This time of year typically brings a busy home-buying and -selling season but its not shaping up to be as robust as many initially thought. We're pointing our fingers at rising mortgage rates, a new tax law, growing affordability problems among first-time buyers and - you guessed it - inventory constraints.
The number of homeowners selling today has declined while the number of people looking to buy homes has increased creating a record-breaking shortage of homes for sale. This gridlock is a phenomena happening across the country, not just here in Santa Cruz County. Higher prices are squeezing out move-up buyers, first-time buyers are seeing nothing in their price range and cash buyers are holding onto lucrative rental properties.
Buyer demand continues to outpace the supply of homes being listed for sale in the market, sustaining the upward pressure on home prices.
The demand mentioned above is obvious when looking at the sales data. In March only 113 Single Family Residences were listed for sale. This was 40% fewer than February and 47% fewer than March of last year. Yet even though it is slim pickings in the market 133 homes sold in March which was a 32% increase from February and 15% increase from March 2017.
At the current sales pace, the inventory of homes for sale will be exhausted in a little under two months. This is well below the norm of four to six months that traditionally keeps demand and supply in a healthy balance.
Where is all the inventory? Existing homeowners see some major disincentives to sell today: Existing property taxes based on historic purchase prices, difficulty finding a replacement property, and having interest rates on their current home that are lower than the market today to name a few. Many homeowners would like to sell but are putting it on hold since they do not want to buy at today's prices. This highlights the homeowner's dilemma and the double-edged sword of selling and buying in the current climate.
Other reasons homeowners are hunkering down:
- They like their home and are comfortable in it
- Avoiding the hassle and expense of finding another home and moving
- There are no homes on the market they want or could afford
- Spooked by rising prices on the buying side
- They want to hold onto a low interest rate
- Homes are still worth less than their current mortgage
In Santa Cruz County and the greater Bay Area we have plenty of jobs and low unemployment. Wages have gone up but not nearly at the same pace as the cost of housing. We're seeing the effects of a confident job market and the economy overall, particularly among millennials who despite reports of the nationwide housing affordability crisis have a relatively healthy housing confidence score. Borrowing standards are also loosening and lenders are becoming more motivated to bring in first-time buyers.
The median price of the single family homes that sold in March was a record breaking $910,000. This is a 14% increase from February and 11% higher than March of 2017. Towards the end of last year industry experts were predicting that prices would appreciate at a slower pace in 2018 (in the 4-6% range). That doesn't appear to be holding true, at least in the first quarter.
Prices keep rising as a result of short supply and buyers trickling in from "over the hill". Some are starting to think that prices will have to top out this year as the market moves toward what many speculate may be a peak. Rather than a crash, however, I anticipate slower growth in prices accompanied by longer marketing times for sellers and increasing inventories.
Those changes haven't come yet though. Homes sold (accepted an offer) in an average of 37 days in March compared to 45 days in February. Fewer homes reduced their price before accepting an offer; 20% in March compared to 24% in February. Homes sold for increasingly above asking, fetching an average of 100.85% of the asking price in March compared to 100.32% in February.
In addition to affordability constraints, the condition of entry-level homes (and homes in general) is declining. Compared to entry-level homes in 2012, the average entry-level home is nine years older, and more are becoming classified as fixers - an 11% share today versus 10% share in 2012. One of the effects of these fixers is that its not just an issue of the cost to purchase but the expenses associated with making a home habitable and desirable to live in. On top of the downpayment, closing costs and subsequent monthly PITI payments (principal, interest, taxes and insurance) many Buyers also need to have enough funds to for necessary repairs and replacements.
While tight supply is expected to keep home prices on an upward trajectory in most of Santa Cruz County in 2018, both the uptick in mortgage rates and the impact of the new tax law on our high-cost market could cause price growth and demand to moderate.
In areas where homebuilding has lagged severely compared to job creation in recent years, its going to be a slow slog before there is enough new construction to cool price appreciation to a pace that aligns more closely with incomes.
We can continue to expect tight inventory, increased buyer competition and a rise in interest rates this spring and summer. Rising interest rates are homebuyers' biggest concern and contributing to this spring's flurry of home-buying activity. The prospective rise in interest rates this year and next is boosting buyer demand to purchase before rates rise further.