Last month I talked about the apparent correction our housing market appears to have entered. Within days headlines from MSNBC and others were howling about the impending housing ‘CRASH’. So the question these days is ‘Are we headed for a crash, or just a correction?’ At the risk of disagreeing with MSNBC (when was the last time I agreed with MSNBC?), I’m sticking with ‘correction’, and here’s a few reasons why.
- While this housing recovery has been slow in many areas, including ours, we have technically been in that recovery phase for about 9 years. That’s a pretty good run as recoveries go and while there are few indicators of a pending crash, a little attitude adjustment may be in order.
- Locally sales are off 9% year-to-date (7,008 / 6,372) but prices are still up 7% ($344,726/ $371,788). That’s not a crash. A crash is when sales drop by half like they did in 2007 and prices dive by 45% or more, like they did in 2009.
- The underlying fundamentals of our economy appear strong with record high employment, rising wages, GDP and consumer confidence up, taxes down (except in CA) and other leading indicators. Most reputable prognosticators are not seeing a market adjustment of any significance on the horizon, although most are anticipating some correction within the next 18 – 24 months. We might be getting ours a bit earlier than the rest of the country.
So, what’s behind the slowdown? Most would point to interest rate increases, rising prices and the fact that wages have not increased at a rate commensurate with these other increases. While the Fed didn’t raise rates last month, they indicated that there may be 2 more increases this year. Mortgage interest rates are already up nearly ½% this year and, while still low by historic standards, when juxtaposed with rising prices it impacts buying power. As a result, mortgage applications dropped to a four-year low in July.
Where we are today has the government removing itself from the policy of keeping interest rates artificially low, as they did for much of the past decade. While low rates did have a stimulative effect on the market, they also allowed prices to appreciate at a rate faster than practicable. While our local market may not have fully recovered to its pre-crash price level, many areas of the state met or exceeded their previous high – notably those already inflated areas like the Bay Area, Silicon Valley, and areas of the OC and San Diego.
A house that might sell for $500,000 today, would likely have commanded closer to $400,000 had interest rates been allowed to respond to the market. That does two things – first, many current homeowners either bought at an attractive rate or refi’d down to a great rate. I reduced my personal mortgage by over $700 a month and I wager most of you took advantage of similar rate reductions. But with a <4% rate on my house, I’m less likely to sell and move up. Not only would my replacement home be much more expensive, but I’d be paying higher interest. At today’s prices and rates, I couldn’t afford to buy
the house I’m in.
So, homeowners are staying put much longer than they used to, as long as 12–14 years compared to just 5-6 years a decade ago, which brings us to the second impact. With fewer sellers moving up there are fewer homes available for entry-level buyers. Unless you can afford $400,000+ in our market, your choices are minimal. I sold two homes the past couple months in the <$350k price range. Both sold within days with multiple offers at higher than asking price.
But for some properties, especially those in the $500k to $800k range, sellers may be waking up to a new reality of slower sales and less appreciation until income catches up with the new payments. That’s what’s happening today. If a buyer wanted to purchase a median price home in Temecula this month ($472,750), they would be paying over $30,000 more than they would have paid for the same house a year ago and be paying about .6% higher interest. That comes out to an extra $120/month or $1,440/year. Factor in higher fuel costs for our commuters, higher costs for most other consumer goods including food, and you can see why our market has gotten wobbly. And housing sales in our region have wobbled within a fairly narrow range since 2009.
But the underlying lack of housing being brought to market in California has not been mitigated, and pent-up demand is still a real thing, albeit at reduced prices. That spells correction – not crash.
Of course, that’s just my opinion. MSNBC might be right and if they repeat it enough…
Gene Wunderlich is the Government Affairs Director for Southwest Riverside County Association of Realtors. If you have questions on the market, please contact me at GAD@srcar.org or to keep up with the latest legislative and real estate trends go to http://gadblog.srcar.org/.