Home Gray box 3 Residential Real Estate: Moderate Growth, Tight Inventories In 2020

Residential Real Estate: Moderate Growth, Tight Inventories In 2020

In both the single-family and multi-family sectors, 2020 is expected to see strong demand, tight inventories and stable, if not skyrocketing prices, real estate experts told the Business Journal.

Uncertainty revolves around the state’s new rent control law, and Long Beach will find out how well the market will absorb the new multi-family units becoming available in the immediate future.

“It’s an unusual market, to say the least,” said Phil Jones, managing partner, Coldwell Banker Coastal Alliance.

Robert Stepp, Stepp Commercial
Robert Stepp, president of Long Beach-based real estate firm Stepp Commercial, recently listed this 22-unit apartment complex at 5401 E. Anaheim Rd. for $10.15 million. (Photograph by Brandon Richardson)

“With housing supply dropping to the lowest level in nearly seven years, California experienced an unusual jump in its median price at the end of the year when the market is supposed to cool down,” said California Association of Realtors Senior Vice President and Chief Economist Leslie Appleton-Young. “While low rates have been fueling demand in the second half of 2019, supply constraints continued to put a drag on the market and undercut the positive effect of low rates.”

The market is facing upward and downward pressures, leading to some level of hesitancy among buyers. According to a news release by the association after a poll in December, “Many buyers, however, remain uncertain about the current housing market conditions, as only one-quarter of respondents (25%) believe that it is a good time to buy now.”

Locally, in the single-family sector, activity has already started increasing in 2020, with the levels of interest in real estate at the beginning of the year reminiscent of the activity that typically takes place in the spring, Jones said.

“January is the new April, the early demand. This year, it’s even stronger. And we expect the demand to continue to grow as the year progresses,” Jones said.

But what marks the current market as different is that the increasing demand has not driven prices into an upward spike in the Long Beach area, Jones said.

“In Long Beach, the pricing appreciation has been moderate for the past year, which is striking because demand is so strong and supply is so tight. I think buyers are not as aggressive as they used to be,” Jones said.

“Still, there’s so much competition. We are seeing overwhelming demand, and we have a smaller inventory than we did last year at this time,” Jones said. “We’re seeing the inventory continue to shrink, and the demand continue to rise. There’s a sense of urgency among buyers, but it’s not driving up prices.”

The demand is strongest for homes in the $500,000 to $800,000 range, Jones said. And millennials will begin to join the market for single-family home ownership in greater numbers, placing additional pressure on homes in that segment, said Robert Kleinhenz, economist and founder of Kleinhenz Economics.

“In 2020, more and more millennial households will form and they will want to become homeowners,” Kleinhenz said. “But those demographics do bump into these constraints.”

Constraints on the upward rise of home prices come from a variety of factors, leaving Jones anticipating only moderate appreciation of between 3-5% percent for home prices in the $500,000 to $800,000 range.

In response to lending practices in the past, the qualifications for obtaining a home mortgage loan remain high, and that limits the amount that potential home purchasers can spend on a house. In addition, the housing market has become more rationalized in recent years, with buyers having a much clearer picture of availability while shopping, meaning they are less likely to make purchases that are out of line with the market.

And housing prices, particularly for single-family housing, are always reflective of the ability of the local economy to provide employment that allows people to purchase those homes, something that Kleinhenz said is a potential concern for Long Beach.

“There’s going to be a premium because it is a coastal community. It’s very likely that home price increases over time are pricing out households with kids,” he said. “I think if the city wants to have a young, vibrant workforce, it needs to take up this issue. We need to make sure that housing is available for all types of households.”

In the multi-family sector, Long Beach is expected to see the arrival of hundreds of new units, predominantly in the premium market space. With tight inventories and increasing pressure for affordable and workforce units, expectations for investors are moderate.

“We’re seeing the re-engagement of investors with moderated expectations,” said Damon Wyler, Marcus & Millichap vice-president/regional manager for Long Beach. “Prices remain at all-time highs, in terms of price per unit and for investors, but volume in 2019 represented a bit of a pullback from a record in 2018.”

For rental units, California has adopted a statewide rent control law that went into effect January 1, limiting annual rent increases to 5% plus the local cost of living increase. Buildings less than 15 years old are exempted, and the time limit rolls with the calendar, meaning that a building constructed in 2020 would be exempt from the rent control limitations for 15 more years.

From an availability point of view, multi-family unit inventories remain low, especially in the segment for workforce housing, Wyler said.

“Workforce housing remains extremely restrained,” he said. “Overall, the market is in dire need of additional units.”

Robert Stepp, president of Stepp Commercial, which specializes exclusively in multi-family investment properties in the Long Beach area, also says that he is seeing low inventories, but he anticipates that political changes on the near horizon may spur changes even sooner.

“So far this year, we’re seeing low inventory in the market, which will most likely pick up as owners look to make a move before this year’s election and potentially more restrictive rent control policies,” Stepp said. “Prices are certainly softening and cap rates are rising.”

There is one more wild card on the horizon for the residential housing market.

The California Association of Realtors is gathering signatures to place another initiative on the ballot to modify the Prop. 13 tax rate portability laws. The last attempt failed at the ballot box, but the association has altered the proposal to address some of the concerns that were raised about the initiative.

Current law allows people 55 and older to move once and hang on to their Prop. 13 tax rates, but they must move into a home that is of equal or lesser value and can only do so once. Representatives from the California Association of Realtors have said that because of this element of the Prop. 13 regulations, seniors have been holding on to their homes even when they have outgrown them and would like to downsize.

The new initiative would expand the portability of the Prop. 13 tax rate and close a loophole that allows children who inherit homes to also inherit the lower tax rate and use the properties as second homes or rentals.

Jones said that if the measure passes, California could see an additional 60,000 or more homes on the market annually, a significant amount compared to the nearly 400,000 detached, single-family home sales per year.

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