It’s a conundrum: Today’s U.S. housing market is characterized by deep demand and a shallow supply of existing homes for sale. This severe inventory shortage is exacerbated by owners postponing listing their houses for fear of being unable to find a suitable replacement. The situation has been affected also by rising interest rates that mean higher mortgage rates for buyers.
Some economists say the housing market has indeed peaked or is close to it. But as an interview with ThinkAdvisor reveals, that isn’t the view of Berkshire Hathaway Home Services realtor Ian L. Brooks. Formerly a financial analyst, he is in the top 1% of BHHS producers worldwide.
Though the U.S. Commerce Department reports that sales of new houses rose 8.8% January though May, existing-home sales have declined year over year for three months straight, according to the National Association of Realtors. With May’s drop of 0.4%, sales are now 3.0% below those of a year ago, and total inventory has shrunk year over year for 36 consecutive months now. As of May, there have been 75 months in a row of YOY price increases.
Brooks, a $1 million producer in the top 5% nationally of Berkshire Hathaway’s residential real estate brokerage (Designerestates.com), specializes in luxury homes in tony Los Angeles enclaves such as Bel Air, Malibu and Pacific Palisades. His pricey A-list celebrity transactions include the sale of Meryl Streep’s glass-wall estate above the Sunset Strip to Alex “A-Rod” Rodriquez.
During the last five years, prices of single-family homes, townhouses, condominiums and co-ops have risen 40%, Brooks notes. The median existing-home price this past May was $264,800, an all-time high, and up 4.9% from May 2017, according to the NAR. For new houses in May, the median price was $313,000.
But Brooks insists that the housing market hasn’t peaked and indeed has room to grow the rest of this year and into 2019. He points to pent-up demand from millennials — long living with their parents and now eager to form households of their own. It is this young cohort that’s driving up home prices, he maintains.
In the interview, the agent discusses his list of the Top 10 Hottest Housing Markets in the U.S. and what makes them magnets for house seekers. Among other factors, he has analyzed the establishment of corporate headquarters and projections of household income and job growth. No surprise: “Tech hotbeds” are the biggest stars.
Meanwhile, the dearth of supply continues: Existing-home “inventory coming onto the market during this year’s spring buying season … was not even close to being enough to satisfy demand,” NAR chief economist Lawrence Yun said in a statement.
Year-over-year sales have declined for three consecutive months. “Incredibly low supply continues to be the primary impediment to more sales,” Yun said. Total existing-housing inventory is 6.1% lower than a year ago.
ThinkAdvisor recently spoke by phone with Brooks, based in Santa Monica. Previously a CFA with Smith Barney and Kidder Peabody, he notes that stock market volatility and a trade war could very well affect ultra-affluent investors’ decision to buy a new home.
Here are excerpts from our conversation:
THINKADVISOR: Has the housing market peaked?
IAN L. BROOKS: NO! You can write that in big capital letters. The housing market is on solid ground and will continue to cycle up because we still have low inventory with high buyer demand. We’re seeing an unprecedented housing shortage: Strong buyer demand and constrained inventory are driving up prices.
What do you forecast for next year?
The market will continue to grow in 2019, though in the latter part, if interest rates go up significantly — which I don’t think they will — we could see a slower buyer pool.
What age cohort is driving the housing market?
Millennials are pulling the trigger. They’re the ones that are dominating even at the higher end with higher priced mortgages over $500,000. Millennials are the reason that prices have been driven up. They’re buying the higher-end houses, while baby boomers are downsizing.
Why are millennials the driving force, and will they continue to be?
Many millennials are tired of living in their parents’ homes and want to form their own households. These pent-up buyers have been waiting on the sidelines for a [housing] correction, which is not in sight. So now that interest rates are going up, they’re finally cashing in their chips and saying, “I’m going to buy.”
Will home prices continue to rise this year?
Housing prices are increasing twice as fast as income growth. We have strong demand with constrained inventory and a lot of buyers that are ready to buy. This is forcing up prices of existing inventory, which is in limited supply. Current low supply is making the available inventory less affordable. We’ll see this wave of demand continue in the third quarter. There are still multiple offers for houses and condominiums.
So, it will continue to be a seller’s market?
Yes. The shortage will hinder sales and increase prices. It will continue to be a seller’s market because housing prices are rising very fast and outpacing income. New construction is primarily targeting the upper middle class, depending on the area. We’re seeing more of that but not a large enough supply to make it a buyer’s market.
What’s on your list of The 10 hottest housing markets nationally?
Based on industry, corporate headquarters, projected job growth, household income growth and how housing is appreciated:
No. 1 – San Jose, California, is a tech hot bed — the new Silicon Valley. Average income is $110,000 with 70,000 new jobs.
No. 2 – Raleigh-Durham, North Carolina, big in tech, with many colleges — such as the University of North Carolina at Chapel Hill and Duke University — producing high-level graduates, many tech-centric. Raleigh has an average income of $71,000 with 29,000 new jobs.
No. 3 – Seattle. Has always been a tech hotbed, where headquarters of Microsoft [in Redmond] and Amazon are located. No. 4 – Charlotte, North Carolina, because of tech, business and jobs. The average household income is $59,000, with 49,000 new job openings.
No. 5 – San Francisco, which continues to grow because of all the tech startups there.
No. 6 – Austin, Texas. The affordability is nice.
No. 7 – Denver, Colorado — a leading contender for Amazon’s second headquarters.
No. 8 – Nashville, Tennessee — a big central distribution center.
No. 9 – Portland, Oregon. It’s got some great corporate headquarters, like Nike. Portland is known as a small Seattle or small San Francisco. There’s a lot of industry and a lot of hipsters.
No. 10. Dallas, because like Austin, you can get a lot for your money.
What about where you’re located — Southern California?
Prices will continue to go up because of the inventory shortage and the plethora of people who live here. We’ve seen builders continue to build: Last year there was a major increase in huge new developments. But there’s still more room to grow. Sales of luxury-priced houses from $2 million-plus are slowing down a bit, and we’re seeing overpriced listings — that had been sitting on the market — get reduced as more luxury inventory becomes available. With a luxury-priced asset, the index of affordability shrinks. That target market is a lot smaller than the general buyer in the $800,000 range.
And the Los Angeles market, in particular?
The restrictions on vertical growth [prohibiting buildings more than a certain height] on the Westside — for example, Santa Monica, Venice, Marina del Rey — which has led to rents being astronomical there, is going to keep a nice retention of high prices with limited supply. Downtown L.A., with [no height limitations], has had an explosion of vertical growth.
What’s the latest trend in real estate investment trusts [REITs]?
We’re seeing REITs in the private sector [doing business] with venture capitalists and raising money to purchase commercial and residential houses. It’s interesting for investors, of course, because it’s a very attractive long-term investment.
Could stock market increases lead to a buyer’s market in housing nationally?
Unlike the very rich, the average American isn’t buying a house because of significant gains in their stock portfolios. Average [consumers] are going to buy based upon the affordability of monthly payments, their credit and the down payment. It’s a different story for the 1% — the ultra rich — because if they’re utilizing their portfolio or other assets to purchase a house, volatility in the stock market could affect them.
But could the potential trade war with China, Canada and the European Union impact the housing market?
That could affect the higher end because we have a good percentage of foreign buyers from those countries.
What effect will interest rate increases have on mortgage rates?
Interest rates are still very low, and they’re not going to go up that dramatically within a year. Slight increases could make [mortgages] a little difficult for some people; but I think that even if rates creep up, money is still very affordable.
What do you expect in mortgage defaults this year?
Very low, maybe 1-1/2%, if that. The economy is much too good for that to be a concern. Salaried employees have steady earnings. Mortgages are being regulated a lot more strictly now, as are appraisers and appraisals. So there’s more of a safety net to [avoid] the kind of implosion we had with [the housing crisis].
You’re in Berkshire Hathaway Home Services’ Chairman’s Circle — the top 1% of producers worldwide. So does Warren Buffett ever come by to say hi?
I only wish! I’m a very big fan of Berkshire Hathaway, and I’m also a shareholder. I’m a true believer in where I work.