SOUTHERN CALIFORNIA HOUSING OUTLOOK
Welcome To The
Southern California Housing Outlook
January 2015

20
Southern California Housing Outlook
January 2015
Economic Session
Kevin Gillen, Ph.D, Chief Economist at Meyers Research

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January 2015 21
Outline
• Review and discuss current housing market metrics
• Review and discuss underlying economic/demographic
drivers of these metrics
• Link housing’s current inputs to its current outcomes
• Deliver the short- and long-term outlook for both U.S. and
California housing market

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January 2015 24
Home Sales Have Not Recovered As Much As Home Prices
0
200
400
600
800
1,000
1,200
1,400
1,600
New Home Sales (000) - U.S.
Source: US Census

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Those are the housing market’s current outcomes.
But: what are the underlying inputs that are determining
those outcomes?
• Macroeconomic factors
• Demand-side factors
• Supply-side factors
Housing Outcomes v. Inputs

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-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
GDP Growth: US v. California
California U.S.
Since the bursting of the tech bubble, California’s
economic growth has lagged that of the U.S.
GDP Growth: Positive, but Continues to Underperform History
Average Annual Growth:
CA: 1.6%
US: 4.0%
Source: US Commerce Dept.

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Composition of California’s GDP
Real Estate is one
of the largest
components of
California’s
economy.
Makes it relatively
exposed to real
estate downturns.
Source: State of California

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Unemployment Declining, But Still Above Historic Average
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
Unemployment Rate: US v. California
California US
Source: US Bureau of Labor Statistics

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Interest Rates Rising Again, But Still Very Low

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January 2015 32
Population Growth Positive, But Slowing
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
1.8%
Population Growth: US v. California
US California
Source: US Census

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January 2015 33
Household Formation Down Significantly

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January 2015 34
Post-Recession Household Income Growth Stagnant
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
Median Household Income: US v. California
US California
California consistently wealthier than
national average.
Source: US Census

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January 2015 35
New Home Construction Still Struggling to Recover
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
New Housing Starts: US v. California
US California
Source: US Census

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January 2015 36
Housing Inventories Back to Historic Norms
U.S. Months’ Supply of
Inventory
California Months’ Supply of
Inventory
Source: Calculated Risk Blog,
California Association of Realtors

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January 2015 37
To recap:
• House prices rising but sales still a bit below average
• Rental market doing well, but due for a correction
• Economy in recovery, but underperforming
• Ditto for employment
• Interest rates rising, but still low
• Population growth and household formation slowing
• Income growth sluggish
• Inventories normal, but new construction still low
• California housing generally doing better than US’s, even if economy
isn’t.
These are mixed signals. So, what does it all mean?!
So: What Does It All Mean??

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Signals are mixed because it’s really a “Tale of Two
Housing Markets”
• Affluent and older households v. poorer and younger households
• Driven by economic differences between these two households
(nationally) and housing supply conditions (locally)
Young Households:
• Debt (esp. student debt), low skills, college degrees with little market value, less experience
• They’ve been renting
Locally, affordability is the real issue, caused by supply constraints
• Land supply
• Environmental Regulations
• Zoning and permitting process
• Political Environment
So: What Does It All Mean??

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January 2015 39
Homeownership for Young Households Near Historic Low
Source: Trulia and WSJ.com

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January 2015 42
Implications of Supply Elasticity for Housing
y = 0.5109x + 51.871
R² = 0.623
y = 0.1675x + 76.19
R² = 0.9188
0
50
100
150
200
250
300
1987
1987
1988
1989
1989
1990
1991
1991
1992
1993
1993
1994
1995
1995
1996
1997
1997
1998
1999
1999
2000
2001
2001
2002
2003
2003
2004
2005
2005
2006
2007
2007
2008
2009
2009
2010
2011
2011
2012
2013
2013
2014
A Tale of Two Cities' House Price Dynamics
Los Angeles
Dallas
Linear (Los Angeles)
Linear (Dallas)
Source: Case‐Shiller

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Affordability: US v. Southern California
Source: Economy.com

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January 2015 46
New Construction is Generally Unaffordable to Most
Source: Meyers Research

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January 2015 47
In the Short Run:
• Housing recovery will continue, both nationally and in California
• But at uneven paces across different U.S. markets
In general, 2015 is looking like a “return to normalcy”…at least at the national
level
• House price appreciation returning to its historic average of 4-6% per annum
• In Southern California, Affordability will remain the key constraint to a more equitable and
widespread recovery
In the Long Run:
• California’s supply inelasticity will be the primary governing factor in determining housing
market outcomes:
• Unaffordability
• Volatility/Cyclicality
• Risk to Statewide Economy
Where Do We Go From Here?