The pundits are chiming in on their housing expectations for next year, and the opinions revolve around one topic: Higher mortgage rates are changing things.
Here are two experts who don’t think the number of sales will change much:
“As we look toward 2019, we are anticipating home sales to decline around 2%. We’re expecting it to be another slightly slower year as buyers continue to wrangle with higher mortgage rates after contending with several years of rapid price growth.” — Ruben Gonzalez, chief economist at Keller Williams
“We’re going to have the same number of transactions, but…rates are going to nudge up to 5 percent; market times are going to expand out to 30 days. You’ll have to have a different set of skills.” – Brian Buffini
For sales to stay the same, then buyers will have to agree that the sellers’ prices are about right. Will sellers list their homes attractively enough, especially early in the selling season?
Or is it more likely that they will add a little mustard to their price in spring, just because they’re not going to give it away?
I want to compare a full 12-month history to prior years, so let’s examine the December 1st to November 30th period – let’s have history guide us:
NSDCC Detached-Home Sales
NSDCC Sales, Dec 1 – May 31
NSDCC Sales, Jun 1 – Nov 30
The 2018 sales are similar to those in 2014, which happens to be the last time rates had popped up 1%.
But then the rates started declining right away, and by the end of 2014 they were back in the 3s, which powered the strong sales between 2015-2017:
(click to enlarge)
But today, rates are much higher – and so are prices:
Something has to give, doesn’t it?
Sellers aren’t going to bend much on price, especially early in 2018 – they won’t believe their prices are wrong until they try them out for months, and maybe longer.
So if most buyers wait-and-see, then sales have to give.
I’m sticking with my prediction that 2019 NSDCC sales will drop 20%, YoY.
A year ago, I guessed our NSDCC sales would be down at least 5% in 2018, and it looks like it will be closer to -10%. While I’m confident that sellers will refuse to lower their price expectations much in 2019, I doubt that home buyers will just go along as they have in the recent past.
The disconnect will probably mean that the 2019 sales of detached-homes between La Jolla and Carlsbad will drop another 20%, which will change the landscape considerably from the robust sellers’ market we’ve enjoyed over the last nine years.
Homeowners waiting for the top of the market will move closer to the exits, and we will probably have 5% to 10% more listings early next year – with no let up in pricing. Potential homebuyers who are starved for quality guidance will be conservative and adopt the wait-and-see approach.
It guarantees a slow start to 2019, and a real standoff.
The worst part about the real estate industrial complex is that they provide no help whatsoever on how to deal with market conditions. They push Yunnie up to the microphone every month to report the latest sales counts, but that’s it.
Consumers and realtors are left to their own devices to figure out what to do.
Buyers will want somebody else go first.
Who will go first? With the rise in mortgage rates, we have already lost almost the entire move-up market. My rule-of-thumb is that if you want to stay in your same area, you have to spend 50% more than what your house is worth to make the move. In other words, if your house is worth a million, the houses you see listed for $1.1 or $1.2 million nearby aren’t enough of an upgrade – you only get, what, one more bedroom?
But if you bought that home for $800,000 with a mortgage rate of 3.5%, the thought of having to spend $1,500,000 with a 5% mortgage rate will send your head spinning:
Mo. Payment w/taxes
Your home’s appreciation generated the bigger down payment, but you have to pay more than twice as muchmonthly, and it isn’t fully tax deductible either. How many people NEED to move that bad?
So if the move-up market is comatose, then who’s left?
Those who don’t own a house here yet – the first-timers and newcomers.
They are at a disadvantage from being new the area, and are probably somewhat unfamiliar to the game – so it’s likely that they will be conservative. But the 2019 market will be entirely dependent upon them paying what the sellers want, or close.
I doubt we’re going to see fewer listings next year, so if there are 5% to 10% more listings – all with optimistic prices – and buyers are waiting to see what happens, there will be many more for-sale signs around. That alone will cause buyers to pause.
Only the vastly-superior homes will be selling, and everyone will struggle to get the price gap right between the creampuffs and dogs. The fixers will need heavy discounts, but thankfully, there is a floor. I’ve probably taken 100 inquiries on my Brava listing – the flipper/investor action is still strong, though they are slightly more conservative about next year too.
Realtors could provide the solutions, but will they?
Here are the typical responses to taking a higher-priced listing:
SELLERS: “Let’s add a little mustard to my list price.”
TOP AGENT: “The market is soft, and virtually all active listings are priced above what the market will bear. An attractive price will help to set us apart, and our expertise will help to clinch the sale in a timely fashion.”
REGULAR AGENT: “Let’s try the value range pricing!”
NEW AGENT: “What the heck, we can always lower the price later!”
Will the home sellers be sufficiently motivated to price their home sharply? For those who have been waiting for the top of the market, the answer is no. They are only selling if they can get their price – especially if they plan to move up in the same area.
We’re headed for a showdown – who will blink first?
There will be a healthy market for for the well-location remodeled homes, but the rest will sit a while before they figure it out – and many will not.
Annual sales dropping 20%?
We’ve been here before, and survived it. We will survive this round too – we don’t have the shock of a market driven by no-qual loans all of a sudden shifting to qualifying-only, like we did in 2008:
NSDCC Detached-Home Sales
Where will prices go? It will be a very soft landing, because without foreclosures and short sales, there won’t be desperate sellers dumping on price – they will wait it out instead.
Heck, they’ve waited this long, what’s a couple more years?
It will be case-by-case though. There will be a few great deals, some retail sales, and a lot of standing around. Welcome to Stagnant City!
Of all the other choices over the last 40 years, I’ll take the last four years as my favorite trend line!
Thornberg has been the most level-headed analyst since the bust:
The annals of postwar Southern California real estate history are full of boom-and-bust cycles, with periods of sharp price appreciation that suddenly skid to a halt. Whether those ups and downs offer any guidance — or hope — for today’s homeowners is a subject for debate.
Some of those who study the housing market predict annual price increases will slow. Others think values could dip. But there is general agreement that a meltdown is not in the offing, given a healthy economy and dearth of home building. The current slowdown,saidChristopher Thornberg of Beacon Economics, “is a bump in the road.”
This time around, the risk of a crash from overborrowing is minimal, if not nonexistent, experts said. Reforms after the financial crisis dramatically tightened lending standards. Today, even though lending has eased somewhat, borrowers are more likely to be able to afford their loans.
That’s borne out in the data:
Mortgage lending is relatively restrained. Last decade, total mortgage debt consistently grew by double digits. In the second quarter, those debts rose only 3.5% from the same period a year earlier, Federal Reserve data show.
Homeowners aren’t as squeezed. Total U.S. mortgage payments in the second quarter accounted for 4.2% of total disposable personal income, the lowest level in at least 38 years. The rate was in the 6% range for most of the mid-2000s bubble, and it hit 7% just before the crash.
Borrowers are less risky. The median credit score for those taking out a mortgage in the second quarter was 760, compared to a bubble-era low of 707.
“I don’t think we need to worry this time around about a bursting of a credit bubble,” said Stuart Gabriel, director of the Ziman Center for Real Estate at UCLA. “We can cross that factor off the list.”
The California Association of Realtors has released their 2019 forecast (above).
Their projections haven’t been that close, which means their guess of 3.3% fewer sales should end up being -5% to -8%. The pricing statistics should keep rising though, due to buyers holding out for superior homes – with fewer inferior homes selling, the median can rise even though prices are stagnant or falling.
A comparison of the C.A.R. forecasts (released every October):
SFH Resales #
SFH Resales %chg
SFH Median SP
SFH Median SP %chg
From the C.A.R.
Market shift underway as housing shortage issue becomes demand issue
A combination of high home prices and eroding affordability is expected to cut into housing demand and contribute to a weaker housing market in 2019, and 2018 home sales will register lower for the first time in four years, according to a housing and economic forecast released today by the CALIFORNIA ASSOCIATION OF REALTORS®’ (C.A.R.).
C.A.R.’s “2019 California Housing Market Forecast” sees a modest decline in existing single-family home sales of 3.3 percent next year to reach 396,800 units, down from the projected 2018 sales figure of 410,460. The 2018 figure is 3.2 percent lower compared with the 424,100 pace of homes sold in 2017.
“While home prices are predicted to temper next year, interest rates will likely rise and compound housing affordability issues,” said C.A.R. President Steve White. “Would-be buyers who are concerned that home prices may have peaked will wait on the sidelines until they have more clarity on where the housing market is headed. This could hold back housing demand and hamper home sales in 2019.”
The California Association of Realtors predicted that statewide sales in 2018 would increase 1%, and the California median sales price would rise 4.2%.
My guess was for the San Diego County detached-home sales to drop 5%, and the median sales price to rise 5% in 2018. How are we doing?
Here are the detached-home sales and median price for the first nine months of the year in San Diego County:
SD County Detached-Home Sales, January through September
Number of Sales
It may seem like the sky is falling, but we should just appreciate how great we’ve had it over the last few years, and accept that we’re going to have fewer sales from now on. Here are the stats for La Jolla-to-Carlsbad:
NSDCC Detached-Home Sales, January through September
The total number of pendings is down to where they were in February, so the off-season has begun. What can we expect the rest of the year?
NSDCC detached-home sales compared to 2017:
Third of Year
# of 2017 Sales
# of 2018 Sales
YoY % change
This year’s selling season was plagued with wildly over-priced listings, so no surprise that the number of sales dropped off year-over-year.
I think we’ll see a rebound of sorts, and sales in the last third of 2018 only be about 5% less than in 2017. Anyone trying to sell during the off-season should be more motivated, and as a result, be priced more competitively. We’ll see!
We’re going to be fed a solid diet of ivory-tower analyses from now on, because when you look at the history, it sure seems like home prices are due to come down. What these authors fail to consider is how the Bank of Mom and Dad has made the current pseudo-bubble possible, and will continue to do so. Plus, for prices to go down, you must have sellers who are willing to dump on price. None have been that motivated, at least not yet.
This article can’t even get the facts straight – the last bust was caused by exotic neg-am financing exploding in our faces, and ill-informed homeowners bailing out. In addition, you can draw the trendline anywhere you want, and these authors drew it where it would produce the most drama – see above – yet their worst-case scenario is only back to 2013 prices. We’d survive that.
This most recent cycle we are emerging from in 2018 has its roots in the early 2000s, when home values began outpacing incomes at a rapid pace.
In 2006, home prices peaked in step with the Millennium Boom. By that time, home sales volume was already falling as buyers sensed prices were too high to continue during the inevitable recession, which arrived in 2008. From 2006 to 2007, prices dropped 16%, followed by a further 26% in the following year.
All in all, California home prices fell 44% from their 2006 peak to their bottom in 2009.
In some ways, this steep fall was a correction to all the excess experienced in the housing market during the early- and mid-2000s. In another sense, the fall was simply the market’s way of bringing home prices back in line with incomes.
There is a name for this reliable force that pulls home prices toward incomes: themean price trendline.
Through the volatility of housing booms and busts, price increases continue to return to the same rate of annual income change, related to the consumer price inflation (CPI), which is typically 2%-3% per year. In California, this mean price change is closer to 3.5% annually over the past several decades.
How does income impact home prices?
Quite simply, home values can only go as high as incomes allow.
Homebuyers reliant on financing are limited to a maximum mortgage payment of 31% of their monthly income. This translates to the ability to purchase a home costing roughly five times their annual income.
Still, there is some wiggle room in the equation. After incomes, interest rates have the next biggest impact on home prices. When interest rates are falling — as occurred in the 2000s — buyer purchasing power is extended, as homebuyers’ mortgage payments go further. When interest rates rise — as is occurring in 2018 — buyer purchasing power falls and homebuyers are limited to paying less with the same income.
During housing bubbles, home prices become temporarily untethered from this rule and the mean price trendline. During the bust that follows the boom, prices fall, returning once again to the trendline.
interest rates are nearly a full percentage point higher than a year earlier, translating to a 7% reduction in purchasing power for the average California homebuyer.
Further, the Federal Reserve (the Fed) plans to continue their efforts to increase interest rates in an effort to cool down the economy and induce a moderate business recession by 2020. Not only do higher interest rates discourage potential homebuyers from entering the market, but they cause homebuyers to offer less when they make an offer to purchase.
In response, first tuesday expects home prices to fall by mid-2019, bottoming once they hit the mean price trendline around 2020. Meanwhile, incomes will continue along at their current measured pace, pausing briefly in 2020-2021 in response to the recession.
After getting LeBron, I couldn’t go a whole week without a reference to the soon-to-be World Champion Los Angeles Lakers!
But seriously, the frenzy is over.
As the year got started, there was a weird phenomenon where the hotter listings were getting shown the first day on the market, but offers weren’t coming in for a few days.
The frenzy causes buyers to react. You’ve already lost a bidding war or two, and you’re on the edge of your seat. You’re going to get the next one, and when you see it – boom, fire an offer without thought.
Buyers are thinking now.
They are thinking about any reason NOT to buy. For those who have only been around since 2009, this is what a normal market looks like.
Buyers should be careful and cautious – YES!
Buyers shouldn’t think it’s going to be different any time soon. It won’t.
Seller optimism has never been so high, and every new listing is still shooting for the moon. There aren’t going to be many sellers who are so motivated that they are going to voluntarily give up a chunk of equity without a fight.
Back in the old days, foreclosure was a threat. Not any more – sellers who can’t or don’t want to make their payments can go months or years without paying, so those folks aren’t going to give it away.
The only place you might see an actual dumping on price is where several sellers in one neighborhood are unusually motivated and are experiencing a race to get out. But that will be extremely rare – sellers who see others dumping nearby will just give up and wait, rather than give it away.
There has been some tightening of the reverse-mortgage HUD guidelines that could prevent that option from being a lifeline. But there are private lenders working to get in the game to pick up the slack.
One of the biggest hurdles are the agents. The ones that don’t recognize the shift will just carry on like they always have. They will put unrealistic prices on listings, and then not know how to adjust, or if they get lucky and get a lower offer, they will berate and insult the buyer’s agent and blow the deal. Expect more ‘back-on-markets’, and they will be due to ‘no fault of the property’ (it was the listing agent instead).
No need for panic though, this is natural:
Christopher Lee, president and CEO of Los Angeles-based CEL & Associates, is one such person. His expertise is real estate, and he recently offered some insights into the future at a meeting of NAIOP San Diego.
For some time, he’s been predicting that we are getting close to seeing the real estate cycle to begin trending downward. We’re in the seventh inning, he’s said.
How does he know this? Real estate follows a familiar pattern, he said. He’s written on the subject in a paper called, “Real Estate Cycles: They Exist … And They Are Predictable.”
He writes: “Most real estate cycles have begun around the third year of a decade (1973, 1983, 1993, 2003) and usually end by the eighth year of that same decade (1978, 1988, 1998, 2008).”
And what year is it?
Yikes! It’s 2018!
Because of the new components (reverse mortgages and no foreclosures), the start of the next cycle may be extended and in slow motion. It should feel like Stagnant City, or be labeled a ‘plateau’ of pricing. But we’re here!
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