There are growing signs that U.S. home prices are no longer rising. If this is indeed the case, now is the time for sellers or prospective sellers to take a good look at the state of housing markets around the country. To make smart decisions, home sellers as well as buyers need to find out whether home price gains are simply slowing or whether housing markets are actually topping out.
An excellent publication,U.S. Home Sales Report, published by real-estate data firm Attom Data Solutions, gives a detailed look at conditions in major U.S. housing markets. This quarterly report provides data on the actual gross profit that sellers pocketed in 124 housing markets nationwide. It tracks every home sold in that metro and compares the price to what the seller previously paid for the house. An average is then taken for all the homes sold in that quarter. The result is the average gross profit in each metro before commissions are deducted.
This data is extremely useful for prospective sellers because it tells them what kind of profit they can expect should they decide to sell their home. Sellers need this information to determine if they will have enough net profit, whether they’re looking to trade up or downsize.
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I compiled data from Attom Data’s U.S. Home Sales Report for the first quarter of 2019 into a table highlighting 12 major U.S. markets and what they reveal about home sales at four different points in time. These 12 major metros were chosen for geographic diversity.
The percentage figures in the far right column show what the average gross profit was for homeowners who sold in the first quarter of 2019. For example, in what had been the hottest market of them all — San Jose, Calif. (Silicon Valley) — homeowners who sold in the first quarter of this year realized an average gross profit of 84%. Yet had they sold a year earlier, the average gross profit would have been 103%. So the average gross profit on homes sold in San Jose has slipped almost 20 percentage points over the past year. In fact, the gross profit figure in this metro peaked at 114% in the second quarter of 2018.
The second-hottest market in the nation was probably Seattle. Owners there who sold last quarter had an average gross profit of 63%. A year earlier, their profit would have been 72%. Gross profit in Seattle peaked at 78% in the second quarter of 2018. Like San Jose, the average gross profit in Seattle has declined for three consecutive quarters.
In all except two of the metros covered in the table, homeowners would almost certainly have been better off had they sold a year ago rather than in this year’s first quarter.
Yet what if these quarter-to-quarter comparisons are not trustworthy, since so much depends on the average length of time that sellers owned their property? That is a fair objection. But consider this: Attom Data Solutions also publishes a quarterly report that calculates the average time sellers held their property. For the nation as a whole, the average tenure of ownership for sellers in the first quarter of 2019 was eight years. A year earlier, it was 7 ¾ years. We can reasonably conclude, then, that many sellers in the first quarter of 2019 bought their home around 2011.
For most major metros, average prices in 2011 were lower than in 2010, when many who sold in 2018 bought their home. You might then assume that the average gross profit for the sellers in 2019 should have been greater than those who sold a year ago. Yet as the table shows, that did not happen in 10 of the highlighted 12 metros.
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Five other key measures suggest that housing markets could be topping:
• Home sales have been declining in many major metros
• Listings of homes for sale have soared in the hottest markets
• Reductions in asking prices have been increasing
• Bidding wars prevalent in hot metros a year ago have all but disappeared
• Standards for underwriting mortgages have plunged in the past year
Real estate brokerage Redfin’s most recent housing data is revealing. According to Redfin, the volume of home sales has been declining in major metros for almost a year. For example, many hot California metros showed double-digit sales declines in February and March from a year earlier. In affluent Orange County, first-quarter home sales fell 20% from a year earlier and were the lowest since the housing collapse began in 2008. Though not dangerous by itself, the weakness in home sales is a red flag.
Worse, the number of homes for sale is soaring in some of the hottest markets. In March 2019, for example, listings were up 104% in San Jose from a year earlier, 83% in Seattle, 30% in Portland, and 24% in San Francisco.
Tumbling home sales along with substantial growth in the number of listings is a dangerous combination. If this trend continues, many sellers will be forced to lower their asking price. This has already occurred in more expensive parts of Los Angeles and Fairfield County, Conn. Reductions in asking prices have also increased in New York City. Grant Long, senior economist at New York City online real estate marketplace StreetEasy, predicted in March: “When the inevitable wave of new inventory hits the [New York City] market this spring, interested buyers should expect to see an uptick in price cuts as the market forces ambitious sellers to accept reality.”
A fourth warning sign: In early May, Redfin reported that bidding wars — where sellers receive multiple offers on their property — have plunged across the U.S. in the past 12 months. In April 2018, Redfin agents had multiple offers on 60% of the homes they were showing. That figure collapsed to 15% by April 2019. Even the hot San Francisco Bay Area market saw a sharp drop in multiple offers, to 22% from 75%.
Fifth, the standards for underwriting mortgages have sunk almost as low as what existed during the height of the property bubble madness in 2005-07. Because of these relaxed underwriting standards, about 3.3 million mortgages were originated between 2014 and 2018 that would have been denied under the tighter standards, the Urban Institute reports. Perhaps Fannie Mae and Freddie Mac, the dominant players in U.S. mortgage markets, decided that unless they lowered their standards, some housing markets might suffer due to a lack of qualified buyers.
Advice for home sellers and prospective sellers
A seller with an active listing do should consider that their local market is softer than they believe and that their asking price is too high. If the traffic of prospective buyers has been slow and the home has not sold for several months, they should talk with their broker about a price reduction. In a weakening market, this may be the only way to sell the house.
What about homeowners who postponed listing their house as prices rose? They need to reconsider this decision. If they believe that home prices may be heading lower for more than a brief period, the prudent action may be to put the home on the market now — before their market weakens further.
Keep in mind that I am not saying home prices are about to plunge as they did in 2008-2011. Yet prudence would suggest that wise homeowners adjust their expectations and plans, in order to deal with any changes in their local housing market.
Keith Jurow is a real estate analyst who covers the bubble-era lending debacle and its aftermath. Contact him at www.keithjurow.com.
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