Forecasting the Real Estate Market with Leslie Appleton-Young


In this interview I speak with Leslie Appleton-Young, the chief economist for the California Association Realtors. They discuss Leslie’s market forecast for the coming year, as well as what drives interest rates and the state of the California housing market. Leslie emphasizes the need for more housing in California and the impact of regulations on housing affordability. She also discusses the relationship between the Federal Reserve rate and mortgage rates, as well as the factors influencing home prices and sales volume. Leslie does not predict a recession in 2020 but acknowledges the challenges of the housing market, particularly for non-tech workers. She encourages individuals to be involved in local planning efforts and to consider solutions such as accessory dwelling units.


Hello and welcome to episode number 44 of the Beta Bay Podcast. I’m your host, Seb Fry, and for this episode, I’m very thrilled to have Leslie Appleton Young as my guest. Leslie is the chief economist for the California Association Realtors. Every year, Leslie does a market forecast for the coming year. She puts that out in late fall and she predicts what’s going to happen with home prices, mortgage rates, unemployment rate, sales volume, all kinds of facts and figures. And these reports are amazing. She updates them several times throughout the year, and she just did a brand new mid-year update just today, and I watched it and it was fantastic and jam packed full of information. So it was really special for me to, after she did that, to have a talk with her about what goes into putting on these reports and what really drives interest rates and what’s going on with the California home prices and employment and all that kind of stuff. Leslie is just such a wealth of information and a very warm and fun person to talk to. So without any further ado, please sit back, relax, and listen to what Leslie Appleton Young has to say.

Hey Leslie, thank you so much for jumping on the call here with me today. I know you’re super busy. I really appreciate you making the time. How are you doing today?

I’m doing great, Seb. Thanks so much for asking me. No problem at all.

Alright, listen, I just listened to your mid-year market update, which was fantastic and all as always, and we’ll get into some of that maybe a little bit later. But I just wanted to start by learning a little bit more about you. Where’d you grow up and what was your childhood like?

Well, I’m actually a native Californian. I was born at the Queen of Angels Hospital in Hollywood and my father was a, we eventually moved to Long Beach. My father was a PhD in physics from U SS C, and he was one of the first physics faculty hired at Long Beach State College, which at that time was I think two bungalows on the lower campus. So I grew up there. I graduated from high school and I went to Berkeley for college and then I went back east to Philadelphia to the University of Pennsylvania to study economics, and I got my master’s degree from there. I lived on the East Coast of Total for about nine or 10 years, and then I came back to Los Angeles in end of 1983 and saw an ad in the newspaper for a research analyst at the State’s largest trade association, which ended up being the California Association of Realtors. And that’s 35 years ago, believe it or not.

Wow, that is super cool. So you went to Berkeley. I’m from Berkeley. That’s my hometown. What did you study at uc? Berkeley

Economics. Economics. Then we would never call it, we’d never call it uc, Berkeley. We just call it uc,

Berkeley, or you could call it UC. We just call it Berkeley.

Everybody else had to say where they were, but we were like “UC”. I took an economics class my freshman year and I just fell in love with it. I loved that it was history and people and sociology and math. It just seemed to have everything that I was interested in. So I really started to major in economics right from the get go,

Hate to wait?

Right from the get go. So you’ve been working at C A R for 35 years, but there was a little while there before you started working at C. Were you a professional economist before starting at C a R or?

Well, I was very young in my career. So when I was in graduate school, I worked at the Federal Reserve Bank of Philadelphia, and then I ended up in Rhode Island and I worked for a consulting firm for a few years. So back in the day it was pre-computers. So I remember doing these very complex graphs with input output exports. I mean it was incredible and it was all kind of by hand and with stickers and so on. We did do an interesting project. It was an analysis of the Rhode Island economy, which at that time was the kind of center for costume jewelry and really looking at a project, what’s called the Greenhouse Project, looking at ways to percolate new industries because there was a clear understanding back in the early eighties, late seventies that that industry would be going away overseas, which is in fact what had happened. So it was a lot of fun to be there.

Alright, cool deal. So now economics, what exactly is economics? I mean, I think I know, but what’s the definition of economics exactly?

I’m sure there is a formal definition that we could easily Google. From my mind, it’s really how people make decisions and how markets work. And I think the challenge for the industry or for the profession has been really reconciling these very heavily mathematized models with how people actually make decisions. So in the years since I was in graduate school, there has been a blossoming of the field of behavioral economics that says that people don’t necessarily maximize utility and they don’t necessarily make the best decisions given their input of information and they don’t have free information. So it’s all the frictions in the market I think that make things interesting because the reality is there are no free markets, there are very few free, truly free market. So I think that’s what it’s all about, right? It’s about how people decide and how markets work. It’s about how economies grow.
I’ve been very enamored with the Hamilton musical and I’ve seen it six times. I can’t get enough of it. I think it’s so great. But I thought one of the things that was very interesting about that was to look at Hamilton, whose view of the future of the colonies and the United States was industrialized. It was mercantile, it was immigration, and Jefferson was a slave owner. It was agrarian. That was the future that he saw. So you had these two very different competing visions of what the country was going to be. And here you have this guy who’s Secretary of the Treasury and he knows that we need credit and that we need a national bank. I mean, it’s been a great thing about that musical is that people really recognize what he did for this country that the other founding fathers just weren’t in tune with.

Yeah, I love that musical. I saw it in San Francisco. And I also love your explanation of what economics is much better than what I’m sure Google would tell me. It’s how people make decisions and how markets work. That’s really a succinct way to put it, I think. So one thing that I think a lot of people get sort of confused about, and me, myself and I kind of have a tenuous grasp, and that is that the Federal Reserve sets an interest rate. And just today they’re talking about maybe doing a rate cut in July. And normally they say, well, when the Fed increases rates, then mortgage rates go up. But we’ve seen that the inverse happen. They’ve increased rates and mortgage rates drop, and maybe this time they’ll increase decrease rates and maybe mortgage rates will increase. So is there really any kind of a firm link between the federal reserve rate and mortgage rates that people get when they buy a house?

I think there are a variety of firm relationships, and one of the things that I’ve come to appreciate over the years is that there is an international capital market that the Fed does not control. And even though the Fed is very, very powerful and the dollar is the international currency, the currency of the realm if you will, we get all kinds of capital flows in and out that are related to let’s say, political events. And I remember back in December of 2015 when the Fed raised rates for the first time coming out of the downturn, and in January rates actually went down because there was a hiccup in the Chinese stock market and a few other things going on over there. And so we had this inflow of capital coming in that resulted in lower rates. So the Fed really can only do too much.
And I think we’ve seen this also in the housing market. There are people from overseas that buy houses that never move into them and that have paid all cash, and this isn’t going on as much as it was before, but pay all cash and don’t seem to have a budget constraint. And they’re not living in the home, it’s their parking their currency by buying real estate in the United States because regardless of all the ups and downs that we have, we are the safest place to be if you want to keep your money safe, even if it’s not in a bank. So even though when the Fed increases the shortest short-term rate, which is the Fed funds rate, which is the rate at which banks borrow from each other overnight to meet their reserve requirements, and that really ought to just go down the line of the maturities, it doesn’t happen that way.
And a lot of it has to do with the expectations. There’s been a lot of concern a couple of times in the last few months when the yield curve has gotten inverted. So short-term rates were actually above long-term rates. And you’d think if you were giving your money away for a longer period of time, you would earn more. But not if you think rates are going to be going down or the economy’s going to tank in the future, then you get an inverted yield curve, which is why people were saying, gee, I feel the winds of recession coming. So the answer to your question is it’s very simple and it’s very complicated in practice.

Point. Click. Offer. Sell.

Alright, very good. A lot to think about right there. So you mentioned in your mid-year market update about the affordability of California being the worst in the nation. And so why exactly is that, do you think? And what would an economist say is the fix for this low affordability in California?

Well, the fix is we need to build more housing in California and we need to make it less expensive to build housing in California. And when you go back to 1970, the US median home price in the California median home price differed by about $400. And I don’t know what that would be if you were correcting it for inflation today. I mean it would be a gap, but it wouldn’t be anywhere near the double gap that we have today. And when you look at this long-term trend of the US median home price and the California median home price, what you see over time is the impact of down zoning, slow growth. What you see is this gap forming and it gets bigger and bigger with the California median going up. And there are very clear reasons why this is happening. There have been rules and regulations and zoning requirements that over the years have reduced the land available to build. I don’t dunno if you saw the news story last week, but Milwaukee has gotten rid of single family zoning because

Yeah, and so in Oregon too, right?

Build, yeah. Parts of Oregon. So that’s really it in a nutshell. We don’t build enough and homeowners for the most part, don’t want more construction near them. You can build it somewhere else. And there have been a lot of measures that have passed that have been pro-growth and pro building, but then when it comes down to actually putting the shovel in the ground and getting it started, it’s just one lawsuit after another to prevent that from happening.

Right, exactly. So basically regulations have put a stranglehold on the supply and its supply and demand, and that’s why we have it. We just have decades of strangled creation of supply and now we’re paying the price.

And one of the things that the social sciences always get a bad rap because the moniker was, well, you can’t do a controlled experiment. And I’ve said that I think the Bay Area is a controlled experiment and you think of it as a Petri dish with job growth and income growth and demographic growth and household formation and no housing growth. And this is what happened. The median home price in San Francisco is 1.6 million.

Yeah, it’s ridiculous. It’s ridiculous. Yeah,


So I just listened to your midyear update. Fantastic. I’m just curious, how long do those take to put together? That seems like it must just take weeks to put those together.

Well, yes and no. When we do the annual forecast, and I must say I have a wonderful team of economists to work with Oscar Way, our director of research, Jordan Levine is our deputy Chief economist and Guillermo Flores and Georgia Fennel. I mean, we have a great team. And for our annual forecast, we work with a professor at the university at Cal State Fullerton, Cal State University at Fullerton. And we run a macro model and get numbers. But to be perfectly frank with you, we typically do a lot of adjusting. And the reason is it’s, I think forecasting really is an art, not a science. I am very much in favor of scenario forecasting as opposed to single point forecasting because whatever number you pick, you’re going to be wrong probably.
But I think the important part about doing the exercise of forecasting and thinking about the future is to really map out a couple of specific but possible things that could happen. And even if there was a low probability that it will happen, if it would have a huge impact on you, maybe you ought to think about it. And I always think about the challenger explosion and the O-rings very small probability that they would freeze and create the problem they did, but if they did, it sunk, the people died. I mean, it was horrible. So I just always think about that. What are the stories that we want to tell that will teach us something about being prepared for what might happen?

Right, right. Okay.

Go to the Head of the Class

So it’s kind of a mixture of a lot of reading, a lot of talking to people, a lot of seeing what the consensus is and what people are talking about. I mean, we’re very involved with the National Association of Business Economists here at C A R, and we are certainly in touch with every housing economist in the country. We’ve all known each other for a long time, and then we kind of do the best job that we can. And sometimes we get it close to, and sometimes that’s not the case, but I look at it as a learning exercise as much as anything else.

Well, the future is very difficult to predict, and it’s pretty brave of you actually to put so many forecasts out there, right? I mean, it’s just so hard to say anything in the future with any degree of certainty. It’s just

Very impressive. Mean that would be a risk taker, right? We’re in an industry of risk takers and we’ve got to at least lay out what we’re thinking and what people ought to be watching. One of the things that I said today is if you want to know what’s going to happen in the market in six months, look at inventory. Inventory will tell you everything about where the market’s going. So you just do the best you can.

I’m glad you said that because I was asking you, my next question was what are the key metrics that people should be looking at when they’re reviewing your, which I always, anytime you ever put a report, I always share it with my database and on my websites, everything like that. So inventory, is that what people should be looking at? That’s like the canary in the coal mine.

Sure. Absolutely. Yeah. Nothing’s going to sell if it’s not on the market. And the trends in inventory, and like I said today, we’ve had about a year now or over a year of increasing active listings going up, but for the past four months they’ve been going up at a slower rate. So there is absorption going on. It’s not like we’re gaining inventory and it’s sitting there. But what’s happened is you have properties that are priced above market. They are sitting there and the properties that are in excellent condition, because everybody wants a Pinterest ready home, H D T V has changed everybody’s perception about what their home is going to look like. It needs to look great and it needs to be priced and it will sell,

Right? Yes. And so also you were saying that the new normal of inventory in California is about three to three and a half months or whatever. That’s just sort of

Exactly. It’s about half what it used to be.

That’s right. About half what it used to be. Right. Okay. Interesting. Now, so tell me about California’s economy. I mean here on again, your midyear update. You said we’ve had 10 years of growth, right? And I remember Jerry Brown telling us that ledge day, Hey, we’re years past the normal expansion and that recession is coming right around the corner. What do you think, I mean, how are we going to be in the next one or two years? Do you think we’re going to receive a session in that time or just no way to know? I don’t.

I, we could. I mean, I never say never, but I don’t think a recession is driven by the date. This has been a very unique recovery. It’s been going on for now 10 years. I mean, this month is its 10th anniversary, and we’ve never had a recovery. That’s been a growth period that’s been this long. But we’ve never had such a slow recovery either. It took twice as long to put back all the jobs that were lost as it typically does. We don’t have the imbalances in the market with all the shady lending that went on in 2004, five and six. We don’t have that today. So I’m sure there are many things that could a 10% mortgage rate, no trade with the rest of the world. I mean, there are many things that could take the economy down, but I don’t see anything brewing in the market right now that’s going to say 2020, we’re going to go into a recession. We see growth slowing growth is slowing in China and Europe. It’s one of the reasons why we’re likely, I think we’re almost assured now of getting a rate cut at the end of this month when the Fed meets, which nine months ago, who would’ve ever expected that? But I’m not on the camp of a recession in 2020. I’m really not.

Oh, I’m glad to hear that. So you touched on a little bit ago about employment and around here in the Bay area, right? Home prices are being driven up, they say, by all these legions of tech millionaires and other well-paid employees. But what about everybody else? So do you see any wage growth coming down the line for non-tech blue collar, like normal type people? Is that going to happen in California

In some wage growth? I think the national average is around 3% right now. Maybe a little bit more than that, but it’s just nowhere near enough to make up for the kind of price appreciation that we’ve seen in California. And that’s why we spent a lot of time earlier talking about net domestic migration out of California, because the level of wages, unless you’re in kind of the tech industry professional, or you happen to have won the ovarian lottery and you have a baby boomer parent that can write you a big down payment check, it’s just very hard. It takes a long time to save enough money for a down payment. And the jobs that every community needs that are kind of the bread and butter of society, the teachers and the nurses and the firefighters, they don’t make enough to buy houses near where they work in coastal California today. So it’s a real tragedy and it’s a real problem, and it’s working its way out, not by increased supply in California. I mean, we’re barely above a hundred thousand units, but it’s being balanced out by people going to other parts of the country to live and work and raise their families.

Yeah, totally. I see it all the time. I never really used to see it, but I see people looking at moving out of California almost every day. Now it seems like you said that wage growth is 3%. Is that 3% after inflation or is that before inflation?

I think that’s with inflation,

With inflation factored in there.

Okay. I’d have to check that. But yeah, I think so. It might be real wage growth. Let me check.

Yeah, because people bandi that number about, and I’m going like, whoa, is that before or after? Because I thought it was with rate. I thought that was in considering inflation is what I thought. Otherwise it’s not just wage inflation rather than a wage growth. Yeah.

Here it says worker wage gains are keeping up with inflation and then some. Yeah. Well, in the real average hourly earnings for all employees, increased 0.2%, that is the latest from the B l s, so it would be 0.2% times 12. So 2.4, something like that. So that’s real.

Ready? Get It Sold.

Okay. Alright. Good to know. I tell people that I, Hey, wages are going up. You might not notice it, but it’s happening and cumulatively over the years, it’s going to help people afford the real estate here for the long run. So in your report, you were mentioned that the number of sales in California is way down versus historical norm way, way down. So why is that? And do you ever expect that that’s actually going to change? We’re going to start selling houses again with the frequency we used to in the seventies or whatever?

No, I don’t. And what I said was that we had a huge drop in transactions when the market tanked in oh seven and oh eight, and then things kind of came back up to around 400, 5, 450, whatever, a hundred thousand units. And then they’ve settled back down. And so we’ve been kind of going above and below kind of fluctuating around 400,000, 400,000 units for seven or eight years. And that’s in the context of an economy with job growth, income growth, household growth, low interest rates, all the stuff we’ve been talking about. So the demand side of the equation’s been very robust. People want to own, but the supply side has just created a situation where boomers can’t afford to move and don’t want to, and building is just incredibly difficult for the building community. So really it’s really not any more complicated than that.

Okay. So one question I get a lot is, are we in a bubble? Is a correction coming? It doesn’t really sound like you feel like a correction is coming, right? No,

I mean I think, well, prices have softened at the high end. I mean there’s no doubt about that. But if you’re talking about a repeat of oh eight, no, no, I don’t see that and I don’t see a significant softening, as long as the economy remains as strong as it is and people are working and have the income to pay their mortgages, if the economy deteriorated for some reason, that would be another story. You always get to increase. If people can’t afford it, they lose their homes, you have an increase in foreclosures. I mean, we’ve all been through that cycle a few times in California, so that’s why I say never say never, but I don’t see those imbalances in the market today that existed back then. And unfortunately hindsight is 2020. Right. Would’ve been nice to have really been able to act on that information back then. But everybody was making a lot of money.

So I’m a hobbyist or an enthusiast for real estate numbers, and when I’ve done my own research, I seem to see that when there’s a recession and then prices go down, it’s not normally what happened in oh eight, which is that prices go down and they cause a huge recession. So do I have that right, that typically housing prices don’t just go down all by themselves, that there usually is some kind of impetus or do prices just go down for,

Well, they go down when people, the economy tanks, people lose their jobs, they can’t pay their mortgage, they leave, they lose their homes, and you get this increase in the supply of housing on the market and no demand. People aren’t buying, the economy is in a recession.

Right, right. So I know we got to wrap things up here, but just one last question and that is that back when Trump’s budget passed to c a r was forecasting that this would have a potentially a 10% drag on home prices. Do you feel that’s at all at play here in the Bay area? Home prices have come down. I was just looking at you in your presentation that Santa Clara County is down. Do you think that really has a lot to do with the mortgage interest deduction and the salt cap and all that, or no?

Well, I think on the buy side it’s had an impact. Most people now are doing the short form as opposed to the long form. And I can’t remember the numbers off my head, but we just did an analysis of that here and it was like a huge shift. It just doesn’t make sense for people to itemize when the standard deduction is $24,000 for a married couple. So there’s no doubt in my mind that that’s had an impact, but I don’t think we’ve seen the full brunt of it yet because people just went through that process filing taxes, taxes in April. There is no doubt that the tax reform act, I won’t say nullify, but it certainly dulled the impetus for home ownership that had been built in with the de deductibility of property taxes and with the higher cap on the mortgage interest deduction. I don’t think that we’ve seen the kind of dramatic drop that we thought we might see. So we were off on that. But it may also be, again, nothing else stays the same. You’re looking at this in the context of a very dynamic market where the stock market’s been booming, job growth has been absolutely incredible, and the supply of homes has just not kept pace. So it’s a complicated stew of factors as you mentioned earlier.

Right. Okay. Very good. Alright, well so I’m going to let you go, but before I do, I just want to ask if you have anything that I didn’t ask you or anything you want to share with our audience?

Oh boy. I don’t think so. I guess maybe just to really be clued into the local planning efforts in your own community and see what you can do to help accommodate at least some kind of growth. I think the accessory dwelling unit legislation that was passed should, if the communities will support it, provide a way to at least give your poor mother, your mother, your dad, a place to live close to their grandchildren or something. But we all should try to be part of the solution.

Alright, very good. We should definitely all try to be part of the solution. I wholeheartedly agree. Alright, well Leslie, thank you so much. I’m going to let you go, but I really appreciate you taking the time to appear on the Beto Bay podcast.

It’s been my pleasure. Thank you so much. It was a lot of fun.

Alright, and I’m sure I’ll see you at a call conference momentarily.

You bet.

Alright, that wraps up episode number 44 of the Beto Bay Podcast. I really hope you enjoyed listening to my conversation with Leslie. There is so much that goes into the housing market. There’s so many factors, domestic, international, monetary, fiscal, consumer sentiment. It really is very difficult to predict the future. And Leslie does so boldly every year and several times throughout the year. And I really appreciate all the work that she and her team at the California Association of Realtors does putting these reports together because a lot of what I tell my clients is what I’ve learned by listening to Leslie in her presentations and all the other updates that I get sent all throughout the year. So that is it for this episode of the Beta Bay Podcast. And hey, if you like this, would you do me a favor? Would you share this episode with someone you think who might be interested in it?
And I would also appreciate it if you would go ahead and give me a five star review on Apple iTunes or Stitcher or Google Play or wherever it is that you find your podcasts. And before I wrap things up, I would be remiss if I didn’t mention that the Beta Bay Podcast is sponsored by the sold That’s right. Go to the sold to pick up your free copy of my book, get It Sold. It’s all about how to sell your home quickly and easily for the very highest price possible with the least amount of hassle and risk and having a good time doing it. So this book, it sells for 13 bucks or so on You can go and buy it there. It’s a real book, but check it out. I will send it to you for free free if you go to the sold to order a copy there and check it out. If you use the coupon code free ship, that’s F R E E S H I P, use that coupon code at checkout. I’ll even ship it to you for free. You can’t meet that at all. It’s only 110 pages is a very quick read and I wrote every word myself and I guarantee you again. Alright, that is it for this episode of the Beto Day podcast. Thank you so much for listening. And before you know it, I’ll have another episode ready for you.

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About the Author
Seb Frey helps long-time Bay Area homeowners make their next move easily the next one yet. If you're looking for a minimum of hassle, maximum net cash on sale, and certain results, contact Seb today.