By Wolf Richter At Testosterone Pit
They’re not even trying to blame the weather this time. “Housing affordability is really taking a bite out of the market,” is how Leslie Appleton-Young, chief economist for the California Association of Realtors explained the March home sales fiasco. “We haven’t seen this issue since 2007.”
In Southern California, the median price soared to a six-year high of $400,000, up 15.8% from a year ago, as San Diego-based DataQuick reported. It was the 24th month in a row of price increases, 20 of them in the double digits, maxing out at 28.3%. Ironically, prices per square foot are increasing fasted at the bottom third of the market (up 21%), versus the middle third (up 15.9%) and the top third (up 14.3%).
Ironically, because at the bottom 65%, sales have collapsed.
People, wheezing under the weight of their student loans and struggling in a tough economy where real wages have declined for years, hit a wall. Private equity firms and REITs, prime beneficiaries of the Fed’s nearly free money, gobbled up vacant homes sight unseen in order to convert them into rental housing, and in the process pushed up prices – exactly what the Fed wanted. But now high prices torpedoed their business model, and they’re backing off. So sales of homes priced below $500,000 plunged 26.4%, and sales of homes below $200,000 collapsed by 45.7%.
These aren’t poor people who stopped buying them but two-income middle-class families who’ve been priced out of the market. Thanks to the Fed’s glorious wealth effect, however, sales of homes ranging from $500,000 to $800,000, increased by 2.9% from a year ago, and sales of homes above $800,000 increased by 5.4%. In total, 35% of the homes sold for $500,000 or more. But combined sales, due to the collapse at the low end, dropped 14.3% from a year ago to 17,638, the worst March in six years, and the second-worst in nearly two decades.
“Southland home buying got off to a very slow start this year,” said DataQuick analyst Andrew LePage. Among the culprits: the suddenly absent large-scale investors, the jump in home prices, and the increase in mortgage rates.
And he put his finger on a new culprit: potential move-up buyers were stymied because they’d refinanced their current home at a “phenomenally low” interest rate. They can’t afford to abandon their relatively low payment, which they already stretched to reach, and buy a much more expensive home – a move-up home during a pandemic of inflated home prices financed at a higher mortgage rate. They’re trapped by the consequences of the Fed’s policies:
They could sell, but they can’t afford to buy!
“Lately on Saturdays and Sundays, you see open house signs everywhere,” Carey Chenoski, a real estate agent in Redlands, told the LA Times. “The houses that last spring would be gone in the first day are sitting maybe 60 days.” That’s at the low end. At the high end, at prime beachfront locations in Manhattan Beach, the wealth effect runs the show. Agents are getting “multiple offers on just about everything,” said Barry Sulpor, with Shorewood Realtors. “The market is really on fire.”
In the nine-county Bay Area, the median price paid for a home in March jumped to $579,000, up a bubblelicious 23.2% from a year ago, the highest since December 2007, according to DataQuick. In my beloved San Francisco, the median price jumped 14.6% to $937,500. In Solano County, the “cheapest” county in the Bay Area, the median price soared 30.4% to $300,000.
Alas, sales plummeted 12.9% to 6,308 houses and condos in the Bay Area, the worst March since 2008, and the second-worst in the history of the data series going back to 1988. And the debacle was concentrated at the lower end: while sales of homes over $500,000 rose 5.2%, sales of those under $500,000 collapsed by 32.9%.
The same phenomenon is playing out across the nation.
Redfin, an electronic real-estate broker that covers 19 large metro areas around the country, saw year-over-year price gains of 9.9% in March, after 17 months in a row of double-digit gains. Las Vegas topped the list with an annual gain of 20.8%.
But home sales in these 19 markets dropped 11.6% year over year, the fifth month in a row of sales declines. Beyond California, where sales fell off a cliff, sales in Washington DC tumbled 13.5%, in Las Vegas 15.8%, and in Phoenix 17.3%. It’s tough out there.
Some analysts, tired of looking silly blaming the weather, started blaming low inventories. So inventories were flat in the 19 markets overall compared to March last year; no reason for plunging sales. In Boston, Portland, and Austin inventories dropped. But in the cities where the sales plunge has been particularly nasty, inventories skyrocketed: up 41.9% in Phoenix, 28.9% in Ventura, 25.7% in Riverside, 24.8% in Los Angeles, 23.1% in Sacramento, 21.3% in San Diego.
And the number of new listings across the 19 markets rose by 6.3%, the first year-over-year growth in March in three years. The usual suspects in California saw the largest jump, with listings in Ventura up 13.1%. But they were up elsewhere too: in Long Island 12.7%, in Las Vegas 11.9%, in Chicago 10.6%, in Phoenix 7.8%, etc.
You get the idea: rising inventories, rising new listings, soaring prices, and plunging sales. Something has to give.
Unlike stocks, housing is subject to the real economy. When the price at the bottom half of the spectrum soars beyond what people can afford even with today’s still extraordinarily low interest rates, and beyond what makes sense for speculators that fix them up and rent them out, then demand stalls. Homes sit. Sellers get frustrated. People who need to move can’t move because they can’t sell their house for the price they want. People who want to move up can’t. Pressure builds. And eventually, the prices that the Fed conspired to inflate into the stratosphere, well…. This is like so 2006.
Giant PE firms and REITs have become the largest landlords in the country over the last two years because “there was a moment in time where it made sense,” but now home prices are too high and the business model has cratered. Read….. Hot Air Hisses Out Of Housing Bubble 2.0: Even Two Middle-Class Incomes Aren’t Enough Anymore To Buy A Median Home