Changing mortgage interest rates, limited choices for buyers and rising prices. Will residential real estate ever get back to "normal"?
Jordan Levine, senior vice president and chief economist for the California Association of Realtors, had several answers to this question during our recent conversation.
We started with a national issue that has a strong influence on local real estate: mortgage interest rates.
Question: CAR analysis that goes back to 1971 indicates sub-6% rates seem to be an exception. Let's start there. Is there a normal mortgage interest rate?
Levine: There is no normal mortgage interest rate. Rates are always going either up or down, and even when they're flat, that's a change from when they're going up or down. If you look back historically, except for the 2008 financial crisis, and the jobless recovery that followed it, rates have almost always been at or above 6%, so that's more the norm than anything else.
Q: Research from the California Department of Housing and Community Development tracks housing need based on population trends and housing production. Is there a "normal" supply of new housing or is the normal that we are normally undersupplied?
Levine: Unfortunately, normal has become far too little housing. The HCD say we need 180,000 units permitted each year to tread water on housing affordability. If you look at what we've done lately, we've been stuck around the 100,000-unit mark. In fact, we've been lucky to get over 100,000 over the last handful of years.
Q: Is there a normal supply of existing units for sale?
Levine: We used to say six months of supply was normal. Unfortunately, if you look at where we've been, not just over the last couple of years but since the end of the financial crisis and subsequent bounce back, housing inventory has been tight.
Even before the pandemic, 2-1/2 months was the average. Now it's plunged even further.
We were in the sub-two months of supply range there for a bit last year when rates were still very low. But we remain below three months of supply. We're not even back to those kind of pre-pandemic levels of under supply let alone the six months that used to be normal. There's just simply not enough homes out there.
Q: Is there a normal number of units that are sold on an annual basis statewide?
Levine: Since 2010 when the market crashed to super low levels and then subsequently rebounded, sales have been about 400,000 annually. They've been a little higher, a little lower and pretty much stuck at that level for the last 10 years or so. Currently, they're down in mid-200,000 range.
I don't want to say 400,000 is normal because that's less than what we used to do in the 1970s, '80s, '90s, even early 2000s. Now we're significantly below that, but we have clawed back a few of the losses that we were suffering more acutely at the end of last year.
Q: What's a normal price for residential real estate in California or in the Bay Area specifically, if you can get that granular?
Levine: The normal price, and maybe this is wishful thinking, is one that folks can afford. But unfortunately, prices have gone up so much over the last couple of years, on top of another decade of growth.
Prices are high in the spring when everybody's buying homes, and they're always a little bit lower in the winter before they start rebounding.
Prices have been on a constant uptrend for the last 10 to 15 years, particularly in the Bay Area. They were hit hard by the financial crisis but have rebounded.
It's been almost constant growth to levels that, at one point when rates were still 3%, were in excess of $2 million as a median price. There's no normal price, all we can hope is that incomes keep up with what happens on the price.
Q: Is there a normal real estate market?
Levine: There is no normal real estate market. Sales are always going up or down. Interest rates are always going up or down. There's no normal real estate market, not even in terms of inventory. It's never in that perfect equilibrium.
Q: How would you bring normalcy to the real estate market?
Levine: I would dramatically increase housing supply so that we don't have these wild swings one way or another. We'd have a housing stock that was more available, more affordable, still generating wealth and income for individuals and a little bit more resilient to these macroeconomic shifts that are inevitable.