Kristin Regan, January 2019
Good news in these unstable times. Reliable economists are forecasting positive growth in the U.S. real estate market for the next three years. This growth will be at a slower pace than we have seen in the post-2012 boom, but we will still see increases in residential home prices. Goldman Sachs expects the U.S. housing market to increase 3-4% annually over the next three years. And, the risk of recession is low.
I believe the prime areas of Los Angeles are poised to exceed 3-4% growth, absent some catastrophic unforeseen event. The reasons for this are: Los Angeles has a limited amount of space; it is in high demand with buyers from out of the state and out of the country; it has not been overbuilt in most areas; and the prime areas have performed very well over the last few years, with some neighborhoods experiencing 10-20% increases in average home prices.
We are seeing strong interest from very qualified buyers in the first two months of this year.
Goldman Sachs is predicting housing prices in the U.S. to continue to appreciate in 2019-2021, but at a slower rate of 3% to 4% annually. This is a notable change from 2014-2017 annual increases where the prices accelerated 4% to 6%. In late 2016, the national home prices overtook their pre-crisis peak, and for the next two years, prices accelerated to new records. The slower rate of 3%-4% annual growth is traditionally a normal rate of growth for the real estate market, and it may be the new normal for years to come. S&P Case-Shiller expects a similar slower growth rate of 3.7% in 2019, 2.8% in 2020 and 1.9% in 2021. (Goldman Sachs; us.spindices.com.)
The number of existing home sales in the U.S. is predicted to decrease minimally in 2019 and 2020 from the 2017 record high. We should see a small increase in 2021 which is more in line with the 2016 figures. New home sales, however, will continue to make small increases from 2019-2021. (Goldman Sachs.)
California is expected to see a 3.1% increase in housing prices in 2019. This is contrasted to a 5.4% increase in 2016; 7.2% in 2017 and 7% in 2018. The number of home sales is expected to be slightly lower than 2018. (CAR 2019 Housing Outlook.) UCLA Anderson is more optimistic for California housing prices than the U.S. because California has a shortage of housing and recent legislation has made it easier to build.
Prime Los Angeles
The prime Los Angeles market is poised to out-perform the U.S. and California. These areas have not experienced the large price drops that New York and some other cities experienced in 2018.
Some of the more recent annual price increases have occurred in the affluent neighborhoods of Los Angeles. (First Am. Title/WEA.)
- Bel Air experienced a rapid acceleration in sales prices with a 11% increase in 2017 and an 2% decrease in 2018.
- Pacific Palisades was up 6% in 2017 and 16% in 2018.
- Malibu appreciated at a steady rate of 9% in 2017 and 12% in 2018.
- Brentwood saw an 3% increase in 2017 and a 20% increase in 2018.
- Beverly Hills-90210 experienced a 6% increase in 2017 down 8% in 2018.
- Beverly Hills-90211 was up 11% in 2017 and up 6% in 2018.
- Sunset Strip was down 11% in 2017 and up 20% in 2018.
- Hancock Park was up 22% in 2017 and 29% in 2018.
- Manhattan Beach increased 19% in 2017 and down 1% in 2018.
Expectations for Interest Rate Increases
The Federal Reserve has stated that there will be no more rate hikes in 2019. (Bankrate.com.) Goldman is predicting at least two rate increases for 2020 in order to keep balance in the economy.
Reasons for the Slowdown
The slowdown in the housing market rate of growth is not viewed as alarming to many economists. They do not see a crash or recession in the foreseeable future, absent some unexpected event. There are three fundamental reasons for the slowdown and none of them are likely to change anytime soon. First, mortgage rates have increased 100 basis points since 2017 which puts pressure on the ability of buyers to purchase. Second, prices of homes have outpaced prices of rents and incomes since 2012, exacerbating the impact of rising interest rates. Third, the 2017 tax law changes have reduced the tax benefits of owner-occupied housing. Volatility in the stock market, instability in U.S. policy and trade wars with China are adding additional psychological pressure to the mix. (Goldman Sachs.)
Low Risk of Recession
Goldman Sachs does not see the slowing of U.S. housing prices to be a new crisis for the U.S. or the global economy. One reason is that housing construction has been restrained since the 2008 crash which has kept the inventory low, especially at the lower end of the housing market. Some regions may see negative price growth in the next few years, but the national average price appreciation is expected to remain positive.
The risk of recession is also low according to Goldman Sachs. “For now, neither overheating risks nor financial imbalances—the classic causes of US recessions—look worrisome. As a result, the expansion is on course to become the longest in US history next year, and even in subsequent years recession is not our base case.” In 2018, the U.S. economy grew at a rate of 3%. The firm expects the economy to grow 1 ¾% in 2019. UCLA Anderson Forecast predicts a 2% acceleration in the U.S. economy in 2019 and 1 ½% for 2020-2021.
What is the Best Return on Investment?
Goldman Sachs is not feeling very bullish about stocks in 2019. If the 25% tariffs are not levied on all Chinese imports, the firm expects the following growth in 2019:
- U.S Housing prices will increase 3%-4%;
- The S&P 500 is expected to rise 5% to 3,000 by the end of 2019 (after closing at 2,850 in 2018);
- The base forecast for stocks is a 7% return;
- T-Bills are predicted to return 3%;
- Treasuries are expected to return 1%; and
- Cash will be a competitive asset class as compared to stocks.
Thus, investing in real estate, especially in the prime areas of Los Angeles, is expected to remain a very strong and stable investment. Demand is still very high from local, national and international buyers. This is very good news for Los Angeles.