Is the party really over?
Over the last decade, the seemingly unstoppable growth of the American housing market has created a bonanza for sellers, a cutthroat environment for buyers, and an endless source of fascination for just about everyone else.
It seemed to be an economic perpetual-motion machine. Could home prices in top markets really just keep going up and up … and up?
Well, no, actually. In the last few months, the real estate market has actually begun slowing down—including in some of the big cities that have been leading the go-go post-recession housing boom.
What does it all mean?
We decided to explore beyond the alarmist headlines to find the 10 metropolitan areas* that are seeing the biggest shifts—and why.
To be clear, prices aren’t always dropping in these places, which are predominantly located on the West Coast. Mostly, they’re decelerating, coming back down to earth. So bargain hunters can put their wallets away.
But in addition to a substantial increase in the number of home listings with price reductions, we found other potentially game-changing signs of market adjustments, including a surge in the amount of inventory for sale and the number of days on the market.
Here are the brass tacks: List prices only rose 7.3% nationally year-over-year in October.
While that’s certainly higher than most raises in compensation, inflation, and buyers’ comfort levels, it’s still less than the 10% annual hike the year before and the 8.2% jump the year before that.
Focus on the small victories, buyers! These markdowns can lead to more choices for those looking to purchase a home. And sellers, you’re still making bank.
“There’s a rebalancing that needs to happen,” says Len Kiefer, deputy chief economist at Freddie Mac. “Prices have risen so high in some of these markets that it’s very tough from an affordability perspective [for buyers]. … It’s not surprising to me that we’re seeing a little bit of a leveling off.”
So stash the B-word, at least for now: The dreaded Housing Bubble isn’t poised to pop. There are simply more homes for sale now and fewer buyers vying for them. In other words, the market is returning to some semblance of reality.
“Are we going off the cliff?” says Honolulu-area real estate broker George Krischke of Hawaii Living. “I don’t have a crystal ball, but I don’t think so. … It’s a temporary slowdown and may be a plateau.”
To come up with our rankings of the real estate markets that are slowing down the most, we looked at annual price, inventory, days on market, and price reduction changes from October 2017 to 2018 in our realtor.com® listings in the 100 largest metros.
Let’s take a look:
So why are these housing markets slowing down?
1. Mortgage rate increases are sidelining buyers
Unless buyers are paying all cash for their digs—not a likely scenario for most of us ordinary humans—they are probably smarting from rising mortgage interest rates. That’s because even the smallest rate hikes of just fractions of a percentage point can add hundreds of dollars to monthly mortgage payments. Over the life of a 30-year loan, it can add tens of thousands of dollars.
Here’s what’s going on: Mortgage interest rates went up from 3.90% a year ago to 4.81% as of last week. That seemingly small 0.91% increase made mortgage payments $127 a month more expensive on median-priced homes of $295,000. It adds extra payments totaling $45,540 over the life of a 30-year fixed-rate mortgage, assuming that the buyers put 20% down. And of course, the more expensive the property, the more new homeowners will be forking over.
This is having an impact, real estate experts say. These increases are forcing some buyers to purchase cheaper, smaller homes and fixer-uppers in less sought-after locales. And it’s led many aspiring homeowners to go into standby mode—waiting to see whether prices will drop to make the whole thing more financially viable. With less competition come fewer bidding wars, and more inventory that isn’t being snatched up within an hour of the “For Sale” sign going up in the front yard.
Borrowers are facing a little “sticker shock,” says Julie Aragon, a mortgage broker at Julie Aragon Lending Team in Santa Monica, CA, who works with buyers from San Diego, No. 5 on our list, and Oxnard, CA, No. 6. “They just don’t realize how much [rates] went up. Even an eighth to a quarter of a percentage point increase is going to make a big impact.”
That’s particularly true in high-priced areas like the Southern California city of San Diego, where the median price of $659,400 is more than double the national figure.
“I’ve seen people lose $50,000 in purchasing power,” Aragon says. And that’s giving buyers pause.
Higher rates are also stymieing move-up buyers who want to trade their starter homes for larger, nicer homes, but are reluctant to give up their existing low mortgage rates to do so, says Ted Wilson of Residential Strategies, a housing consultant based in the Dallas area.
The reality is that rates are still low compared to previous decades, when double-digit rates weren’t uncommon.
“Folks have been used to a world of dirt-cheap mortgage rates,” says Freddie Mac’s Kiefer. “We’re moving to a world where rates are more in line with what we’d expect to see over the long term.”
2. Prices just got too damn high
Fact is, prices can’t increase at record levels forever. And we may have finally hit an inflection point in many bellwether markets.
“To some degree, the markets that went up the most and the fastest just pushed too hard [in prices],” says Patrick Carlisle, chief market analyst for Silicon Valley and the Bay Area at the real estate company Compass. “Over the summer, it was like something cracked, and people said ‘I can’t do this anymore.’”
In Silicon Valley’s San Jose metro area, No. 2 in our rankings, prices shot up a whopping 22.2% from 2016 to 2017. And this was already one of the nation’s most expensive places to live. But even hefty tech salaries can only stretch so far.
Add in those higher mortgage rates, and “that’s a whole lot more money that someone is going to have to spend to pay their monthly mortgage on a 1,500-square-foot, three-bedroom, two-bathroom ranch house that suddenly costs $2 million,” says Carlisle.
So is it any big surprise that about 36.8% of San Jose-area sellers have had to slash prices on their homes in the last year?
President Donald Trump‘s tax changes have also hit Silicon Valley and the Bay Area hard. (San Francisco comes in at No. 3 on our list.) Homeowners can now only deduct from their taxes mortgage interest on loans of up to $750,000, down from $1 million. This isn’t just a rich person’s problem—it’s hard to find even a modest starter home for less than $1 million in this region.
Then add in a new $10,000 cap on property and either sales or income taxes. Suddenly, owning a home is a whole lot more expensive.
The entire West Coast, long the growth capital of the United States, is showing signs of being overheated. “For everyone, there’s a maximum to what they can pay,” says Annie Radecki, senior manager at John Burns Real Estate Consulting, who covers Seattle and Portland.
3. Sellers want to cash in while they can—leading to more homes for sale
More and more homeowners, fearing that the real estate market has reached its peak, are champing at the bit to sell. And that has led to a relative glut of available homes—more than even the hottest markets can easily absorb.
“There’s a perception [among owners] that the market has had a good run and maybe it’s time to cash in,” says Honolulu broker Krischke. “The good times have to end.”
In Stockton, CA, which came in first in our slowdown rankings, price drops are common because sellers shot too high, says local agent Jerry Patterson of Cornerstone Real Estate Group. This is a city that has long been plagued by crime and poverty. But its location, about an hour and a half northeast of Silicon Valley and close to the vineyards in Lodi, CA, gave it a boost in recent years, with annual prices rising 8.2% last year and 14.3% in the prior year.
But with more homes for sale and less competition for them, “buyers are now in a bit more of a power position,” Patterson says. “[They're] able to flex their muscles a little bit more.”
And sellers are learning the hard way that the danger of pricing their homes too high is that they can wind up stagnating on the market. “They’re entering what we call the ‘sludge,’” says Nashville real estate broker Brian Copeland, of Doorbell Real Estate. “There’s nothing wrong with their house. But that price becomes a stigma.”
4. New construction booms benefit buyers—but slow down sales
New construction in certain markets has given buyers more options—but developers may have overshot their goals, often to accommodate corporate growth. Just look at Nashville, TN, No. 4 on our list, where a new Amazon center is slated for location, and Dallas, No. 8, which has added more than 500,000 jobs in the last decade. About a third of Nashville-area home listings on realtor.com® and a quarter of Dallas-area listings are for brand-new homes.
In Dallas, “There’s more inventory than there is demand,” says Dallas-area Realtor Dee Evans of Ebby Halliday Realtors. But she’s beginning to see the pace of new construction slowing, and those extra units are being absorbed by buyers. “Hopefully, the builders will be smart about putting less new stuff up.”
* A metropolitan statistical area is a designation that includes the urban core of a city and the surrounding smaller towns and cities.
* Lance Lambert ran the data analysis on which this story is based.
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