We may be at the beginning of a market shift.
Realtor.com’s Chief Economist Danielle Hale reports that Pending home sales remained lower than one year ago for the sixth consecutive month in spite of inventory beginning to become more available. Six months of declining pending home sales year over year suggests we are experiencing market movements that cannot be explained away by seasonal variation. According to Hale, a mismatch in price between what’s available and what home buyers are looking for is holding back sales.
Inventory
Realtor.com’s Director of Economic Research, Javier Vivas reports that the nation’s inventory of active listings is expected to be down 4 percent over last July and this rate of decrease is slower than the 8 percent average decrease in the previous 12 months. If this trend persists, it’s likely that in the coming months will see the first inventory gain in more than 3 years.
Housing Prices and Wages
In the past few years, low inventory relative to housing demand has been causing housing prices to climb to new heights. As affordability has eroded away, buyers are slower to snatch up new listings as they come on the market. According to Fannie Mae’s monthly consumer sentiment surveys, fewer consumers think that it is a good time to buy:
(source)
It is true that buying has become increasingly less affordable for the average American. Due to rising interest rates and home prices, buying a home is now approximately 17 percent more expensive than it was a year ago. Wages have not kept pace with these home price increases. According to Reuters, annual average earnings growth has remained below 3 percent even as house price rises have averaged more than 5 percent over the last few years across the country.
(source)
A Gradual Slowdown in Sales
A Nobel Prize-winning economist who is famed for warning of the dot-com and housing bubbles, Robert Shiller said “this could be the very beginning of a turning point,” though he stressed that he isn’t ready to make that call yet. There are signs that Shiller’s hunch is accurate. According to CNBC, sales of both existing and newly built homes fell in June, with new home sales at the lowest level since last year. Prices continue to rise, but the gains are slowing. Mortgage applications to purchase both new and existing homes have been falling steadily, and mortgage rates are rising again. Single-family home construction also fell and was lower than June 2017.
If buyers don’t come to the the table soon, price may start to decline in certain markets.
The Santa Cruz Market
In Santa Cruz, Inventory was also up, 2.9% compared to last July. This is the first time inventory has been higher than the year before since December 2015. After going over $900,000 for the first time ever in June, the median sales price for single-family, resale homes retreated below that in July. Nevertheless, the median sales price was up 10.8% year-over-year.
Multiple offers continue to be the norm. The sales price to list price ratio, or what buyers are paying over what sellers are asking continues to hover around 100%: 100.5% for homes and 100.8% for condos.
Homes and condos are selling quickly. It is taking only twenty-five days from when a home is listed to when it goes into contract. The average since January 2003 is sixty-four days. Condos are taking twenty-two days. The average is sixty-five days.
All of this is due to an incredible lack of inventory. Since January 2003, Santa Cruz County has averaged 145 days of inventory. Compare this to August when average day of inventory was fifty-eight and July when the average was fifty-seven.
High prices and low inventory translate into a seller’s market, which has been the norm in Santa Cruz County for over five years. We shifted into a “seller’s market” in mid-2012, with market conditions persistently favoring seller’s up until present day. This may change in the next few years. When surveyed, a majority of real estate economist predict that we will see a shift from a seller’s to a buyer’s market in two years time nationwide. If the market shifts, we may start to see a softening in prices, higher inventory, and a decline in the sales to list price ratio.
Santa Cruz County Market Shift Mid-2012
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Conclusion
Many markets around the nation, including our local market in Santa Cruz, have been experiencing low inventory relative to demand, causing housing prices to move upwards. This cannot last forever, especially given the fast pace of housing price growth compared to wages. We may be starting to see the very beginnings of a slow down. With buyers anticipating interest rate increases, there may be a rise before the fall as hopeful homeowners attempt to close the deal before rates go up. However, as rates do rise, we are likely headed towards an slow down in home price growth in the coming years.