide crisis of character.

But there are a few reasons all this re-nesting may not be such a bad thing.

For one, consider the macroeconomic and social conditions that today’s young adults face.

Their unemployment (and underemployment) rates remain relatively high, as do their student debt burdens. Their wages have stagnated.

Young adults want to live on their own and aspire to purchase homes. But homeownership remains out of their reach. National home prices today are not so far below their pre-recession peaks, with some metro areas even reaching all-time highs. Meanwhile, rents, too, have skyrocketed, fast outpacing inflation.

Young people are also living with their parents in higher numbers in part because they’re delaying marriage. This is a consequence of both precarious job prospects and a growing perception that financial security is a prerequisite to tying the knot — which the vast majority of singles say they still very much want to do.

In this context, swallowing their pride and living with parents rather than frittering away money on rent looks financially prudent.

Second, the growth of intergenerational households shouldn’t be so alarming given how common this living arrangement is everywhere else in the developed world. In fact, the share of young adults here who live with their folks is still relatively low compared with the rate in many of our peer countries.

According to a recent census survey, 42 percent of Canadian adults age 20 to 29 live in their parents’ homes. Across the European Union, it’s nearly half of young adults age 18 to 34. In Japan, about half of unmarried 20-to-34-year-olds (dubbed “parasite singles”) live with their parents, too.

But, you cry: American exceptionalism! We don’t want to be like everyone else!

It’s not clear, though, why a society in which young singles live on their own is more desirable than one in which the same demographic errs on the side of doubling up with relatives. This norm is especially puzzling in the United States, where for decades the tax code has incentivized home buyers to purchase as much house as possible, whether or not they need the space.

Perhaps it makes sense to use the housing stock we already have more efficiently, rather than insisting that young people move out as part of some artificial adulthood milestone.

Of course, boomers may object to bunking up with their boomeranging offspring, even when they have ample space. Well, boohoo.

Today’s boomers have benefited for decades from huge public intergenerational transfers of wealth. Is it really so much to ask that they make some much smaller private intergenerational transfers to their own children?

The public infrastructure that boomers have enjoyed all their lives was largely built by their elders. Those who went to college paid low tuition and received much more generous public subsidies for their schooling. For decades they have paid tax rates far too low to actually fund the government services they receive. They have racked up trillions in federal debt and handed the tab to their kids.

Why more millennials than almost ever live at home By Catherine Rampell, The Washington Post | 6 a.m. May 28, 2016

The Housing Market Horror Story Isn’t Over Yet

By David Dayen

The raw numbers show very good times for the U.S. housing market, one of the bulwarks of support for economic growth. Existing home sales rose for the second straight month in April and are tracking 6 percent above last year. New home sales shot up at their fastest pace in eight years. Housing starts, building permits and pending home sales — a signal of future growth — are also all increasing at healthy clips.

It’s enough to make you believe that the housing market has completely left behind the troubles of the bubble and crash years and is poised to lead the nation into prosperity. But there’s something lurking in the data, which I first identified in myvery first article at The Fiscal Times two years ago. We don’t have a housing market, we have two: one for the rich and one for the rest.

First of all, the supply of new and existing homes appears to be shrinking, a natural occurrence given that sales have risen. We can get out our supply and demand curves and reason that low inventory inevitably means higher prices. And indeed, the average sales price on a new home in April was $379,000 (the median price was $321,100, meaning 50 percent of sales were above that number and 50 percent were below).

This is a record in nominal dollars (though if you account for inflation, it’s onlyhalfway up the scale of the housing bubble). And it reflects a change in the mix of home sales, which you can see in this quarterly sales chart from the U.S. Census Bureau. Though new homes sales rose from 2013-2015, sales of homes below $200,000 keep falling. And homes at the higher end, particularly those selling for $400,000 and over, are rising. According to Bill McBride of Calculated Risk, 30 percent of new homes sold in 2002 were under $150,000. In April, that number was 2 percent.

It’s clear that builders are making more luxurious homes rather than trying to attract entry-level buyers. Not only does this maximize their profits, it matches with the consumers most willing to buy homes.

The conventional wisdom on this topic is that lower-income homeowners with subpar credit scores were being pushed out of the housing market by gun-shy lenders wary of new government regulations. They “closed the credit box” to newer borrowers, denying Americans their chance at a home. The Urban Institute estimated in 2014 that 1.2 million borrowers were denied credit from these tighter standards, and a disproportionate number of those were borrowers of color.

First of all, even the Urban Institute admits that the credit box has loosened in the past two years. Just this week, both JPMorgan Chase and Wells Fargo started offering mortgages with a skinny 3 percent down payment.

Second, take a look at this intriguing analysis from Archana Pradhan, an economist with market research firm CoreLogic. Pradhan looks at the data and finds that the problem is not tighter supply of mortgage credit, but weaker demand at the low end. The denial rate for loans is actually lower today than in 2005 and 2006, and the distribution of credit scores for loan applicants has shifted dramatically. Fewer people with poor credit scores are even bothering to apply for a mortgage. “Self-sidelining of cautious/discouraged consumers makes it appear as if credit is tightening,” Pradhan writes.

Maybe low credit-score borrowers are discouraged by the expectation of being denied a loan. But I think two other things are going on. First of all, people don’t have the money. Wages are starting to grow a bit but have been stagnant for years, and with prices growing, they simply cannot afford a mortgage. This is especially true among millennials according to the Pew Research Center, for the first time since the 1880s, more young people aged 18-34 are living with a parent than with a spouse or romantic partner.

Besides the discouraged borrowers, there are the cautious ones. CoreLogic estimates that 6.2 million families have lost their homes to foreclosure since September 2008. Practically everyone in the middle class of this country either experienced the horrors of mortgage defaults, loan modification attempts and eviction notices or knows somebody who did.

A decade after the housing bubble started to collapse, people remain shattered by foreclosure or continue to fight for their homes. More than one in three homes valued at $100,000 are still “underwater,” meaning the borrower owes more than the home is worth. The foreclosure fiasco totally crushed families, and would-be buyers reasonably look at that mess and opt out.

Low demand for entry-level or modestly priced homes fuels developer desires to maximize profits by catering to the luxury market, filled with the only people left buying. The whole thing folds on itself, accelerating the trend of wealthy Americans segregating themselves through housing and pulling away from everybody else. The most expensive zip codes in America have seen far greater price appreciation than their lower-income counterparts (this is particularly true when you factor in communities of color, where prices have stalled out the most). And the biggest factor in that price appreciation is higher demand: In higher-income areas, more people bid against one another on properties.

This divide has tremendous implications for the country.

First of all, home values remain one of the few ways for lower-income families to gain wealth in America. If they don’t want or don’t feel they can get a mortgage, we have to find other wealth-building strategies.

Second, the continuing trend toward the luxury market could create a price spiral that eats away at affordability, especially if mortgage interest rates rise.

Third, housing groups could continue to push to “open the credit box” when that isn’t the problem, exposing those vulnerable families willing to buy a home to more risk. And finally, the economy won’t expand as much if residential housing is a mere playground for the rich.

The situation is far worse in the rental markets, where affordability is at a point of crisis. Maybe more construction would help, or maybe regulators can generate more confidence that housing isn’t a trap for the non-rich. Or maybe people just need to have enough money to actually afford a home (which would help fix rental markets, too, by reducing demand). But until we unlock the keys to reversing this, and give everyone a shot at an affordable place to live, we cannot claim that the housing market is on stable footing.

Housing Market cont.

Dr. Chris Thornberg echoed this concern in recent remarks at the

TVCC Economic Summit when he said “It’s great being a liberal in San

Francisco where the people and policies have conspired to increase

the cost of housing to the point where they no longer have to deal

with poor people.”