Liz's Law of Real Estate Gravity states that what goes down must come up and what goes up must come down. Like Newton, I see the attraction between two objects with mass: buyers and sellers.
When Newton got walloped on the head by the apple he reasoned that there must be a "force" acting on the apple to cause its acceleration as it moves back toward the Earth. This force he called gravity.
Liz's Law of Real Estate Gravity holds that a market that swings greatly in one direction will eventually rebound in the other. Remember the years of the Great Recession? Look at the market now and how prices have not only rebounded, they have far exceeded anywhere the market has ever been.
So what is the "force" in the real estate market? Unfortunately there is no one thing that influences the direction of the market, but a constant push and pull from all different things. Factors like mortgage industry regulations, unemployment rates, the political environment, foreign policy, consumer confidence...the list goes on and on.
We've seen prices rebound, but when will Liz's Law apply and the market see appreciation slow or perhaps prices even decrease? We'll get to my prognostications for the 2018 market later, but first lets look at market activity in Santa Cruz County in November.
Median Price of Homes
Home prices have felt unstoppable this year, but will they stay that way? The median price of single family homes in the county increased by 1% in November to $875,000. This is a 10% gain from November 2016.
Today's low mortgage interest rates (hovering around 3.75% for a 30-year fixed lately) combined with an improving economy and low inventory of homes for sale have been the main catalysts for continued price appreciation.
Prices are not simply a rebound from the Great Recession, they have reached all-time new highs (and not just in the California Bay Area). The median price for a single family home in 2017 is a mind-boggling 14.6% higher than in 2007 in Santa Cruz County.
Prices won't rise forever. Measures of affordability continue to slide indicating that the pool of potential buyers is shriveling up.
As prices continue to eek up and up, many fear another housing bubble. It is important to remember that rising prices didn't cause the housing crash, it was rising prices stoked by subprime and low-documentation mortgages as well as people looking for short-term gains (versus today's truer market vitality) that created the conditions for the crash.
In contrast with 2006, today's credit conditions for obtaining a home loan are much stricter. For example, the median FICO score for a mortgage is 734 whereas in 2006 the median was 700.
While still on the topic of prices, the median price for condominiums and townhomes in November was $590,000, up 13.4% from October. In these market updates I tend not to focus on the price fluctuation of these types of properties. The reason being that so few sell in relation to single family homes. A few properties well above or below the average will skew the numbers. As a result, single family homes are generally a better indication of the market because the data set is bigger. Make sense?
Inventory of existing and new construction properties for sale continues to fall short in our market and many other markets around the country. A healthy economy is creating more jobs and households, but not giving these people enough places to live.
In November only 124 new listings came to the market, 34% fewer (whoa!) than in October. Conversely, 181 single family homes sold in November which was up from 178 in October.
What does this tell us? Increased prices and less inventory yet higher closed sales certainly points to continued strong demand as the year comes to an end. This demand is likely fueled by a combination of buyers wanting to get into something before the end of the year and in advance of further increases in price and interest rates and changes to tax laws.
In fact, demand has been strong throughout the year. Lets compare 2017 to 2016:
- Median price has increased 5%
- Inventory of homes for sale has decreased 1.6%
- Closed sales are only down 0.9%
A few other statistics worth keeping an eye on each month are days on market, price reductions and the sale-to-list price ratio. While the market isn't necessarily cooling, it is slowing slightly as we enter the winter months.
- Homes took an average of 43 days to sell in November; 7 days more than in October.
- More sellers reduced their price before accepting an offer (37% in November compared to 29% in October).
- Properties sold, on average, for increasingly less than their asking price; 2.02% below asking in November compared to 0.45% below in October.
For those of you who are visual, here are a few not-so-fancy charts for you:
what will happen in 2018
This year's turbulence will likely change housing in 2018. There is no denying that the new political administration, relentless natural disasters, the lowest level of homes for sale and highest prices on record will most certainly have a ripple effect on the housing market.
While there is no guarantee my predictions - and those of many other industry experts - are that prices will soften, inventory will creep up and there will be a shift in housing demand.
Stay tuned for next month's update when I dust off my crystal ball and share my best predictions for the 2018 housing market. I'll leave readers with a few final thoughts though.
Revisiting Liz's Law of Real Estate Gravity, the market will always correct itself at some point towards equilibrium. Buyers and sellers, inventory and prices, and countless other pieces are constantly pushing and pulling one another in an effort to find balance. Just as the market recovered from declining prices of the Great Recession, real estate professionals and economists realize that the housing market will not continue appreciating at this pace forever. Unfortunately, it is difficult to know when the metaphorical stem of the apple will break and hit the market on the head. It is safe to say, however, that the stem is feeling the strain.