The change in market balance accelerated during October reaching a shocking pace we almost never see. Only in the second half of 2005 have we seen demand drop at this exceptional speed. Those who think this is just a seasonal effect are mistaken. Demand has been falling dramatically for the past 3 months and October saw that rate increase rather than moderate. The market is already in the balanced zone where the Cromford Market Index™ lies between 90 and 110. It is currently above 100 but the 90’s are only about a week away. The pace may yet moderate but at the present rate of change we will be under 90 and in a true buyer’s market by the time we reach December. The cooling market is turning positively chilly for sellers, many of whom will find it hard to believe.
When demand falls suddenly like this, active listings pile up because they are not going under contract as they normally would. On top of this, October was the busiest month for new listings since April 2011. Supply is therefore building fast, especially when expressed in months of supply, since the monthly sales rate is in steep decline.
Sellers no longer have any significant bargaining power and will soon be at a disadvantage in negotiations with buyers. Buyers will find themselves being treated with unusual respect and many will be able to negotiate concessions. Sellers who list homes priced well over market value are increasingly unlikely to get showings, never mind offers. This is an amazingly swift turn round in a market that heavily favored sellers as recently as July.
The reasons we are seeing such a steep fall in demand are not clear. Yes interest rates went up at the end of spring, but they have since moved lower again and are not far above the lowest we have seen over the last 40 years. After all, the long term 40-year average rate for a 30-year fixed loan is 8.6%, about twice the current interest rate. Sales prices are some 19% higher than they were last year, but only moderately higher than last spring when the market was doing fine. They are still below the long term trend line, though not far below it. Buyers just seem to be seriously rattled, and the government shutdown and threat of default have unsettled them even more. However the slowdown started long before the government shutdown, so this cannot take all the blame. The national media has been generally unkind to housing in the last few months, covering groundless stories of “zombie homes” fuelled by patently incorrect data from RealtyTrac and dramatically overstating the impact of institutional investors. Anyone reading these stories without easy access to the facts is likely to be scared into staying on the sidelines. Ill-judged comments about housing bubbles by Karl Case caused widespread concern, despite his comrade Robert Shiller’s stated opinion that we unlikely to see another housing bubble “in our lifetime”. Clearly the average consumer’s confidence is fragile. Making a big decision like buying a home requires a reasonable foundation of confidence.
General austerity is another possible reason. The sequester is impacting certain industries more than others, causing job loss and financial hardship. The number of people who are in a financially sound situation and can qualify for a home loan is clearly limited. Over the last ten years a greater percentage of the middle class has slipped into near-poverty instead of becoming wealthier. Loss of ownership of their residence and failure to benefit from the increase in asset values in the last two years has contributed to that effect. Many of the wealthy now own multiple houses, either as vacation homes or as investment properties. But the working poor are less able to achieve home ownership now that lending rules have been toughened up. Cut backs in welfare programs like SNAP mean they will have even less disposable income. Certainly we are seeing little to no evidence of a corresponding change in the rental market. There we find supply and demand are in balance and have been for some considerable time. Rental inventory stands at 2.4 months on ARMLS, exactly the same as this time last year. Since population growth, though modest, is still positive, we can probably expect any lack of demand in re-sale homes to be beneficial to the rental market.
Here are the basic ARMLS numbers for November 1, 2013 relative to November 1, 2012 for all areas & types:
When demand falls suddenly like this, active listings pile up because they are not going under contract as they normally would. On top of this, October was the busiest month for new listings since April 2011. Supply is therefore building fast, especially when expressed in months of supply, since the monthly sales rate is in steep decline.
Sellers no longer have any significant bargaining power and will soon be at a disadvantage in negotiations with buyers. Buyers will find themselves being treated with unusual respect and many will be able to negotiate concessions. Sellers who list homes priced well over market value are increasingly unlikely to get showings, never mind offers. This is an amazingly swift turn round in a market that heavily favored sellers as recently as July.
The reasons we are seeing such a steep fall in demand are not clear. Yes interest rates went up at the end of spring, but they have since moved lower again and are not far above the lowest we have seen over the last 40 years. After all, the long term 40-year average rate for a 30-year fixed loan is 8.6%, about twice the current interest rate. Sales prices are some 19% higher than they were last year, but only moderately higher than last spring when the market was doing fine. They are still below the long term trend line, though not far below it. Buyers just seem to be seriously rattled, and the government shutdown and threat of default have unsettled them even more. However the slowdown started long before the government shutdown, so this cannot take all the blame. The national media has been generally unkind to housing in the last few months, covering groundless stories of “zombie homes” fuelled by patently incorrect data from RealtyTrac and dramatically overstating the impact of institutional investors. Anyone reading these stories without easy access to the facts is likely to be scared into staying on the sidelines. Ill-judged comments about housing bubbles by Karl Case caused widespread concern, despite his comrade Robert Shiller’s stated opinion that we unlikely to see another housing bubble “in our lifetime”. Clearly the average consumer’s confidence is fragile. Making a big decision like buying a home requires a reasonable foundation of confidence.
General austerity is another possible reason. The sequester is impacting certain industries more than others, causing job loss and financial hardship. The number of people who are in a financially sound situation and can qualify for a home loan is clearly limited. Over the last ten years a greater percentage of the middle class has slipped into near-poverty instead of becoming wealthier. Loss of ownership of their residence and failure to benefit from the increase in asset values in the last two years has contributed to that effect. Many of the wealthy now own multiple houses, either as vacation homes or as investment properties. But the working poor are less able to achieve home ownership now that lending rules have been toughened up. Cut backs in welfare programs like SNAP mean they will have even less disposable income. Certainly we are seeing little to no evidence of a corresponding change in the rental market. There we find supply and demand are in balance and have been for some considerable time. Rental inventory stands at 2.4 months on ARMLS, exactly the same as this time last year. Since population growth, though modest, is still positive, we can probably expect any lack of demand in re-sale homes to be beneficial to the rental market.
Here are the basic ARMLS numbers for November 1, 2013 relative to November 1, 2012 for all areas & types:
- Active Listings (excluding UCB): 23,330 versus 16,939 last year – up 37.7% – and up 15.4% from 20,215 last month
- Active Listings (including UCB): 26,123 versus 22,399 last year – up 16.6% – and up 12.8% compared with 23,151 last month
- Pending Listings: 6,047 versus 9,714 last year – down 38.2% – and down 8.0% from 6,576 last month
- Under Contract Listings (including Pending & UCB): 8,840 versus 15,245 last year – down 42.0% – and down 7.1% from 9,512 last month
- Monthly Sales: 5,992 versus 7,155 last year – down 16.3% – and down 6.7% from 6,420 last month
- Monthly Average Sales Price per Sq. Ft.: $124.09 versus $104.10 last year – up 19.2% – and up 3.1% from $120.31 last month
- Monthly Median Sales Price: $184,938 versus $151,000 last year – up 22.5% – and up a negligible amount from $184,850 last month
Pending listing counts are still falling, though not quite as fast as last month. However falling pending listings are a harbinger of falling sales counts. These are now dropping fast.
The average price per square foot is still increasing and probably has some further to go before momentum runs out. However there is now little fuel left in the price rocket. We expect prices to stabilize in the area between $125 and $130 per square foot.
We saw a significant jump in cancelled listings during October – the highest since August 2011. However expired listings remain at a subdued level, well below average, though up 18% from this time last year when they were even scarcer.
There is currently little sign of a change in the cooling trend. The first sign should appear in the Cromford Market Index™. This should stop falling so fast and eventually turn round. The second sign will be an increase in pending listing counts.
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