The next few months will tell the story for California real estate 2018. The peak median price for the year is usually May or August of a calendar year. The lowest price for the year is February.
So, if you look at the year-over-year gains for February, 2017 was about 8% higher than 2016 and 2018 was about 9% higher than 2017. May 2017 was about 6% higher than May 2016. May 2017 median price was $550,000.
If the current pace of gains is attained, the May 2018 median price would be about $583,000. August 2017 price of $565,000 was about 7% higher than the $527,000 in August 2016. If that growth is matched in 2018, the median price in August this year should be $604,000; an all-time record. All the lights seem to be green for a price boom.
Inventory is reasonably low at below four months.
The unemployment chart stands at a 40-year low.
Interest rates while rising are still only at 4.5% and historically that’s still a bargain.
Affordability is still high at 29% in early 2018.
Foreclosures are very low and no longer a negative factor in the market place.
With these charts in place, attaining that $600,000 price level should be a piece of cake.
However, I’m not buying it. There’s something called a yield curve and it’s the history of the yield curve that troubles me. Looking at the yield curve charts when the United States has attained close to full employment is interesting.
1990 yield curve:
The 1990 yield curve shows short-term rates and long-term rates virtually the same. This usually predicts a recession; short-term interest rates are lowered by the Fed by about 4-5% and the economy recovers. Notice that the rate of interest in 1990 across the board for bond yields of all lengths is about 8%.
2000 yield curve:
The 2000 yield curve shows short-term yields are higher than long-term yields (an inverted curve). This signals a recession; short-term interest rates are lowered by the Fed by about 4-5% and the economy recovers. Notice that the rate of interest in 2000 across the board for bond yields of all lengths is about 6%.
The 2007 yield curve shows short-term yields are higher than long-term yields (an inverted curve). This signals a recession; short-term interest rates are lowered by the Fed by about 4-5% and the economy recovers. Notice that the rate of interest in 2007 across the board for bond yields of all lengths is about 5%.
The 2017 yield curve shows a curve that isn’t concerned about inflation or a recession. The yield on the short end is 0.5% and 3% for a 30-year bond; a 600% difference.
The 2018 yield curve shows that gap closing. As the Fed raises rates, this yield curve will mimic the yield curves of 2000 and 2007 and signal a recession. The difference will be that this time we will have a recession when the long-term and short-term yields invert below 3% for the first time ever.
As 2018 progresses, the yield curve will show short-term yields and long-term yields pretty much the same by the end of the year. This signals a recession; short-term interest rates are lowered by the Fed by about 4-5% and the economy recovers. Hmmm, wait a minute! If bond rates are below 3% at the start of a recession, how does the Fed lower rates by 4-5%?
For the first time, it’s quite possible that the short-term rates will be pushed into negative territory and the 10-year T-bill will approach 1% sometime in 2019 or 2020. That would force mortgages under 3% for a 30-year loan.
This yield curve chart is signaling that the bond world isn’t buying the story that we are about to fight inflation and have to slow down an over-heated economy. It’s not buying that we have full employment and that wage inflation is imminent.
So, I’m not buying that real estate prices will soar in 2018. The good news is I also don’t see any price crash in our future and that will be what we talk about at the upcoming meeting at the Long Beach Convention Center on May 15, 2018.
Bruce Norris is an active investor, hard-money lender and real estate educator. A talk show host in his hometown of Riverside, Calif., Norris is a frequently quoted in financial publications and a speaker at investor club meetings throughout California. His latest study, The California Comeback 2, was released in July 2013 and provides the statistics that substantiate his predictions. More information about Bruce Norris, his research and his investment seminars are available at www.thenorrisgroup.com.