Million Dollar FOMO−An Update on the Housing Market

Contemporary House

With 2019 just starting, one might ask, “What is the current state of the housing market?”  How are things now since I wrote my last article in September about my home buying experience? Well to cut right to the chase things aren’t looking much better, if anything things are looking worse.  

For me, things haven’t really changed.  I am still looking for a house and have yet to buy.  This is because through my consistent and continued research and all the reasons listed in my previous article, I see the housing market slowing down.

In some cases, it has come down quite a bit, which I will detail below.  I haven’t bought anything one because I personally don’t want to catch a falling knife given that current state of things, two because prices haven’t fallen down to a level where I am comfortable making a purchase given the data I am seeing, and three because I don’t have an immediate need to do it right now.

So overall, I have no regrets about buying a house at all.  With the markets slowing down the way they are. I am sure that a buying opportunity will present itself in the medium term.  This is key for people like me who live in San Diego, California, where the dollar doesn’t get you nearly the house it can get you in a place like Austin, Texas.

The Big Picture

Pulling data straight from Redfin, we can see the following patterns.  Over the past three months, national home sales have been less than that in 2017.  

National Homes Sales 2017 vs 2018 (Source: Redfin)

 

2017

2018

% Difference YoY

September

240,611

233,559

-3.0 %

October

243,499

238,666

-2.0 %

November

225,123

209,149

-7.6 %

Moving on to the inventory, we can also see a steady increase of homes that are sitting on the market on a year over year basis (YoY).

National Inventory 2017 vs 2018 (Source: Redfin)

 

2017

2018

% Difference YoY

September

770,092

774,242

.5 %

October

741,197

762,177

2.8 %

November

688,322

721,810

4.9 %

Redfin has also reported that in the number of completed homes sales fell faster than it has in over two years.  It was down 8.3% from November 2017 and that homes sales declined in 65 of the 74 largest metro areas that the company tracks.

Looking at the coastal real estate markets, which have seen some of the largest gains since the Great Recession, inventory in my home town of San Jose, CA is up 123.2%, Seattle is up 96.5%, and Oakland saw an increase of 60%.

In those markets in particular, homes sold above list price is decreasing.  In November of 2017, 76.1% of homes sold above listed price in San Jose. That number is now 45.2% in November of 2018.

For Seattle the same trend can be seen, where 43.3% of homes sold above list price in November of 2017.  That number is down to 21.7% for November of this year.

Redfin also noted that on a year over year basis, they have noticed significant decreases in bidding wars for homes.  In Seattle in particular, ¾ homes faced stiff competition, while that has dropped to about ¼ homes now.

 

According to the California Association of Realtors, California statewide active listings have risen for the 8th straight month.  This is after nearly three years of declines.  The year over year increase is 31% and they noted that November 2018’s increase was the largest since April 2014.

What’s Happening in San Diego?

Now let’s take a look in at San Diego where I live and what I am seeing here.

San Diego County Sales 2017 vs 2018 (Source: Redfin)

 

2017

2018

% Difference YoY

September

3072

2528

-21.5 %

October

3184

2757

-15.5 %

November

2834

2401

-18.0 %

San Diego Inventory 2017 vs 2018 (Source: Redfin)

 

2017

2018

% Difference YoY

September

6066

8273

36.4 %

October

5803

8244

42.1 %

November

5212

7542

44.7 %

Like the other expensive coastal real estate cities noted in the previous section, San Diego is also not immune to the trends that we are seeing nationally.  This can be clearly seen in the data presented above where year over year, we are seeing sales volume decrease from the mid to high teens, and inventory increasing by almost 45% from November 2017 to now.  This is simply just crazy the supply that is now out there.

While on a year over year basis, homes that sold over price in San Diego is dropping precipitously from their early 2018 highs.  In this case we are down to 17.6% from 25% of November of last year. It doesn’t get any better if we look at how much they dropped off from their highs just early this year where that percentage was at 32.5%.  

Looking at the neighborhood I ideally want to live in, it gets even worse where it has dropped almost 26% (52% down to 26%).

Redfin Data

While all these numbers may be abstract, why don’t we look at some real homes to drive this all home.  As noted in my previous housing article, I got in a bidding war with another buyer for a home.  Ultimately, I decided that the house was overpriced and not worth it at a selling price of $615,000.  

Looking at comparables of what recently sold, another home which is the same exact floor plan and in the same exact development sold for $585,000.  This is a 5% drop from the highs or $30,000.

Now let’s look at what is on the market.   Currently there are five homes in the same development with all the same floor plan (+/- a few square feet).  The average days on the market between all five homes is 80 days (Note: although Redfin says that 16916 Hutchins Landing has been on the market for only 23 days that real number is 132 days because the listing agent continually lists and delists the house.  This results in the reset of days on the market.) Clearly if the housing market was still hot, these homes would be gone by now.

Looking at the above list in further detail, the cheapest house on the market now is priced at $525,000 and still hasn’t sold yet!  That’s a 15% drop in home value compared to the same comparable house I almost bought at $615,000. If after 85 days and at a 15% discount this home hasn’t yet sold, I believe this down turn has more to go.  

Causes for the Slowdown

Here is my running thesis for why we are seeing a slowdown in housing market.  One reason can be attributed to the fact that interest rates on a 30 year mortgage in November of 2018 is a full point higher at 4.9% than the average seen from 2012-2017, which was 3.9%.

For someone like me who is looking to buy a three bed room home in the $600,000 price range, that adds up to being $300 a month, which is no way insignificant.  Sure I could charge more for rent as I would need to house hack to afford the mortgage payment. On the other end, rents are already at an all-time high and finding tenants with such market turmoil might be difficult.

This brings me to my second reason, which is the current market turmoil.   As of this writing, all three major indexes (DOW Jones Industrials, S&P 500, and NASDAQ), are all down for the year.  This is primarily driven by slowing global growth, the current tariff and trade war with China, and a higher interest rate environment.  As such, I believe buyers are beginning to see these negative economic signs around them and are holding off big purchases such as a house.  

My third reason is that buyers who could afford to have bought a house, already did so.  These buyers are probably those who profited greatly from the economic recovery following the Great Recession of 2008.  With the Great Recession causing a massive readjustment in the housing market, buyers saw great deals that spurred the run up and recover in housing values.  This point is reinforced by the example above where the house is selling at a significant discount from its highs yet is still on the market after 85 days.

Wrapping these three reasons together, the CEO for Toll Brothers, a prominent homebuilder in the US, Douglas Yearley, Jr., said the following during his latest earnings report, “In November, we saw the market soften further, which we attribute to the cumulative impact of rising interest rates and the effect on buyer sentiment of well-publicized reports of a housing slowdown.  We saw similar consumer behavior beginning in late 2013, when a rapid rise in interest rates temporarily tempered buyer demand before the market regained momentum.”

For those who weren’t able to participate in the huge gains on Wall Street, real wage growth, according to Pew Research Center, has barely increased in decades due to inflation.  In other words, you have the same purchasing power as you did 40 years ago.  This huge disconnect with wages and the double digit increases in housing over the course of the recovery has made it simply difficult for the average American to purchase a house.  We have reached what I believe to be the upper limit in housing affordability.

Personally, I have seen how the affordability crisis here in California play out first hand amongst my friends.  Earlier this year, my best friend moved up to Washington State to take a new job and buy a house for over half the cost it would take me to purchase the equivalent down here in San Diego.  Even this month, another friend of mine moved from Los Angeles to Dallas, Texas citing housing affordability as one of the driving factors.

With the trade war with China in play, I believe that foreign investment is drying up especially from buyers in China.  This is because the Chinese government has instituted capital controls to prevent the fleeing of money from their economy as the trade war has significantly impacted their economy.  This basically leads to less buyers on the market, which means less demand.

Where Do We Go From Here

As presented above, we clearly are seeing a slowing trend in the housing market.  I have shown you all what is happening nationally and moved all the way down the micro scale as to what is happening in my neighborhood.  Personally I feel that the market has to more to go in terms of a slowdown.

Homebuilders are beginning to recognize this and now offering incentives for buyers to purchase home (i.e. more designer credits, 2/1 buydown mortgage, and etc.)  They have offered modest price decreases, but I don’t think this is enough.On the secondary market, I feel like homeowners are driven by emotion and value their homes based in part on sentiment.  

I also feel like many still hold out hope that they can sell at the market highs from earlier this year. Until sellers make the realization that there has been a significant change in the housing market, homes will continue to sit on the market and reinforce the idea of slowdown. This can clearly be seen in the 16938 Hutchins Landing home that is being offered at $619,000 ($4k over market high) and has been on the market at 112 days.

Indeed, the data and research I have presented is bleak, but with all that said I don’t predict a housing crash like we saw in 2008.  This is largely because of stronger standards that were passed following the Great Recession. Overall, I do expect prices to correct further in the neighborhood of 20-25% from their 2018 highs.  It may take some time to get to these numbers due to the fact that housing is a less liquid asset that stocks.

For those looking to buy a house right now.  I would continue to adopt a wait and see approach to the market.  Now is the time to take your time and do your due diligence and research.  Make sure your own financial house is in order. Personally, I am being pickier and should the correct opportunity arise, you know I will jump on it.

 Below the fold:

For those who would like further reading on the housing market I would recommend the following articles:

https://finance.yahoo.com/news/housing-market-recession-coming-224827298.html

https://www.wsj.com/articles/the-u-s-housing-boom-is-coming-to-an-end-starting-in-dallas-1543248073 (potential paywall)

https://www.wsj.com/articles/las-vegas-housing-weakness-signals-the-slowdown-is-spreading-11544702400 (potential paywall)

Sources:

https://www.redfin.com/blog/data-center

https://www.redfin.com/blog/2018/12/home-supply-up-123-in-san-jose-nearly-100-in-seattle-leading-the-nations-biggest-inventory-increase-in-3-years.html

https://www.redfin.com/blog/2018/12/november-2018-housing-market-tracker-inventory-up-sales-down.html

https://www.bizjournals.com/losangeles/prnewswire/press_releases/California/2018/12/18/LA06610

http://www.pewresearch.org/fact-tank/2018/08/07/for-most-us-workers-real-wages-have-barely-budged-for-decades/

https://www.bloomberg.com/news/articles/2018-11-21/china-s-capital-controls-keep-a-very-bad-year-from-getting-worse

https://www.zillow.com/blog/mortgage-definition-fha-21-buydown-2-38424/

Leave a Reply

Your email address will not be published.