Housing market update: rents up, prices up, sales down
A slowly improving economy and tight inventory for both rentals and resale homes drives up rents and prices while harming home sales rates.
The housing market broke out of it’s yearlong flatline condition over the last few months.The spring rally pushed prices higher, driven mostly by rising rents, but resale volume was very low, suggesting the gains do not represent fundamentally strong demand from an improving economy. Housing bears suggest the recent weakness may be a sign of a medium-term market top.
Coastal California housing is the least affordable in the US because the chronic shortages of inventory forces buyers to compete and bid prices higher. These higher prices are hurting both resales and new home sales. Further the market may face serious long-term problems with demand, a weakness not caused by tight mortgage standards. But despite the problems, both rents and resale prices continue to rise, an outcome specifically engineered by the banks whose loan modifications push up rents, and create the cloud inventory phenomenon that pushes up resale prices.
Back in June, I predicted that single-family home rents would soon begin to rise because hedge funds were no longer bringing new rentals to the market. The trend of rising rents picked up strength over the last few months.
As evidenced by the many properties on this site’s system, the market is trading very close to rental parity, and despite the high price tags, a cost of ownership well below the cost of rent can easily be found in most cities.
The big question is why are rent’s rising? Is it merely due to the lack of new supply from investors pulling back, or is it due to an improving economy?
If the rise in rents is due to an improving economy, the gains in rents and resale prices will be sustainable; however, if the gains are based on inventory manipulation alone — and the lack of sales volumes suggests this — then the headwinds of rising mortgage rates and loan modification recasts may make the road ahead much rockier.
The relationship between the cost of ownership and the cost of a rental has been locked in at rental parity for the last 18 months. This limit of affordability is proving much more durable now that the new mortgage rules prohibited most affordability products.
The deviation from the historically normal value over the last 18 months has been remarkably small.
The market paused earlier this year, but prices have steadily moved higher over the last few months. The rate of appreciation is certainly slowing, but it still remains elevated above normal levels. Since I use a 6-month smoothing factor, we won’t see the full effect of the flattening until December.
The relationship between median resale and rental parity is as tight as the mid 90s.
Bloom Off the California Real Estate Rose
August 2014 Sales Down 13.5 Percent from August 2013
Median Prices Fall in Half of California’s Largest 26 Counties
In August 2014, 34,269 California single-family homes and condominiums were sold, down 4.2 percent from July’s total of 35,787 and a decline of 13.5 percent from 39,614 sales in August 2013. August 2014 sales were the lowest August sales since 2010. On a regional basis, over the past 12 months sales are down 15.7 percent in the Bay Area, 16.7 percent in Southern California, and 18.8 percent in the Central Valley.
There is no bullish way to spin that. A big decline in sales volumes from an already low level doesn’t signal anything positive in the market.
“The bloom is definitely off the California real estate rose,” said Madeline Schnapp, Director of Economic Research for PropertyRadar. “The rapid rise in prices over the past two years has outstripped the ability of many would-be California homeowners to purchase.” …
That’s exactly what happened. The marginal buyers were priced out, and the economy is not producing enough good jobs to make up the difference.
On a county level, median price increases have slowed or peaked in many of California’s largest counties. In August, 13 of California’s 26 largest counties experienced monthly price declines compared to only six in March.In other California housing news:• Negative equity continues to decline but remains at historically high levels. In August, slightly more than 1.0 million California homeowners, or 11.6 percent were underwater. Historically elevated levels of negative equity will continue to exert a drag on the California real estate market.
• Cash sales totaled 7,547 in August and were 22.0 percent of total sales. Cash sales have been steadily declining, down 46.2 percent, since reaching a peak of 14,028, or 40.0 percent of total sales in August 2011.
Home Sales – Single-family residence and condominium sales by month from 2007 to current divided into distressed and non-distressed sales. Distressed sales are the sum of short sales, where the home is sold for less than the amount owed, and REO sales, where banks resell homes that they took ownership of after foreclosure. All other sales are considered non-distressed.
Year-over-Year Home Sales
Year-over-Year Home Sales – Single-family residences and condominiums sold during the same month for the current year and prior years divided into distressed and non-distressed sales.
California Homeowner Equity
California Home Owner Equity – A model estimate of California homeowners segregated into various categories of levels of homeowner equity for a given month. Homeowner numbers represent a percentage of total California homeowners.
The 11.6% who are underwater and the 4.4% that not far enough above to sell and pay sales commissions and closing costs are cloud inventory. These are the listings that will appear as prices approach the peak.
Is it a good time to buy?
Because rising prices are mirrored by rising rents, the market timing system still gives the market a high rating.
Shevy tells me the market is very slow. Very few buyers are active today, and we are seeing many more price reductions. As I noted above, the weak volume suggests weak fundamentals, or it may just be the market pausing before resuming its upward climb next spring. This is either a poor time to buy because prices may drop again, or it’s an excellent time to buy because there are fewer competing buyers in the market.
Personally, I believe it is a good time to buy. It’s almost always better to buy when competition is less intense like it is today. The weakness today is based on short-term problems, and the economy should finally pull out of the 2008 recession over the next few years. I believe the period of rapid appreciation and super-tight inventory is over, and although the selection is still below normal, buyers don’t have to compete with dozens of other buyers to bid on what’s available, and those are the conditions that favor getting good deals.