Strong 2017 Outlook with Headwinds Emerging

Much is in the cards for 2017, including a solid economic growth, income growth, and slowly rising rates
By John Burns & Adam Artunian

Look to 2017 for another great year for Southern California housing, with demand continuing to exceed supply. Orange County has established itself as the mecca of master-planned communities and will continue to attract Asian buyers, while the Inland Empire will benefit from relatively low supply and buyers coming from nearby Orange County looking for more affordable housing.

Both of our risk indices show that risk is beginning to mount. By the end of 2017, we expect Orange County and the Inland Empire’s risk levels to be slightly higher than normal, driven by affordability problems. If rates ever rose to their historical norm of 6 percent, Orange County’s home prices would be 23 percent higher than they should be, and Inland Empire’s 25 percent, thanks to many years of low mortgage rates and demand exceeding supply. Strong income growth is needed to bring affordability back into line, and that income growth is finally starting to happen. Solid economic growth and slowly rising rates would help too, and both seem in the cards for 2017.

Orange County
Orange County has four of the largest master-planned communities in the country by sales volume, according to our firm’s recently released “Top 50 Master-Planned Communities of 2016.” The Irvine Ranch tops the list nationally with nearly 2,000 sales last year. The Great Park, Baker Ranch, and Rancho Mission Viejo also made appearances in the top 20. The 30 percent YOY increase in new home community count in Orange County, after a significant run up in prices, has made superior execution critical. Single-family construction is now the highest since 2004 and is expected to rise slightly in 2017. However, expected new single-family supply in 2017 will be nearly half of peak levels seen in 1997.

Inland Empire
Inland Empire demand continues to grow, but few buyers seem to have great credit and a down payment, so pricing below the FHA limit will continue to be the demarcation of success. The FHA loan limits will receive a nice boost in 2017, increasing by nearly 7 percent to $379,500 from $356,500. Communities priced at or under the current limit have experienced strong demand, but builders have had little ability to increase prices due to qualification issues above that threshold. With the coming increase, these communities may be able to push prices a bit more in 2017 to increase margins and offset higher costs.
With only 228 communities open for sale in the Inland Empire and little future supply on the way, prices should continue to appreciate. Single-family permit activity in 2017 is expected to be below the historic average for the market, and just 20 percent of levels seen in the mid-2000s. The Inland Empire’s relative affordability, with a current housing cost to income ratio at a healthy 33 percent, will help capture demand from its more expensive neighbors (i.e., Orange County, Los Angeles, and San Diego) in the coming year. In addition, the completion of the Highway 91/I-15 improvements, scheduled for spring of this year, should help the I-15 corridor dramatically.

On a more macro level, Trump will appoint almost everyone overseeing mortgage policy, so we will keep a close eye on those changes. Mortgage credit is much more likely to loosen than tighten. Loosening credit conditions should partially mitigate any downward pressure on pricing as a result of rising mortgage rates. In summary, overall housing fundamentals for Orange County and the Inland Empire point to another strong year, with design and execution to play a larger role in determining a project’s success.

John Burns is the CEO and founder of John Burns Real Estate Consulting, providing independent research and consulting services related to the U.S. housing industry. Hey may be reached at jburns@realestateconsulting.com or at 949-870-1200.

Adam Artunian is Senior Manager at John Burns Real Estate Consulting. He may be reached at aartunian@realestateconsulting.com or at 949-870-1200.

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