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2017 Real Estate Outlook for the California

December 9th, 2016 12:41 PM by Gregg Mower

It is the time of year where we wrap up the prior year and look forward to the next year.  This year’s wrap up is about the same as the last several years with Real Estate in California and the Sacramento Area enjoying steady increases.  We have already gone past the highs in the Real Estate Market before the bust in 2008, which is a good thing, however, does that signify a coming change or correction to Real Estate Values?  Or are we going to keep with a steady rising Real Estate Market?  Residential Real Estate has been the cornerstone of the recovery over the last 5 years, with commercial Real Estate staying constant unless you happen to be around new growth areas such as around the Golden One Arena in Sacramento or other special developments projects.   In addition, the Stock Market has been hitting record highs and that could send capital away from bonds thus raising interest rates and possibly creating inflation in the short term.  There are a lot of things to consider when evaluating the economy and the future of Real Estate in 2017.

With the new regime change in Washington D.C. we could see some radicle changes that will affect the Real Estate Industry, but don’t expect to see the results of any changes right away.  Even with the most rapid and radicle changes it will take time to implement and for the Real Estate markets to adjust and adapt.   So, although it is my belief that we will some positive changes in the Real Estate Industry with regards to de-regulation these changes will take time to see any real changes.  It is too early to speculate on the changes that will come out of our Government, but my belief is that less Government intervention will ultimately be good for the American economy.  There are a lot of things the new leaders in Washing DC will have to address and in what order they want to attack them in may have consequences to all Markets.  The Government will have to make major changes to the Obamanation of a Health Care system that has been imposed on the American people as a first priority, as middle class America cannot afford the current health care system nor can small to medium sized companies.  That will have to be fixed first and could cause ripple effects i the economy.

When the New Leadership evaluates the housing markets and the changes that were made during the last regime, they will see the need to address changes here as a high priority as well.   Over the last several administrations we have seen monumental spending increases from the Government with the guise to help the citizens of these United States of America, but our Nation Debt is over 20 trillion dollars and growing every day.  We must change this radically or our once great country will be viewed as bankrupt by the rest of the world.  If this happens America and the US Dollar could lose world currency status, which could be so detrimental that America could fall as the world Economic Leader, thus causing a worldwide depression.  That may not be as far fetched as it sounds if we keep spending recklessly with no repayment plans.  These are some big issues that the new administration must address quickly.  Be aware if the debt issue is addressed first there could be a recession as a result, in the short term.  There would be no way of avoiding that, as when the Government Beast stops or slows spending, those people and companies that have been dependent on that spending will be no longer receive federal funds and thus will go out of business sending many to the unemployment lines.  Unfortunately, this is what has to happen in order to fix the growing problem, or the rest of world could just forgive that fact we owe more than we are worth, but I don’t think China would just say “no problem, we will just give you back all the treasury bonds and securities we bought from the US”.   That said, there will have to be a strengthening of our private industry first to stabilize income and private jobs.  There needs to be incentive to go to work from the government back to the private sectors and this must been done before there can be cuts to the government. It has has to start by lowering taxes, and providing non-monetary incentive to business’ to not only produce their products in the US but to expand in the US.  These actions would bring business back to America and increase employment and thus create more taxes as more people are employed and businesses are making more money in the US thus paying US taxes.  You see this concept is where most people are fooled or ignorant on how things work.  With a lower tax rate on people and business’ and incentives to live work and produce in the US there will be more tax dollars going back into the system.  Simple math, less people paying more in taxes is worse than more people paying less in taxes and having more people and businesses employed in the US.   For example; would you rather own 2 rental properties that you receive $10,000 a month on, valued at $500,000 each, or would you rather own 10 properties valued at $100,000 each where you receive $1,000 a month on each?  The theory here is multi fold, although you have the same value of real estate if you have a vacancy on one with the high value properties you lose half of your income, where if you have a vacancy in one or two of the lower value properties you are only missing 10-20% of your potential income.  Also, the chances of the $100,000 properties increasing in value at a faster rate than the higher priced properties is greater as there is more demand for affordable housing than luxury housing.  Same holds true in the labor markets if you create a demand for low cost labor and you can’t get enough you then need to pay more to entice labor to work for you, thus higher taxes and higher employment and the Government receives more income proportionately with more people and business working within the US in the private sector.  With higher wages in the private sector government could cut back and thus lower the debt.  Simple math that gets confused by some believing that you should tax the higher wage earner and business’, the very people and business’ that employ Americans, rather than lowering their taxes and provide incentives to employ and hire and expand within the US.    

I digressed a bit, but feel the education is necessary as it may be obvious to most folks others may have never heard of this concept.  So as the new administration makes changes to to bring business back to America and incent them to stay in the US we will gradually see a real demand for employment as business will need more folks working for them here in the US.  This will not happen overnight and there will be a lot of resistance, believe it or not, as some people actually believe that the Government can spend your money better than you can.  None the less, it will take time for any of the changes to take affect, but what you will see is a raising of interest rates in anticipation of a rising inflation due to a more game fully employed America.  This will slow housing in the short term until the average American sees the increases in pay from all of the positive incentives for businesses to do business in the US.  We saw this with President Reagan, his whole first term was dedicated to lowering taxes and providing incentives to businesses to expand.  The US economy didn’t see the effects of the changes until his second term and Reagan was almost not elected for a second term simply because of the time lags in the economy. 

So the long term outlook is great for the Real Estate industry, however, the short term will be a slowing down in Real Estate.   California, in the short term, will see an overall slowing of housing appreciation and demand will slow with higher interest rates.  The short term will be over the next 1-2 years.  We will not see a devaluing of Real Estate like we saw due to the mortgage industry implosion in 2088 through 2011.  We will see builders catching up with the pent up demand, however, interest rates will slow their growth as less people will be able to qualify with the higher rates.     Unfortunately California has implemented high taxes on companies and employers that companies will continue to move out of California as it will not be profitable to do business in California.  The California State Government seems to follow the doctrine of over regulating and taxing business in this state to the point where good businesses are leaving the state in droves in search of a friendlier environment to do business.  Until this State figures out basic economics the State will continue to go backwards.  So long term Real Estate trends for California I feel are going to be different for different parts of the state with the bigger Cities and their bedroom communities maintaining their values and a having steady demand, however, not as high as they have been enjoying over the last several years with low interest rates.  The central valley of California will be slow but steady with some depressed Cities like Stockton down to Fresno seeing a relatively flat Real Estate market as these would be the areas in the state that growth could occur but with high taxes on businesses the businesses that would consider moving into the state will seek other states to do business in.  Real Estate is always the best long term investment anyone can make, it is a hedge against inflation and over the long haul they aren’t making any more of it so it will have to enjoy growth.  To make America Great again will take the efforts of the whole not just the people educated in economics.    

 

 

Posted by Gregg Mower on December 9th, 2016 12:41 PM

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