High house prices slowing California home sales
Since most people no longer fear being priced out, prospective home buyers see high prices as a deterrent rather than an incentive to recklessly jump into the market.
Generally, when the price of any good or service goes up, buyer demand at the higher price diminishes because fewer people can afford higher prices. This isn’t a particularly difficult economic concept to understand except that housing markets violated this idea repeatedly over the last 40 years.
In the past, rising house prices often led to an increase in the quantity demanded, not because more people could afford it, but because buyers became more motivated in order to capture home price appreciation.
When prices rise faster than their wages, people can obtain less real estate with their income, so there is a natural tendency for people to react with urgency because they don’t want to be forced to accept lower quality accommodations later on.
When people react to the fear of being priced out, they often act irrationally and buy whatever is available, and in their buying, they contribute to the problem of rapidly rising prices that prompts even more irrational buying. A frenzy results.
Lenders enabled buyer foolishness with affordability products that destabilized the market and lead to a crash. Affordability products were subsequently made more difficult and costly to underwrite, effectively removing them from the mortgage finance system.
Without affordability products to enable a mania, when home prices go up, buyers react in textbook fashion by reducing demand. Rather than stoke a mania, higher prices become a major turnoff to buyers, so demand wanes.
Lenders and underwater borrowers both demanded (and received) massive government bailouts both directly and indirectly. The biggest indirect intervention was the federal reserve’s hastening the decline of mortgage rates to make the unstable and unsustainable debts of the bubble mania both stable and sustainable. While buyers couldn’t possibly afford peak prices at 6.5% mortgage rates 10 years ago, with meager wage gains and 3.5% mortgage rates, bubble era home prices are now financeable with stable loan terms.
Written by Rachel Musiker on July 26, 2016
Homebuyer demand fell 17 percent in June, the fifth-consecutive month of year-over-year declines in early-stage homebuyer activity. The Redfin Housing Demand Index, based on thousands of Redfin customers requesting home tours and writing offers, fell 7 percent from May to a seasonally adjusted level of 88 in June.
Today Redfin unveils an improved version of its Demand Index, which tracks the earliest stages of homebuyer demand across 15 major metro areas. The Demand Index uses a new methodology that computes a seasonally adjusted value to reflect the level of homebuyer activity, enabling us to compare demand from one month to another accounting for expected seasonal changes. Redfin also introduces seasonally adjusted metro-level Demand Indices for 14 markets.
The Redfin Housing Demand Index, the industry’s first and only measure of homebuyer activity prior to purchase, has a benchmark of 100, representing the three-year historical average from January 2013 through December 2015. A Demand Index reading over 100 reflects high, or stronger-than-expected demand. A reading below 100 means demand is relatively weak and there is less activity than expected. The Demand Index is a forward-looking metric that is highly correlated with existing-home sales levels seen two months later as reported by the National Association of Realtors.
The number of Redfin customers requesting tours in June was up 9.2 percent year over year, the smallest increase in tour activity seen since August 2014. Customers requesting tours fell 6 percent from May. Seven percent fewer people wrote home-purchase offers in June than did a year earlier and there was a 5.6 percent drop in offer-writing activity from May.
Based on June’s demand decline, we expect sales to slow from their current pace in August.
Even though the market feels hot, with 7.6 percent fewer homes for sale across the 15 metros tracked by Demand Index, there simply wasn’t much for buyers to act on last month. Still, there were more buyers than homes, which meant homes sold quickly, many over list price and often in bidding wars.
“These major metro areas have all felt the squeeze from inventory, meaning there was just less for buyers to look at,” said Redfin chief economist Nela Richardson. “It’s not surprising that demand reflects that squeeze. Even strong buyer interest can’t squeeze a fresh listing from what’s become a dry turnip of housing supply.”
The housing supply in Orange County was up 12.5% year-over-year in June. Sales were flat.
July 19, 2016 2:18 PM
LOS ANGELES (CBSLA.com) — Home prices are way up, and that may be the reason why the number of home sales has slowed in Southern California.
Yes, that’s exactly why.
According to Core Logic, the median price of a home in Los Angeles County rose by 6.2 percent in June to $530,000, up from $499,000 in June 2015. A total of 7,869 homes were sold in the county, a dip of 3.5 percent, from the 8,152 sold during the same month the previous year.
Orange County saw a similar trend. The median price of a home was $657,500 last month, up 4.6 percent from $628,500 in June 2015. The number of homes sold dropped by 1.7 percent, from 3,850 in June 2015 to 3,786 last month.
Interest rates are near record lows, inventory is coming back to the market, and the economy is producing good jobs, so home sales should be better — and sales would be better if house prices were more affordable to more people.
Where we go from here is unclear, but my guess is that the overhang of cloud inventory sellers will start to be a barrier to prices rising too rapidly. Since these listings are suspended in the clouds by the large mortgage debt, this won’t act as a weight pushing prices lower. I expect we will see more of the same as the market limps along with tepid sales volumes propped up to the limit of affordability.