Dec022015

Why did home sales stall in October?

Home sales generally decline in the fall, but this October saw a larger decline than normal. Was TRID implementation to blame, or high home prices?

Lenders don’t set out to inflate housing bubbles. The pressures on lenders to obtain business prompts them to expand loan programs and develop “innovative” loan products in order to keep sales volumes up when prices reach the limit of affordability. Sellers could always rely on lenders to arm borrowers with dangerous loans to finance ever-higher asking prices. That will not be the case in the future.

Dodd-Frank regulations installed a rigid ceiling on affordability. Borrowers must document their income, and that income is applied to amortizing loans with a reasonable debt-to-income ratio. Buyers can either afford the property or they can’t; if they can’t, then they can’t buy a house.

Now that home prices reflated back to the limit of affordability, prices have largely stalled for the last two and one-half years. There is very little kool-aid permeating the market, so with no frenzy to motivate action, buyers may simply have packed it in for the holidays.

Home sales stall in October

Diana Olick, Thursday, 19 Nov 2015

Home sales usually slow in the fall, but they took a more “dramatic” turn down in October, according to Redfin, a national real estate brokerage.

Home sales have a strong cyclical component, but with prices rising faster than incomes, the slightest headwind can blow the market back significantly.

Much of the problem is a drop in the already-tight supply of homes for sale, down 4.3 percent from a year ago. New listings grew, but at the slowest pace since May.

The weakness in Orange County is certainly not due to a lack of supply. While sales peaked in July, which is typical of the yearly pattern, rather than seeing the normal decline in listings, the local inventory continues to balloon.

oc-inventory-sales-2015

California, which is often a leading indicator for the nation, saw a sharp drop in sales in October. Southern California home sales fell 5.5 percent from September and were up barely 1 percent from a year ago, according to CoreLogic. Sales were over 14 percent below the October average since 1998.

I haven’t updated this chart for 2013 and 2014, but if we are still 14% below normal, there hasn’t been much improvement.

Sales as a Percentage of 1997-2006 Historic Norm

It’s even worse when you consider the growth in population.

Resales per 1000 Residents, Orange County, CA 1988-2012

“After a relatively strong summer, Southern California home sales lost steam in October, dipping more than usual from September and rising only slightly from a year earlier,” said Andrew LePage, research analyst with CoreLogic. “Sales remain constrained by a tight inventory of homes for sale and lower affordability.”

Sales leading up to October had been very strong, LePage added, which makes the October dip more troubling.

“An increase in rates on the part of the Fed, causing mortgage rates to rise, can actually be good for the housing market in the long run. Continued low mortgage rates are a contributing factor to the pace of price appreciation that we have seen in the housing market over the past three years,” said Mark Fleming chief economist at First American.

Contributing factor? Yes, it contributed all of the gains over the last three years.

PriceRentJan2015

Low rates have allowed for strong home price appreciation — outpacing income growth and reducing affordability, especially for first-time homebuyers. …

“We should be buying more homes, but we’re not. All the fundamental things that go into buying a home are there,” said Fleming.

The fundamentals like employment and income growth, an aging millennial generation and an overall improved economy are there. What is not there? Enough affordable homes for sale.

keep_us_flyingYes, As I recently noted, housing inventory is abundant at prices buyers can’t afford. The housing bubble was inflated by unstable affordability products, leading to millions of delinquencies and foreclosures. The bust prompted the Dodd-Frank reforms that effectively banned affordability products, and the lack of affordability products fundamentally changes how housing markets work. The housing bust also significantly changed loss mitigation procedures at the banks. Loan modifications keep distressed inventory off the market and suspend prices at values buyers may not be able to afford.

Low inventory constrains sales, but not for any of the reasons commonly stated in the financial media. There is no major shortage of houses for sale on the MLS, but there is a shortage of houses for sale at prices buyers are willing and able to afford. That’s what cloud inventory does to a market.

Future home prices will be much more interest-rate sensitive due to lack of affordability products. Higher mortgage rates will first impact volume, perhaps severely due to distressed inventory suspended at prices buyers can’t finance. If mortgage rates move too high, house prices will fall in low-affordability markets on the coasts on low volume.

Future sales boosts will come from first-time homebuyers in the high-affordability markets of the interior US. Coastal California, like other Coastal markets, will suffer from below average sales for the foreseeable future.

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[listing mls=”OC15250961″]