Every quarter, I look online for reports to indicate how the Orange County market is doing, overall. It’s easy to see trends in my own neighborhood, or in the neighborhoods where my friends and clients are, but I want to see the bigger picture, too. This post from First Tuesday gives a great overview.
Orange County housing indicators
Orange County’s housing market is on a slow but steady path to full recovery. Home sales volume remains low, as does job creation. However, Orange County’s construction industry is seeing signs of a resurgence, particularly in multi-family construction starts.
Still, a full housing recovery will not occur until that all-important economic factor controlling home sales volume — jobs — catches up with population gain. The next 30 years are going to be an about-face of the past 30 years of repetitively declining mortgage rates and regulations. Soon, rising mortgage rates will put downward pressure on home prices.
View the Orange County regional charts below for details on current activity and forecasts for its local housing market.
Home sales volume low and rising
Home sales volume in Orange County remains weak and somewhat stuck at just over half the heights seen during the Millennium Boom. 2014 home sales volume fell 8% below the prior year, slightly worse than the statewide average 7% drop. However, sales volume picked up in 2015, with June 2015 experiencing the highest sales volume of any month since 2006. 2015 sales volume came in at 9% over 2014, just slightly higher than 2013. In totality, the annual sales volume has been flat since 2008, held down by a sharp bounce in home pricing following the speculator interference of 2012-2014.
In review, 2009-2010 Orange County sales volume rose slightly with the introduction of the housing tax credit, falling back in 2011 for lack of end user demand. From the latter half of 2012 through most of 2013, speculator hyper-activity bumped sales volume artificially yet again, as it did in all of California. The speculator buying wave has since receded. Home sales volume finished 2013 roughly level with 2012, and 2014 finished well below 2013.
Looking forward, a complete recovery with annual sales volume of around 46,000 in Orange County will be reached only after end user demand is buttressed by labor force participation and job levels normalize, expected by 2019-2020. Sales volume will continue to rise in early 2016 due to the strengthening jobs market, then start to trend downward with the rise in FRM rates, sometime after mid-2016. Sales volume will bottom again in 2017 before rising continuously into 2019-2020.
Low turnover rate to continue
Without turnover, homes do not sell. The homeowner turnover rate in Orange County has remained mostly level since the end of the recession in 2009. The renter turnover rate has declined since 2010 and is at 20.9% for 2014.
Both homeowners and renters are demonstrating they will remain cautious about relocating until personal incomes and job security improve (which will lift their confidence).
Turnover rates are likely to rise dramatically in the convergent 2019-2021 boomlet period raising rental vacancy rates. Then, members of Generation Y (Gen Y) will collectively rush to buy and Baby Boomers (Boomers) will retire en masse, selling and mostly buying replacement homes. International and domestic emigration into California will also play a significant role in suburban housing demand.
Homeownership remains low
Orange County’s homeownership rate has fallen since its 2007 peak of 62.7%. The most recent homeownership data shows a 57.4% homeownership rate in Orange County. Statewide homeownership has historically been about two percentage points below Orange County’s. The state average was 54% in Q3 2015, thus homeownership in Orange County in 2016 will likely slip to around 56%.
Expect Orange County’s homeownership rate to remain at its present low level until jobs catch up with its population increases, likely around 2019. Only then will the first-time homebuyer population gain traction.
However, don’t expect the rate of homeownership to fully return to the inflated heights seen in 2007 anytime soon. This rate was elevated by unfettered access to easy money, which mortgage regulators tamped down in 2014 with enforcement of ability-to-pay (ATR) rules to protect society from certain destabilizing types of mortgage lending. These rules limit mortgage funding to those homebuyers with the financial ability to actually repay their debts.
Thus, the housing market won’t see a repeat of those Millennium Boom homebuyers who lacked the proper finances. Though this translates to a slightly lower homeownership rate in the near term, it fosters a more stable future housing market in Orange County and the state. The shift of Gen Y to rentals for a longer period before buying a home than in past generations also puts a cap on home sales volume.
Construction starts on the rebound
New building permits issued for housing — displayed here as construction starts — put Orange County well on the road to recovery with roughly 11,600 total housing units started in 2015. However, the mix of single family residential units (SFRs) and multi-family units has changed. As is the case across most of California, multi-family starts are improving quickest as rentals are in greater demand.
Multi-family starts in Orange County during 2015 total 7,800, having exceeded full recovery in 2014 at just over 6,000 starts. This upward trend in starts will face the headwinds of vacancies in the period following 2020 as Gen Y shifts from renting to owning their housing, a repeat of the late 1980s Boomer generation shift.
On the other hand, don’t expect the SFR construction recovery to occur anytime soon. The next peak in SFR construction starts will likely occur in 2019-2021 as renters shift to becoming homeowners. Even then, SFR starts are unlikely to return to the mortgage-driven numbers seen during the hyperactive Millennium Boom.
Jobs are recovering, too slowly
California regained all jobs lost at the end of 2014, but Orange County didn’t catch up until the last quarter of 2015. The number of employed individuals in Orange County is nearly 1.6 million in the first quarter of 2016, just above the number of jobs held before the recession. However, since Orange County’s population has grown since jobs previously peaked in 2006, the real recovery is still further down the line.
As seen in Figure 9, job additions have been one-third slower to come about during this recovery compared to the 2000s recovery, and at half the pace of the 1990s recovery, echoing the secular stagnation of the 1930s. When will all of these jobs return?
When Orange County does catch up, likely in 2019, the housing market will finally find real steam in Orange County as end users will then have the financial support of jobs. One obstacle facing home sales volume will be the mitigating effect of increased mortgage rates in reaction to increases in bond market rates, likely after mid-2016. Thus, multi-family starts will continue to surge, ending in the 2020 period as tenants increasingly shift out of rentals into homeownership.
Jobs by top employing industry
The number one employing industry in Orange County is currently Professional and Business Services. During the prior decade, the Goods Producing sector was the main employer but these jobs rapidly plummeted during the recession and have not rapidly returned.
The number of individuals employed in the real estate and construction industries also fell during the recession, demonstrating mixed improvement in 2014-2015. Both construction and real estate job numbers will continue to grow slowly in the coming years, as they are tied to the housing industry’s very slow recovery.
Per capita income plays catch up
The average income earner in Orange County made $55,096 in 2014 (the most recently reported data from the Bureau of Economic Analysis). For perspective, this is a mere 10% above the average nominal income earned six years earlier in 2008, not enough to keep up with the intervening consumer price inflation.
Applying these numbers, home price increases are limited to a ceiling set by personal income, the annual rate of increase from 2014 to 2015 being 3.7%. These annual income and price increases will remain low until an optimal employment level is attained with a full jobs recovery for the 8% population growth since 2007. Orange County will likely achieve these job numbers in 2019 or 2020. Meanwhile, price increases will remain low since homebuyer occupants ultimately determine selling prices — they can only pay as much for a home (or rent) as their savings and income qualify them to pay — nothing more for a sustained period of time.
Expect per capita income to increase concurrently with increases in job numbers. As a result, income — and home prices — will remain stunted even as they grow, significantly below income growth trends in prior recoveries, through at least 2017.