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HOW RECENT SHIFTS IN PRODUCT TYPES AND GEOGRAPHICAL DEVELOPMENT
PATTERNS BY MILLENNIALS ARE IMPACTING NEW MONEY CFDS
AND
POTENTIAL IMPACTS OF THE PROPOSED REPUBLICAN’S TAX POLICIES
ON THE ECONOMIC RETURNS FROM HOMEOWNERSHIP
PREPARED FOR CASTOFF
FEBRUARY 17, 2017
JOSEPH JANCZYK, Ph.D. - EMPIRE ECONOMICS
2
FAVORABLE FUNDAMENTAL FACTORS - CALIFORNIA
STRONG EMPLOYMENT GROWTH; NEW PEAK LEVELS:
HIGHER BY 600,000 POSITIONS OR 4.0%
FAVORABLE MORTGAGE RATES
TOTAL NEW HOMES (FOR-SALE HOMES AND APARTMENTS) SIMILAR TO LONG-TERM AVERAGE
0
25,000
50,000
75,000
100,000
125,000
150,000
175,000
200,000
225,000
250,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
CALIFORNIA: NEW RESIDENTIAL HOMES
State Totals Single Family Permits State Totals Attached Permits State Totals Apartments
ROBUST/BUBBLE RECESSION/DEPRESSION RECENT RECOVERY
Empire Economics
RELATIVE LEVELS OF NEW SINGLE-FAMILY HOMES
2008-2012
During 2008-2012, as spillover diminished
activity in the suburban/rural areas became depressed
Green = Counties with smallest losses
Yellow = Counties with average losses
Red = Counties with the largest losses
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RELATIVE LEVELS OF NEW SINGLE-FAMILY HOMES
2000-2007
During 2000-2007, as spillover from urbanized areas rose,
activity in the suburban/rural areas became robust
Green = Counties with highest gains
Yellow = Counties with average gains
Red = Counties with the smallest gains
Empire Economics Empire Economics
RELATIVE LEVELS OF NEW SINGLE-FAMILY HOMES
2013-2016
The suburban/rural areas that had depressed levels of activity
during 2008-2012 continued to be depressed during 2013-2016
Green = Counties with strongest gains
Yellow = Counties with average gains
Red = Counties with the smallest gains
RELATIVE LEVELS OF NEW APARTMENT UNITS 2013-2016
Urban areas had high levels of new apartment units during 2013-2016, due to
Millennials preferring to reside in urbanized areas, primarily
in the San Francisco and Los Angeles coastal regions
Green = Counties with strongest gains
Yellow = Counties with average gains
Red = Counties with the smallest gains
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Empire Economics
Empire Economics
5
LESS SINGLE-FAMILY SPILLOVER
SHIFT TO
APARTMENTS
ALTHOUGH EMPLOYMENT GROWTH IS STRONG,
EXTRAORDINARY SPECIAL FACTORS ARE CAUSING MAJOR MARKET SHIFTS
Empire Economics
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COMPARISON OF PHILOSOPHICAL DIFFERENCES BETWEEN
MILLENNIALS VERSUS GENERATION X AS WELL AS BABY BOOMERS
(GENERAL CHARACTERISTICS OF MILLENNIALS – BUT MANY INDIVIDUAL DIFFERENCES)
GENERATION X
BABY BOOMERS
PRIMARY:
1. MARRIAGE
2. HOUSE
3. CHILDREN
SECONDARY:
CAREER
MILLENNIALS
EQUALLY IMPORTANT
1. CAREER
1. CHILDREN
1. MARRIAGE Empire Economics
72,423 75,893
46,865 46,865
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
FOR-SALE APARTMENTS
SOUTHERN CALIFORNIA COMPOSITION ON NEW HOUSING 2013-2016ESTIMATED SHIFT FROM FOR-SALE SINGLE-FAMILY TO APARTMENTS
ESTIMATED SHIFT AMOUNTS TO ABOUT 46,865 NEW UNITS DURING 2013-2016
ACTUAL
INCREMENTAL
TYPICAL
REDUCTION
ACTUAL72,423
ACTUAL122,758
T
Y
P
I
C
A
L
SOUTHERN CALIFORNIA:
ESTIMATED MAGNITUDE OF THE PRODUCT TYPE SHIFT DURING 2013-2016
• NEW CFDS ARE RELATED PRIMARILY TO SINGLE-FAMILY HOUSING
• APARTMENTS DO NOT TYPICALLY UTILIZE CFDS
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Empire Economics
8
SOUTHERN CALIFORNIA – TYPES OF NEW HOUSING PRODUCTS BY GEOGRAPHIC AREAS
NEW FOR-SALE HOME ACTIVITY RECOVERY:
* MODERATE PACE IN THE URBANIZED AREAS
* BUT AT A SLOW PACE IN THE INLAND AREAS
NEW APARTMENT ACTIVITY RECOVERY:
* STRONG PACE IN THE URBANIZED AREAS
* BUT MINIMAL LEVELS IN THE INLAND AREAS
NEW FOR-SALE HOMES NEW APARTMENT RENTALS
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
19
91
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SOUTHERN CALIFORNIA: NEW SINGLE-FAMILY HOMESBY GEOGRAPHIC AREAS
Urbanized/Coastal Suburban/Inland
New single-family homes in the Inland Areas had a much higher peak level during the
Housing Bubble
New single-family homes are recovering at a faster pace in the coastal vs. the inland Area, but are still at
a low level.
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
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SOUTHERN CALIFORNIA: NEW APARTMENTSBY GEOGRAPHIC AREAS
Urbanized/Coastal Suburban/Inland
New apartments in the Coastal Area have attained
a new peak level
New apartments in the Inland Area peaked in 2004
Empire EconomicsEmpire Economics
MILLENNIALS: STRUCTURAL SHIFT VS. SHORT-RUN TREND ?
POTENTIAL FOR OPTIMISM
MILLENNIALS ASPIRATIONS VS. CURRENT STATUS
DESIRE FOR MARRIAGE AND HOMEOWNERSHIP
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27%
62%65%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
MILLENNIALS - NOW; 18-36 GENERATION-X; 18-36 BABY BOOMERS; 18-36
SHA
RE
OF
GR
OU
P M
AR
RIE
D
MARRIAGE RATES FOR VARIOUS GENERATIONS; AGE CONSTANT 18-36FOR MILLENNIALS, MAJOR DIFFERENCE BETWEEN DESIRE AND ACTUAL
GOAL= 55%
13%
81%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
% MILLENNIALS OWN HOMES % MILLENNIALS WANT HOMES
MILLENNIALS: MAJOR DIFFERENCE BETWEENACTUAL HOMEOWNERSHIP CURRENTLY
VERSUS EXPECTATION OF HOMEOWNERSHIP
Source: Beginning Post Secondary Studies, 2004 / 2009 Calculations
Empire Economics
Empire Economics
$850,000
$650,000
$400,000
$300,000
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
Orange County; Irvine Orange County; South Inland Empire: Suburban Inland Empire: Rural
PRICES FOR NEW SINGLE-FAMILY HOMES BY GEOGRAPHIC AREASHOME WITH LIVING AREA OF 2,000 SQ.FT.
RECENT CHANGES IN HOUSING PRICES 6.5% 2.6% 1.2% 1.0%
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CONCLUSIONS
IS THIS A SHORT-RUN OR A STRUCTURAL SHIFT ?
MANY COMPLEX ECONOMIC AND CULTURAL FACTORS – MILLENNIALS EVOLVING
EMPIRE ECONOMICS MONITORING KEY INDICATOR – RATE OF PRICE APPRECIATION:
WHEN PRICES START TO RISE IN THE SUBURBAN/RURAL AREAS, THIS
WILL SIGNAL THAT THEIR HOUSING MARKETS ARE RECOVERING
Empire Economics
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ANTIDOTAL OBSERVATIONS ON THE TIMING OF BOND ISSUANCES FOR CFDS
1. Strongest - Exceeds 3 to 1 Value/Lien at Grand Opening – City of Irvine
Housing price for a 2000 sq.ft. home: $850,000, $425/sq.ft.
Recent appreciation: 6.5%
High residual land value
2. Strong - Close to 3 to 1 Value/Lien at Grand Opening – Near San Juan Capistrano
Housing price for a 2000 sq.ft. home: $650,000, $325/sq.ft.
Recent appreciation: 2.6%
Moderate residual land value
3. Weak - Not achieve a 3 to 1 Value/Lien at Grand Opening – Western R-SB Counties
Housing price for a 2000 sq.ft. home: $400,000, $200/sq.ft.
Recent appreciation: 1.2%
Low residual land value - Need Home Construction Value & Sales
4. Very Weak - Not achieve a 3 to 1 Value/Lien at Grand Opening – Central R-SB Counties
Housing price for a 2000 sq.ft. home: $300,000, $150/sq.ft.
Recent appreciation: 1.0%
Minimal residual land value - Need Significant Home Construction Value & Sales
A. Homeownership: Personal as well Financial Aspects - Focus herein on Financial.
B. Proposed Republican Policies vs. Current Policies:
1. Increase in the Standard Deduction to $30,000 from $12,600 (for joint filers)
Favors renting - Higher deduction, without homeownership deductions
2. Decrease in the Tax Bracket to 33.0% vs. Current 39.6%
Favors renting: Tax savings from mortgage interest / property tax deductions reduced.
3. Deductibility of Property Taxes: Trump: Status Quo House/Ryan Plan would eliminate
House Plan favors renting, property tax deductions eliminated.
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POTENTIAL IMPACT OF PROPOSED REPUBLICAN TAX POLICIES ON
THE FINANCIAL RETURNS FROM HOMEOWNERSHIP
Conclusions: Proposed Republican tax policies appear to reduce economic return of homeownership.
Impacts on New Housing Product Types – Geographical Patterns
Reinforces recent shift by millennials to rent apartments in urbanized areas
Resulting in reduced demand for new single-family homes in suburban/rural areas
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CONCLUSIONS ON TAX POLICIES AND
POTENTIAL IMPACTS ON THE MARKET FOR NEW
HOMES/APARTMENTS