Regular readers of this column know I’ve gotten close but not quite to the finish line in explaining variation in home prices across California counties. Since writing last month’s column, I’ve had my ‘eureka moment,’ so I now know how to get there. But that explanation will wait another day. More timely now are the results presented at our recent 40th annual Economic Forecast Conference.
Monthly job estimates from the Employment Development Department, or EDD, point to a sharp slowdown in Orange County’s job growth from 2.3% in 2016 to 0.6% in 2017. Such a drop puts Orange County’s job growth not only below California’s 1.7% but even below the nation’s 1.5%. No other county in California is reported to have such a dramatic slowdown.
Our Chapman Model calls for a 2.4% increase in the rate of job growth in 2017 rather than the sharp drop showing up in EDD’s monthly statistics. So which data do we accept as accurate? Tough call, but recently released reports from our Anderson Center for Economic Research, which include a Purchasing Managers Survey and a Consumer Sentiment Index for Orange County as well as a recently released report from the Bureau of Labor Statistics, point to the veracity of the Chapman projections.
As a result, we have decided to use the job growth number emanating from our model as our starting point for our 2018 forecast. That decision is critically important, since any upward growth we forecast in 2018 will be based on Chapman’s projection of 2.4% growth in 2017 rather than EDD’s much lower 0.6%. Whether we are right or wrong will be determined in April, when the benchmark revisions on job growth are released.
If our model proves correct, that would be good news for Orange County. Instead of being a laggard, as the EDD estimates suggest, Orange County will be outpacing California, as well as the U.S.
For 2018, our forecast calls for Orange County job growth to increase slightly from 2.4% to 2.6%, with particularly strong growth in construction and services (see Figure 1). Manufacturing jobs are forecast to decline slightly as they have for the past several years. A study we recently completed, however, shows that while Orange County is losing low-paying manufacturing jobs in sectors like textile products and fruit preserving, we are adding jobs in significantly higher paying manufacturing sectors like aerospace products and medical supplies and equipment.
Our forecast findings show that housing affordability will continue to decline in 2018, which in turn, will lead to a decline in the rate of housing appreciation from 6.4% in 2017 to 5.2% in 2018. But a big question mark here is what happens to housing prices if there’s tax reform along the lines of the current House bill. A recent Anderson Center press release reports on research that my Chapman colleague Fadel Lawandy and I have completed. It points to a negative impact on California home prices if caps on mortgage interest and property tax deductions are put into effect.
That negative impact in Orange County is an average decline of 8.7% that will occur over a period of five years or more. In the early years there’s likely to be upward pressure on home prices, though, because the caps on home-related deductions will not change for current homeowners. Since the current tax advantage will be lost once a home is sold, families will be incentivized to hold on to their homes longer, thereby limiting the supply of resale homes for sale.
At this point we don’t know if positive short run or negative long run forces on housing prices will prevail if tax reform as currently proposed passes. So our best call at this point is to expect Orange County home price appreciation next year of 5.2%, which will occur as a result of supply-and-demand forces unrelated to tax reform (see Figure 2).
There are other moving parts to our forecast that we discussed at our conference, including concerns about repealing NAFTA, the impact of the Fed’s plans to decrease its assets by $1.3 trillion and, especially, the possibility of losing the deductibility of state income taxes.
By the time of my next column in January, we should at least have a better idea about the results of the reconciliation process between the House and Senate versions of the bill. More importantly, we’ll know whether the reconciled bill passes. Since I’m an economic rather than political analyst, I’ll shy away from attempting to forecast that one. n
