Silicon Valley Real Estate NOT in a Bubble Says NAR Economist Yun
by Santa Clara County REALTOR Michelle Carr Crowe
"Is Silicon Valley real estate in a bubble?," agents and consumers want to know.
"No, We Are Not In a Bubble," says NAR Chief Economist Lawrence Yun, presenting NAR's Economic Forecast to Silicon Valley Association of REALTORS and Santa Clara County Association of REALTORS on Oct. 19, 2017.
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Yun explained how conditions today are fundamentally different from the bubble of a few years ago. Home sales are recovering and the subprime lending is gone. Mortgage lending has stringent requirements today - almost too stringent, according to Yun. Three key areas are strong: job growth plus business and consumer sentiments are high.
Like Silicon Valley, though to a lesser extent, much of the nation is experiencing high demand, rising home prices and low inventory, said Yun. The economy is growing, though not at a robust pace. Much of the housing shortage is due to the lack of home construction because of shortage of lots, lack of skilled workers, stringent lending, the high cost of lumber due to higher tariffs, and tedious and costly regulations.
Regarding the low housing affordability and inventory in the Bay Area, Yun warned, "Unless we address the housing issue, including the little-talked-about problem of high numbers of undocumented construction workers, jobs will go elsewhere."
Yun cited that a recent survey showed 80 percent of respondents still believe that owning a home is the American dream, and about 87 percent said they plan to buy a home in the future.
There is a glaring disconnect between the dream and reality, as the homeownership rate is still at a near 50-year low, which bodes ill for the country as a whole. Housing typically drives numerous other industries, including home improvement and home-related purchases, including furnishings.
Why aren't people buying? Yun pointed to student debt, which has tripled in the last 10 years. A Kansas City Federal Reserve study estimates there are 6.9 million missing households. Many of those are young adults ages 25 to 34 who are still living with their parents. The situation is understandable in the Bay Area where the cost of housing is prohibitive, but this occurrence is nationwide.
Yun projects 2017 will end with 1.7 percent GDP growth and forecasts 2.7 percent GDP growth in 2018. Unemployment is down and he expects job growth to continue through 2018.
"I do not see a recession over the horizon with continuing job creation," said Yun. "However, uncertainties lie ahead due to several factors."
Factors quoted included the following:
Rising interest rates. Yun expects 2017 will end with a 4 percent 30-year interest rate and forecasts 4.5 percent in 2018.
"We're in a rising interest rate environment," said the NAR chief economist.
Fannie Mae and Freddie Mac loans will be a 2018 issue. "Without them, mortgages, especially for first time buyers, will be difficult to access," warned Yun.
Dodd-Frank Wall Street Reform and Consumer Protection Act. Under the current administration it is very likely that many Dodd-Frank requirements will be lifted.
FHA mortgage insurance premiums. One of the first things the administration did when taking office was suspend a cut to the FHA mortgage insurance premium that President Obama announced during his final days in office.
Yun said NAR was told the Trump administration had no issue with the FHA and only suspended the cut because it was done by the prior Obama administration.
GOP tax reform proposal. Yun said to expect the current tax reform proposal has unintended consequences for middle class homeowners. The proposal fundamentally changes the homeownership incentive structure by diminishing the role of the mortgage interest deduction (MID) and will result in less of a push for people to be homeowners. The proposal calls for raising the standard deductions and keeping the MID, but does away with personal exemptions and eliminates state and property tax deductions, which are big incentives for homeownership. NAR estimates homeowners with incomes from $50,000 to $200,000 could face average tax hikes of $815 in the year after enactment.
Renters, not homeowners, would be the clear winners. "One wonders, is this the direction America wants to pursue?" Yun asked.
The homeownership incentives are so critical for a strong housing market that creates jobs and builds stable communities that Yun underlined the importance of REALTORS® answering NAR's "Red Alerts" Calls for Action and urging Congress to reform the tax code and protect middle class homeowners.
Local agents still want to know why fewer Silicon Valley homeowners are selling than in the past. Yun pointed to the high cost of taxes as one factor. A married couple can take up to $500,000 tax-free from capital gains. However, with homes selling at $1 million, that pencils out to netting maybe $800,000 on the sale. While people love the idea of keeping half-a-million dollars tax-free, they hate giving up the remaining large sums of money to the government.
Seniors who sell and buy within the cooperating California counties can keep their tax basis from the old property and transfer it to the new one. However, sellers who've been paying $1,000 per year or less for property taxes balk at increasing their annual costs to ~$10,000-$15,000 per year if they buy a $500,000 home in a county or state with 2-3 percent property tax rates.
Data and photos gathered from both presentations to the Silicon Valley Association of REALTORS and Santa Clara County Association of REALTORS. Other images courtesy of www.pixabay.com and author's collection.
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