Last week, in a new report from Zillow, it was revealed that there has been a rash of price cuts across the country. According to the report:
- There are more price cuts now than a year ago in over two-thirds of the nation’s largest metros
- About 14% of all listings had a price cut in June
- Since the beginning of the year, the share of listings with a price cut increased 1.2%
- This is the greatest January-to-June increase ever reported, and more than double the January-to-June increase last year
“A rising share of on-market listings are seeing price cuts, though these price cuts are concentrated at the most expensive price-points and primarily in markets that have seen outsized price gains in recent years.”
What this DOESN’T MEAN for the real estate market…This doesn’t mean home values have depreciated or are about to depreciate. A seller may put a home worth $300,000 on the market for $325,000 hoping a bidding war will occur and an overanxious buyer will pay more than its actual value. That has happened often over the last few years. If the seller gets no offers and reduces the price to $300,000, it doesn’t mean the home dropped in value. It is still worth $300,000. Home prices will continue to appreciate over the next 12 months. In this same report, Terrazas remarks:
“It’s far too soon to call this a buyer’s market, home values are still expected to appreciate at double their historic rate over the next 12 months, but the frenetic pace of the housing market over the past few years is starting to return toward a more normal trend.”
What this DOES MEAN for the real estate market…This does mean that sellers should be more conservative when it comes to the price at which they list their homes – especially sellers in the upper end of each market. Sellers have been listing their homes at inflated prices hoping a super-hot market will deliver a buyer willing to pay virtually any price to ensure they don’t lose the house. That strategy has worked somewhat successfully over the last two years. However, the time that strategy would have worked may have passed. Again, quoting Aaron Terrazas in the report:
“The housing market has tilted sharply in favor of sellers over the past two years, but there are very early preliminary signs that the winds may be starting to shift ever-so-slightly.”
Bottom LinePrices are not depreciating. However, if you want to sell your house quickly and with the least amount of hassles, pricing it correctly from the beginning makes the most sense.
Some are attempting to compare the current housing market to the market leading up to the “boom and bust” that we experienced a decade ago. They look at price appreciation and conclude that we are on a similar trajectory, speeding toward another housing crisis. However, there is a major difference between the two markets. Last decade, while demand was being artificially created by extremely loose lending standards, a tremendous amount of inventory was coming to the market to satisfy that demand. Below is a graph of the inventory of homes available for sale leading up to the 2008 crash. A normal market should have approximately 6 months supply of housing inventory. As we can see, that number jumped to over 11 months supply leading up to the housing crisis. When questionable mortgage practices ceased, and demand dried up, there was a glut of inventory on the market which caused prices to drop as there was too much supply and not enough demand.
Today is radically different!There are those who believe that low mortgage rates have created an artificial demand in the current market. They fear that if mortgage rates continue to rise, some of the current demand will dry up (which is a possibility). However, if we look at supply again, we can see that the current supply of homes is well below the norm of 6 months.
Bottom LineWe will not have a glut of inventory like we did back in 2008 and home values won’t come tumbling down. Instead, if demand weakens, we will return to a normal market (approximately a 6-month supply) with historic levels of appreciation (3.6% annually).
For many Americans, buying their first home is their first taste of achieving part of the American Dream. There is a sense of pride that comes along with owning your own home and building your family’s wealth through your monthly mortgage payment. It may seem hard to imagine that the first home you purchased (which made your dreams come true) might not be the home that will allow you to achieve the rest of your dreams. The good news is that it’s ok to admit that your home no longer fits your needs! According to CoreLogic’s latest Home Price Index, prices in the starter home market have appreciated faster than any other category over the last year, at 9.4%. At the same time, inventory in this category has dropped 14.2%. These two stats are directly related to one another. As inventory has decreased and demand has increased, prices have been driven up. This is great news if you own a starter home and are looking to move up to a larger home as the equity in your home has risen as prices have gone up. Even better is the fact that there is a large pool of buyers out there searching for your starter home to help them achieve their American Dream!
Bottom LineIf you have outgrown your starter home, call me today. I will explain the market conditions in your area and help you find your next home!
- According to the National Association of Realtors’ latest Existing Home Sales Report, sales in June were down 2.2% from last year.
- Inventory of homes for sale showed a modest improvement of 0.5% over last year’s figures, but still remains under the 6-month supply needed for a normal market.
- NAR’s Chief Economist Lawrence Yun had this to say: “There continues to be a mismatch since the spring between the growing level of homebuyer demand in most of the country in relation to the actual pace of home sales, which are declining. The root cause is without a doubt the severe housing shortage that is not releasing its grip on the nation’s housing market.”
[caption id="" align="alignnone" width="648"] Supply & Demand Will Determine Future Home Values |[/caption]
Supply and Demand Determine Home ValuesWill home values continue to appreciate throughout 2018? The answer is simple: YES! – as long as there are more purchasers in the market than there are available homes for them to buy. This is known as the theory of “supply and demand,” which is defined as:
“The amount of a commodity, product, or service available and the desire of buyers for it, considered as factors regulating its price.”When demand exceeds supply, prices go up. Every month this year, demand (buyer traffic) has increased as compared to last year and for the first five months of 2018, supply (the number of available listings) had decreased as compared to last year. However, a recent report by the National Association of Realtors (NAR) revealed the first year-over-year increase in supply in three years. Here are the numbers for supply and demand as compared to last year since the beginning of 2018: The increase in the June numbers doesn’t mean that prices won’t continue to appreciate. In that same report, Lawrence Yun, NAR’s Chief Economist, explained:
“It’s important to note that despite the modest year-over-year rise in inventory, the current level is far from what’s needed to satisfy demand levels. Furthermore, it remains to be seen if this modest increase will stick, given the fact that the robust economy is bringing more interested buyers into the market, and new home construction is failing to keep up.”
Bottom LineThe reason home prices are still rising is that there are many purchasers looking to buy but very few homeowners ready to sell. This imbalance is the reason prices will remain on the uptick.
Back in 2005, Federal Reserve Chairman Alan Greenspan described the dramatic increases in residential real estate values as a “froth in housing markets.” Greenspan went on to say:
“The increase in the prevalence of interest-only loans and the introduction of more-exotic forms of adjustable-rate mortgages are developments of particular concern…some households may be employing these instruments to purchase homes that would otherwise be unaffordable, and consequently their use could be adding to pressures in the housing market.”Greenspan was warning that the loosening of lending standards could lead to disaster. And it did. With home prices again appreciating at percentages well above historic norms, many are wondering whether the market is again becoming “frothy.” Mortgage standards are much stricter now, however, than they were in 2005. The Urban Institute’s Housing Finance Policy Center issues a monthly index which measures the percentage of home purchase loans that are likely to default. A lower score indicates that lenders are unwilling to tolerate defaults and are imposing tighter lending standards. A higher score indicates that lenders are willing to tolerate defaults and are taking more risks. Their July Housing Credit Availability Index revealed credit availability rose to 5.9%. For context, they went on to explain:
“Significant space remains to safely expand the credit box. If the current default risk was doubled across all channels, risk would still be well within the pre-crisis standard of 12.5 percent from 2001 to 2003 for the whole mortgage market.”Here is a graph depicting the Urban Institute’s findings:
Bottom LineThough it may be slightly easier to get a mortgage today than it was a year ago, lending standards are nowhere near where they were during the build-up to the housing bubble.
The results of the latest Rent vs. Buy Report from Trulia show that homeownership remains cheaper than renting, with a traditional 30-year fixed rate mortgage, in 98 of the 100 largest metro areas in the United States. In the six years that Trulia has conducted this study, this is the first time that it was cheaper to rent than buy in any of the metropolitan areas. It’s no surprise, however, that those two metros are San Jose and San Francisco, CA, where median home prices have jumped to over $1 million dollars this year. Home values in San Jose have risen 29% in the last year, while rents have remained relatively unchanged. For the 98 metros where homeownership wins out, 97 of them show a double-digit advantage when buying. The range is an average of 2.0% less expensive in Honolulu (HI), all the way up to 48.9% in Detroit (MI), and 26.3% nationwide! Below is a map of the 100 metros that were studied. The darker the blue dot on the metro, the cheaper it is to buy there. In order to calculate the true cost of renting vs. buying, Trulia includes all assumed renting costs, including one-time costs (like security deposits), and compares them to the monthly costs of owning a home (insurance, mortgage payments, taxes, and maintenance) including one-time costs (down payments, closing costs, sale proceeds). They also assume that households stay in their home for seven years, put down a 20% down payment, and take out a 30-year fixed rate mortgage. The full methodology is included with the study results here. Below is a chart created with the data from the last six years of the study, showing the impact of the median home price, rental price, and 30-year fixed rate interest rate used to calculate the ‘cheaper to buy’ metric. In 2016, when buying was 41.3% less expensive than renting, the average mortgage rate was the driving force behind the difference. Rates this year are the highest they have been in six years which has narrowed the gap, all while home price appreciation has also been driven up by a lack of homes for sale. Cheryl Young, Trulia’s Chief Economist, had this to say,
“One point deserves emphasizing: The ultra-costly San Francisco Bay Area is not a harbinger for the nation as a whole. While renting may outweigh buying in San Jose and San Francisco, it is unlikely that renting will tip the scales nationally anytime soon.”
Bottom LineHomeownership provides many benefits beyond the financial ones. If you are one of the many renters out there who would like to evaluate your ability to buy this year, let’s get together to find your dream home.
The National Association of Realtors (NAR) released the results of their latest Existing Home Sales Report which revealed that home sales declined 0.6% to a seasonally adjusted annual rate of 5.38 million in June from 5.41 million in May, and are 2.2% below a year ago. Some may look at these numbers and think that now is a bad time to sell their house, but in fact, the opposite is true. The national slowdown in sales is directly tied to a lack of inventory available for the buyers who are out in the market looking for their dream homes! In fact, the inventory of homes for sale had fallen year-over-year for 36 consecutive months before posting a modest 0.5% gain last month and has had an upward impact on home prices. NAR’s Chief Economist Lawrence Yun had this to say,
“It’s important to note that despite the modest year-over-year rise in inventory, the current level is far from what’s needed to satisfy demand levels. Furthermore, it remains to be seen if this modest increase will stick, given the fact that the robust economy is bringing more interested buyers into the market, and new home construction is failing to keep up.”The few houses that are on the market are selling fast! According to NAR’s Realtors Confidence Index, properties were typically on the market for 26 days.
Bottom LineIf you are one of the many homeowners who is debating listing your house for sale this year, the time is now! Let’s get together to discuss the specifics of our market!
Another Housing Bubble?With home prices continuing to appreciate above historic levels, some are concerned that we may be heading for another housing bubble. It is important to remember, however, that today’s market is quite different than the housing bubble market of twelve years ago. Here are four key metrics that will explain why:
- Home Prices
- Mortgage Standards
- Foreclosure Rates
- Housing Affordability
1. HOME PRICESThere is no doubt that home prices have reached 2006 levels in many markets across the country. However, after more than a decade, home prices should be much higher based on inflation alone. Last week, CoreLogic reported that,
“The inflation-adjusted U.S. median sale price in June 2006 was $247,110 (or $199,899 in 2006 dollars), compared with $213,400 in March 2018.” (This is the latest data available.)
2. MORTGAGE STANDARDSMany are concerned that lending institutions are again easing standards to a level that helped create the last housing bubble. However, there is proof that today’s standards are nowhere near as lenient as they were leading up to the crash. The Urban Institute’s Housing Finance Policy Center issues a monthly index which,
“…measures the percentage of home purchase loans that are likely to default—that is, go unpaid for more than 90 days past their due date. A lower HCAI indicates that lenders are unwilling to tolerate defaults and are imposing tighter lending standards, making it harder to get a loan. A higher HCAI indicates that lenders are willing to tolerate defaults and are taking more risks, making it easier to get a loan.”Their July Housing Credit Availability Index revealed:
“Significant space remains to safely expand the credit box. If the current default risk was doubled across all channels, risk would still be well within the pre-crisis standard of 12.5 percent from 2001 to 2003 for the whole mortgage market.”
3. FORECLOSURE RATESA major cause of the housing crash last decade was the number of foreclosures that hit the market. They not only increased the supply of homes for sale but were also being sold at 20-50% discounts. Foreclosures helped drive down all home values. Today, foreclosure numbers are lower than they were before the housing boom. Here are the number of consumers with new foreclosures according to the Federal Reserve’s most recent Household Debt and Credit Report:
- 2003: 203,320 (earliest reported numbers)
- 2009: 566,180 (at the valley of the crash)
- Today: 76,480
4. HOUSING AFFORDABILITYContrary to many headlines, home affordability is better now than it was prior to the last housing boom. In the same article referenced in #1, CoreLogic revealed that in the vast majority of markets, “the inflation-adjusted, principal-and-interest mortgage payments that homebuyers have committed to this year remain much lower than their pre-crisis peaks.” They went on to explain:
“The main reason the typical mortgage payment remains well below record levels in most of the country is that the average mortgage rate back in June 2006, when the U.S. typical mortgage payment peaked, was about 6.7 percent, compared with an average mortgage rate of about 4.4 percent in March 2018.”The “price” of a home may be higher, but the “cost” is still below historic norms.
Bottom LineAfter using these four key metrics to compare today to last decade, we can see that the current market is not anything like that housing bubble market.
Some experts are calling for a slowdown in the economy later this year and most economists have predicted that the next recession could only be eighteen months away. The question is, what impact will a recession have on the housing market? Here are the opinions of several experts on the subject:
Ivy Zelman in her latest “Z Report”:
“While economic activity appears to have accelerated so far in 2018, some prominent economic forecasters have become more cautious about growth prospects for 2019 and 2020… All told, while solid long-term demographic underpinnings support our positive fundamental outlook for housing, in the event micro-economic headwinds surface, we would expect housing transaction volumes and home prices to weather the storm.”
Aaron Terrazas, Zillow’s Senior Economist:
“While much remains unknown about the precise path of the U.S. economy in the years ahead, another housing market crisis is unlikely to be a central protagonist in the next nationwide downturn.”
Mark Fleming, First American’s Chief Economist:
“If a recession is to occur, it is unlikely to be caused by housing-related activity, and therefore the housing sector should be one of the leading sources to come out of the recession.”
Mark J. Hulbert, Financial Analyst and Journalist:
“Real estate may be one of your best investments during the next bear market for stocks. And by real estate, I mean your home or other residential properties.”
U.S. News and World Report:
“Fortunately – and hopefully – the history of recessions and current issues that could harm the economy don’t lead many to believe the housing market crash will repeat itself in an upcoming decline.”