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Ups, Downs, and In-Betweens

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There's wide variety in the economic outlook of Southern California's six major markets.

Our outlook for 2016 varies dramatically by market and price point in Southern California. At a high level, there are three major markets on the upswing, one is holding its own, and two are showing signs of slowing.

Markets on the Upswing: Stronger Momentum

San Diego 

Major indicators are trending positive. Housing demand is up, thanks to increasing job growth (current +40,000 year-over-year versus +31,000 at this time last year), declining unemployment (current 4.8 percent versus 6.0 percent a year ago) and rising wages (current +2.1 percent). Demand drivers are once again pushing increasing home sales.

After 16 straight months of declining year-over-year resales through June 2015, year-over-year resale activity turned positive in July and has been increasing every month since then: July 2015 +3.7 percent year-over-year, August +6.6 percent year-over-year, September +7.5 percent year-over-year, October +8.0 percent year-over-year.

Rising year-over-year sales activity and a year-over-year decline in listings are pushing resale prices up. The Burns Home Value Index™ for resales was up 6.4 percent in November 2015 year-over-year compared to a 4.6 percent increase at the same time a year ago.

In the new home market, lack of supply continues to keep total sales down. As of the end of the third quarter of 2015, there were just 79 actively selling new home projects in the entire county, 62 percent below the average of the last 27 years (206 projects).

Ventura

A strong rebound in job growth last year (+6,700 year-over-year as of October versus +3,800 at the same time a year prior), declining unemployment (currently at 5.4 percent versus 6.4 percent a year ago) and one of the highest rates of wage growth in Southern California (+2.8 percent year-over-year) are driving the demand for housing.

Resale activity was up 15 percent year-over-year in October, and resale prices were up 5.9 percent year-over-year in November, compared to 5.2 percent a year earlier.

Lack of supply is holding sales back in the new home market. As the end of 2015 neared, there were only 15 actively selling projects in all of Ventura County compared to a historical average of 71 active projects since 1988.

Inland Empire (Riverside and San Bernardino Counties combined) 

A continued widening of the gap in home prices between the less expensive Inland Empire region (median resale $280,000) and the pricier Coastal Southern California counties (Los Angeles: $505,000; Orange: $662,000; San Diego: $503,000) is starting to push more prospective home buyers to the Inland Empire. Lower gas prices are also helping ease the burden of longer commute times and are starting to help reignite some of the “drive to qualify” markets such as Beaumont, Perris, and Hemet.

After 22 straight months of declining or flat resale activity from October 2013 through July 2015, year-over-year resales started to rise in August 2015 (+2.6 percent year-over-year) and have been increasing at a growing rate since September at +3.8 percent year-over-year and October at +4.1 percent year-over-year. At the same time, the supply of resale listings has dropped 8.2 percent year-over-year.

Partly thanks to an increase in the supply of active new home projects compared to a year ago, total new home sales activity has been rising for the last six straight months and is on pace to hit the highest level of sales since 2009 (although still substantially below peak levels). Note: Improving conditions exclude the Coachella Valley.

Holding Its Own: Trending Similarly

Los Angeles

Lack of new home supply is holding back overall sales in both the new home and resale markets (the number of resale listings was down 10 percent year-over-year in November). This lack of supply is, in turn, putting upward pressure on prices and is resulting in the lowest housing affordability ranking of all Southern California counties.

However, strong job growth continues to fuel the demand for housing. As of this writing, job growth stands at +85,000 year-over-year compared to +93,000 at the same time last year. In comparison, only about 22,000 building permits had been pulled for 2015 as year-end approached, for a job-growth-to-new-housing ratio of 3.9. With continued strong demand but low supply, resale prices are up 6.8 percent year-over-year (BHVI), following a 6.9 percent increase at the same time a year ago.

Resale volume is up the last four months after having trended downward for the prior 17 straight months. As in San Diego and the Inland Empire, resales are rising at an increasing rate and were up 4.8 percent year-over-year in October.

New home sales are flat, partly due to a lack of supply, but they also have been impacted somewhat by affordability. The denial of the Newhall Ranch environmental impact report will further exacerbate new home supply issues in the short term.

Slowing: Fundamentals Not As Strong

Orange

The rate of job growth is down (currently +41,000 year-over-year versus +47,000 a year ago), the number of building permits issued is up slightly (+1 percent year-over-year), and new home project counts are up substantially over the past two years (currently 111 active projects versus just 69 in 2013, although still below the long-term average of 136 active projects). At the same time, new-home builders have had to push prices to cover high land costs, and the median new-home price in November was up 12.7 percent year-over-year ($900,000).

High prices have impacted affordability levels, and issues in China have caused Chinese buyers to pull back on new home purchases. As a result, despite an increase in the supply of new home projects, new home sales were down almost 21 percent year-over-year as of October, the latest month available. Slower total sales are resulting in slower project-by-project sales rates and pricing weakness.

Some OC projects are reportedly offering as much as $100,000 in incentives; however, most official incentives remain in the $5,000 to $30,000 range. On the other hand, with much lower average price points in the resale market ($662,000 in October) versus the new home market ($900,000), resale activity has been rising the last few months, with resales in October up 8.4 percent year-over-year.

Coachella Valley (submarket of the Inland Empire region)

There are three main market segments in the Coachella Valley: primary home buyers (driven by local employment growth), second-home or vacation home buyers (driven by the health of the Southern California housing market and equity in existing homes) and retirees or age-qualified community buyers. The only segment showing any sign of strength as year-end approached was the retiree segment, which is expected to be a growth market over the next decade.

The second-home market likely needs Southern California home prices to rise at least another 10 percent to 15 percent before equity levels start to reach the point where owners feel comfortable pulling out equity toward a second-home purchase. The primary market was fed in the 2000s by construction and the opening of several Native American casinos, something not happening today.

New home sales have been flat at right around 850 to 900 sales per year for the last three years, but the number of active projects has increased from about 35 in 2013 to about 45 in 2014 and about 55 as of this writing, resulting in slower project-by-project sales rates and pricing weakness.