Mike Imgarten, a 29-year-old civil engineer, encountered a frenzy of demand and a dearth of inventory during a two-month house hunt this spring in Sacramento, Calif. Fearing he’d end up paying too much, he took a break from the search in June. Sales in Sacramento now are off by more than 25 percent from a year ago.
While inventory remains tight by historical standards, the supply of homes on the market has almost doubled, says Erin Stumpf, Imgarten’s real estate agent. “Six months ago, if I listed a property under $400,000, I would expect multiple offers within a few days,” she says. “Now, I might get one offer within the first couple weeks.”
In California, Arizona, and Nevada, where bidding wars have caused the country’s largest gains in home prices, markets are showing signs of cooling. The surge in prices, combined with higher mortgage rates, is reducing affordability while encouraging more sellers to list properties.
“We are shifting from a frenzy to where buyers are taking a step back and being more analytical and unwilling to just make rash decisions,” says Ellen Haberle, an economist for Redfin, a real estate brokerage based in Seattle.
A reduction in homeowners who have negative equity—owing more on their mortgages than their houses are worth—is pushing more homes onto the market. Negative equity had been limiting sales in regions hard hit by the housing crash. Thanks to rising prices, more than 2.5 million homes returned to positive equity in the three months through June, according to research firm CoreLogic.
Sellers lowered asking prices on about 25 percent of listings in September, the biggest share in two years, according to Redfin, which tracks 22 cities across the country. In October the figure was 23.8 percent.
The inventory of unsold U.S. homes climbed in September from a year earlier for the first time since 2011, while contracts to buy previously owned dwellings plunged the most in three years, data from the National Association of Realtors show.
The pullback comes at a time of year when sales typically slow. Still, the drop-off in heated markets such as Phoenix is far greater than expected, says Michael Orr, director of the Center for Real Estate Theory and Practice at Arizona State University.
A jump in borrowing costs since May has discouraged some buyers, and the government shutdown may have weakened confidence, he says. The average rate for a 30-year fixed loan was 4.35 percent, Freddie Mac said on Nov. 14. That compares with 3.35% in May.
“We have buyers, but they’re on strike,” Orr says. “This caught everybody by surprise, including me.”
Some markets have been super-charged by investors flipping houses and institutional purchasers such as Blackstone Group acquiring large numbers of single-family homes to rent. Many of these buyers are pulling back in the cities with the fastest price growth, says Sam Khater, senior economist for CoreLogic.
Demand slowed after institutional investors began withdrawing from the southern Nevada market a few months ago, says Dave Tina, president of the Greater Las Vegas Association of Realtors. “We did a catch-up from being as low as we were,” he says. “Now we’re going to see normal raises in prices, not the craziness of 32 percent.”
There will be more national stories of despair in the coming months, but I think we just got overheated between May and September (see graph above).
If prices would have topped out around $215,000, then 2013 would have looked a lot like 2012 with 14% appreciation – which is less remarkable during a ‘bottoming’ era. It’s when prices are going up 2% or more per month that it feels crazy.