Two differing styles of valuation math found slippage from springtime’s price pinnacles.
By JONATHAN LANSNER | Orange County Register
Source: LA Daily News
“Bubble Watch” digs into trends that may indicate economic and/or housing market troubles ahead.
Buzz: California cities are leading a brewing cooldown in home prices nationwide.
Source: My trusty spreadsheet analyzed two recent home price reports: Black Knight’s report on median sales prices for July in 50 big U.S. markets, and Case-Shiller’s price indexes for 20 metro areas for the three months ended in June, which tracks price changes of individual homes sold.
The trend
Neither of the valuation math was kind to California.
Real estate insiders suggest these may be seasonal dips. But why are the 10 markets with the biggest slips tracked by Black Knight and all six decliners from Case-Shiller located between the Pacific coast and Denver?
The details
Simply put, this year’s soaring mortgage rates and rising consumer anxieties have shaken the foundation for the sky-high home prices of the pandemic era — especially in California.
San Jose: July prices were 10% off their peak (the largest dip of the 50 metros).
San Francisco: 7% off the peak (No. 3 dip).
San Diego: 6% off the peak (No. 4 dip).
Los Angeles-Orange County: 4% off the peak (No. 5 dip).
Sacramento: 3% off the peak (No. 7 dip).
Riverside-San Bernardino counties: 3% off the peak (No. 8 dip).
The other top drops were Seattle (8%), Denver (4%), and Portland and Phoenix (3%).
And what Case-Shiller shows …
San Francisco: Off 1.3% June vs. May (the second-largest drop of the 20) — first dip in 24 months.
San Diego: Off 0.7% in a month (No. 3 dip) — first dip in 32 months.
Los Angeles-Orange County: Off 0.4% in a month (No. 4) — first dip in 30 months.
The other drops: Seattle (1.9%), and Portland and Phoenix (0.1%).
Another view
Remember what matters most to house hunters — the monthly payment required to finance a purchase.
The typical U.S. house hunter must now put 36% of their income toward house payments, according to Black Knight’s “affordability” index vs. the 25-year average of 24%. So today’s house hunter has one-third less buying power than the norm.
“Given the large role affordability challenges appear to be playing in shifting housing market dynamics, the recent pullback in home prices is likely to continue,” says Andy Walden, Black Knight’s vice president for enterprise research.
How bubbly?
On a scale of zero bubbles (no bubble here) to five bubbles (five-alarm warning) … THREE BUBBLES!
Forget what you may hear about a shortage of homes to buy. Demand is crumbling as rising rates plus high prices slam finances for many buyers.
The pandemic era’s feeding frenzy for home ownership badly distorted prices and expectations. Now that potential buyers — both for ownership and investment — are either priced out of buying or have a sense of lowered profitability, the market cools.
Yes, it’s a remarkable rapid change of scenery. This year started with the real estate industry hopeful of a slight homebuying moderation. But those prognosticators misread the Federal Reserve’s conviction to cool an overheated economy and rapid inflation — a battle that’s included ballooning mortgage rates off historic lows to levels last seen in 2008.
So sales activity this year slumped to a lethargic pace last seen around those Great Recession days.
What’s certain is that the Fed isn’t lowering rates any year soon. With demand crimped by affordability, lowering prices is the most sensible way to bring sanity back to homebuying.
Which creates a big question: How much discounting is needed to get folks back in a buying mood?