California Sees Continued Downward Trend in Sales

When we looked at July data, we saw home sales volume decreasing for the fourth straight month nationwide and third in California. August added to the same downward trend in California, making it the fourth straight month for California. Sales of existing single-family homes dropped 1.8% since July.

At the same time, prices were still going up, though at a slower rate as sellers are catching on to the lowered demand generated by high prices and high interest rates. California’s median home price was $596,410 in August, an increase of 0.8% from July.

C.A.R. Senior Vice President and Chief Economist Leslie Appleton-Young believes this is the start of a shift. Prices are roughly at their peak, and we should see them begin to either flatline or drop soon. More homes are staying on the market unsold and sellers are more willing to take price reductions.

Southern California had the most significant decline in sales volume. It’s been going down in most counties, though, with the exception of Marin, Napa, Kern, and Merced counties. Marin and Napa counties don’t account for much of the Bay Area’s sales volume, but their contribution was enough that the region had an overall increase of 0.3%.


Over Half of Inventory in Highest Price Tier

Across the nation, the share of high-tier homes has risen dramatically in the past two years. That doesn’t mean there are more homes, though — there are much fewer, and most of them aren’t the more affordable low- and mid-tier homes. There’s a lack of affordable housing, and a lack of housing in general.

In California, the contrast is not as stark, but it’s still there. As of the beginning of the year, there were about 1.6 times as many high-tier homes as low- or mid-tier homes, which were approximately equal. Homebuyers have become more and more aware of this as total inventory has decreased.

Many first-time homebuyers — who would generally be purchasing in the low tier — are Millennials who needed to recover from the 2008 recession before being able to buy. Those who have been saving up now have money for a down payment, but the market isn’t suitable. There isn’t enough new construction, and the builders that are building are searching for the most bang for their buck, which in a market with high prices overall means high-tier construction.


School Districts Top Priority for Buyers

When it comes to finding the right home, most buyers are aware that the perfect home doesn’t exist, so compromises need to be made. In the spring of 2018, the features that buyers were most looking at were a garage, an updated kitchen, and an open floor plan.

Priorities have shifted now. 78% of buyers are not willing to compromise on their choice of school district, often giving up the garage or updated kitchen buyers wanted in spring or other features they would ideally want. Of course, only 34% of those without children believe school districts are important or very important, but among those with children, the number is a whopping 91%.

How do buyers decide which school district they want? For 59% of them, test scores are the most important factor. Prospective buyers are also looking for schools with accelerated programs and music programs.

Beach Cities Real Estate Slowing

By Carl Clark
The sellers’ market has peaked for the Beach Cities. If you’ve been waiting for the “top of the market” before listing — this is it!
Real estate is the quintessential example of the law of supply and demand. Ideally there would be one buyer for every seller in the market. That way it’s given the property will sell. The only discussion is over price, and because there’s no competition, the dollars are by definition fair because it resulted from agreement between “ready, willing and able” parties.

Most of the time that’s not the real world. As you can see in the August chart above, daily fluctuations can make a chart look like sales are leaning toward sellers. In fact, the red trend line shows the longer term trend has shifted from a flat line, to a downward line, more favorable to buyers.

The chart below shows available inventory, confirming the market slowdown. In just eight months the number of homes available has risen from ~400 to ~1000.
Looking back at 2017, we see the precursor to this market shift. Throughout the year more and more homes came on the market, as sellers became more anxious about the impact of rising interest rates. Concurrently, more buyers dropped out of the market because they could no longer afford to buy. By the fourth quarter, buyers and sellers were approaching the one to one ratio.

January of 2018 the center shifted and there were more sellers with homes available than buyers able to buy. The difference is miniscule at this point. It won’t be ‘statistically significant’ for a long time yet. The most important thing to note is the impact to local prices.

Without bidding wars, prices increase at the rate of inflation. This round of bidding wars has ended. Buyers are now writing offers at asking price, or a little less.

So, statistically we can say there is probably going to be one buyer looking for a home just like yours. The next most important factor is the time it takes your broker to find the buyer for your property. Sellers, like everyone else, have a timetable to be concerned about. You need to know whether it will take two days to find a buyer and six weeks to close, or if it’ll be six weeks to find a buyer and six more to close.

In theory we could look to Average Days On Market (ADOM) to estimate the time between your listing date and Close Of Escrow (COE). Unfortunately, sometimes the ADOM reports how long it took to get an offer, sometimes how long it took to close escrow.

There’s no way to programmatically derive the time it takes to sell a property. Experienced brokers will have a good idea based on personal experience. Careful agents will have analyzed comparable sales to manually determine the time on market for those homes.

What is expected for the longer term? Most forecasters are saying the traditional 10 year real estate cycle will be extended this time because the recession had significantly more impact than is usual. Some are predicting a short downturn starting late in 2019 and ending in 2020. Others are saying sales and prices could remain flat until 2020 when prices will begin to drop.

In reality, the Great Recession was a blow to the US economy not seen since the Depression. Coupled with the fast swirling political waters of the nation, most financial rules and expectations have lost validity.

One of the most important changes over the past few years has been the isolation of local market conditions. For example, here in the Beach Cities we have been seeing record high prices for quite some time. In contrast, the homes in the Central Valley are still priced below pre-recession highs.

My best guess for our local market is a continuing gradual slowing of sales and drop in prices this year. The second half of the year should look very much like the first eight months.

A caveat: Real estate is not subject to tariffs, but wars, whether trade wars or real wars, have a way of impacting far beyond their anticipated reach.

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Homeowners Waiting for Return on Investment

CoreLogic, a leader in global property data analysis, has recently released July data. This data saw a 6.2% increase in prices during the prior 12 months, and the increase is projected to continue into next year, albeit at a slower rate. The estimation is a 5.1% increase from July 2018 to July 2019. CoreLogic’s Market Condition Indicators (MCI) show that 40% of the top 100 markets are above market value and another 40% at market value as of July, with only 20% below market value. The top 50 data is 50% overvalued, 38% at value, and 12% undervalued.

Increased interest rates and overvaluation are contributing to the slowing rate of growth, but it’s still growth. As such, CoreLogic believes the reason fewer homes are on the market despite high prices is that homeowners believe prices will continue to rise. Sellers are holding out for a higher price before they decide to sell.


Home Sales Down for Fourth Straight Month

Nationwide, July saw the sale of existing homes decrease for the fourth straight month. Some Wall Street Journal economists had predicted an increase of 0.6% from June to July due to what looked like a recovering market after the recession. It actually fell 0.7%. Rising house prices are pricing people out of affordable housing rather than being a predictor of recovery. Indeed, the median house price has risen 4.5% while average wages have risen only 2.7%. Interest rates are also up 0.5% since the beginning of the year. Curiously, sales rate of some of the most affordable housing at the bottom of the price spectrum, those under $100,000, decreased 11% since July of last year, while the rate of sale of those over $1 million increased 16%.

Of course, with home prices as high as they are in California, the numbers are going to be different than the nationwide average. A price over $1 million is much easier to find than a price under $100,000, and accordingly, July was only the third consecutive month of overall decrease in sales of existing homes, not the fourth.


Fewer Americans Relocating for New Jobs

The total number of people in the US willing to relocate for a job has been trending downwards for a few years, with a decrease of 10% from 2015 to 2017. This is despite a 20% increase in population over that time period. As a percent, the share of relocating for jobs has been dropping ever since the late 1980s, from over 33% then to 10% in the first half of 2018. At least one executive search firm, the Salveson Stetson Group, has noticed the shift. They had been assuming prospective workers would be willing to relocate, but now they’ve recognized that it’s a relevant question that needs to be brought up.

There are a few factors contributing to this. Housing costs have risen in the cities, where most job opportunities are located, pricing people out of relocation for a large number of possible positions. Changing social patterns also account for some of it. Children have more of a say in when or where parents can relocate, as parents are increasingly reluctant to break up friendships or routines. In some cases adults are living with aging parents and taking care of them, so they can’t move away. Double income households are also more common with more women sharing part of the income, so both spouses may need to change jobs to relocate.

Additional factors could be the changing nature of the job market itself. We’re approaching more of a gig economy, with jobs often being short term, so a major change for a temporary position seems ill-advised or annoying at best. Telecommuting into from-home jobs is also on the rise.