In the housing market, Spring always brings an increase in sales. As the weather warms and summer nears, potential buyers are normally very eager to find a home and lock into a school district before fall comes around – this year that’s not the case.
A collection of recent housing data shows a slow start for this Spring’s selling season. February – a tell-tale indicator of early-spring activity – showed an 11% decline from last year in pending home sales on a national level. DataQuick released a report earlier this month showing that Southern California home sales had their second-slowest March in two decades, with a low supply of homes and elevated prices dampening sales. This decline in market activity is even seen in the amount of foot traffic at open houses across the country – down a third from last March. In certain parts of the country cold weather has taken partial blame for this decrease in open house attendance – but let’s be real, that excuse won’t work for Southern California open house attendees (or rather, the lack thereof).
The dream of being a homeowner has become more difficult for buyers this past year as home prices, interest rates, and borrowing costs all experienced sharp increases. With the aforementioned variables having increased, mortgage lending is currently experiencing a 14 year low – with 30-Year fixed mortgage rates up a full percent from last year, now at 4.6%. In the past 365 days our nation’s median monthly home payment has risen 20%, all the way up to $900/mo.
Homes are becoming increasingly less affordable and we can directly see this in the percentage of houses that have had to reduce original asking prices. According to Zillow, about 28% of U.S. houses on the market in February have experienced at least one price cut, compared to 26% last year. The extent to which prices are falling varies from market to market – take Phoenix for example, where almost 45% of homes listed in February had at least one price cut (compared with 32% last year). Not only is it becoming more difficult to purchase a home, but even renting is becoming much less affordable. The rule of thumb when renting is that you really shouldn’t be spending more than 30% of your income. A Zillow report showed that in 90 cities across America the median income did not match up with the median affordability for rent.
Now everyone out there knows that Los Angeles’ housing market is a beast of it’s own, and often doesn’t follow trends seen elsewhere in the country (or doesn’t react with the same volatility given a relatively steady demand), however we did some digging ourselves and found that a pull back in prices is likely headed our way. Those who are avid readers of our blog will recall a couple months ago when we predicted this pull back coming for us, and while we can’t officially say that it is here just yet, the data on hand increasingly suggests that it is on its way. For instance, March of 2014 had approximately 16.6% less sales than March of 2013, for Los Angeles County. Going one step further, the first quarter of 2014 had approximately 13.7% fewer closings than the first quarter of 2013. These two metrics by themselves would not be too alarming if the number of properties for sale had decreased with it, as the whole supply and demand curve would’ve moved, but instead we found just the opposite. When looking at March ’14 vs. March ’13 and Q1 ’14 vs. Q1 ’13 we saw an increase in new listings of 9.6% and 5.7%, respectively.
This decrease in closed sales and increase in new listings marks, as I am sure you have figured out, a decrease in demand and an increase in supply. Furthermore we saw a slight pull back in average active listing price between March ’13 and March ’14. So why this happening? Well, while no one can deny the inverse correlation between buyer demand and interest rates, I think that what we are seeing is a little bit of air coming out the bubble we have built in the past couple years. Whether it was due to scarcity, interest rates being on the floor, or any other number of factors, there was a plus $100 per sf increase seen and I believe it has done two things:
1. Enticed homeowners to list their property for sale, thinking that they are sitting on a gold mine (listing agents: I know I am preaching to the choir here!)
2. Proven that the demand for Los Angeles real estate is not inelastic!
Being on the front lines, running a real estate brokerage, I can say with certainty that there are still PLENTY of homeowners out there that have delusions of grandeur, and believe that their $600k home is worth $1 MM; but baby, the buyers just ain’t bitin’ no mo’! (especially with interest rates on the rise). The problem here is that over-eager agents aren’t correcting their clients, with regards to their unrealistic ideas what their property is worth, and instead are just employing a “bait & switch” tactic – where they promise one price to the seller and then after a couple months of chiseling the price down and letting it sit on the market, the sell the property for fair market value. Why is this a problem? Because the house around the corner notices that this house is listed for $1mm and starts believing that their property is worth $1mm, and then they list for $1mm, and the neighbor around the corner from them sees that they listed for… I think you get the point. The end result is an unhealthy market where supply continues to increase under artificial pretenses, prices are driven down due to excess supply, and Days on Market increases due to negotiations etc.
So, here’s the takeaway:
1. We believe that we are going to see a pull back in housing prices.
2. Realtors stand your ground and inform your clients as to what their home is actually worth. If you bait and switch them, you may earn a commission but you will smear your name, leave your clients unsatisfied, further perpetuate the problem in the housing market.
3. Sellers if you say “I want to sell my home for $1mm”, and you know on a good day its worth $700k, and your Realtor says absolutely – then you need to find an agent who is going to be upfront and honest with you! (like maybe a JohnHart Agent meet them here 😉 )
Best of luck, and who knows maybe spring time will prevail, and everything will remain as they are!
P.S. If you are a really avid reader and are thinking “man this article contradicts the last inventory report they wrote”, then please understand that it doesn’t. The last inventory report compared March ’14 to February ’14, and March was stronger than February. This article is looking at year over year patterns/trends.