Is The Housing Market Crashing?

Everybody wants to know when the housing market is going to change. Wondering when buyers will once again be in control. Control the price, time on market, and ultimately, their ability to be picky. It’s complicated.

Photo by Andrew Neel on Unsplash

Although prices across California increased this year, they have not risen as much as before, and sales are slowing. According to the latest data provided by CoreLogic, home sales barely increased for July 2018 above July 2017. Following two months of lower home sales. The slowing volume of sales does not, however, mean that housing prices have dropped.

Why is the real estate market beginning to slow?

Factor #1. Affordability

The real estate industry is facing a basic economic problem. Many people want to buy homes but can’t really afford to. This is because affordability has become an increasingly acute issue over the past decade.

Factor #2. Mortgage Rates

One of the main reasons the housing market is beginning to turn is rising mortgage interest rates. “The recent rise in mortgage rates have reduced the pool of eligible homebuyers,” said Lawrence Yun, chief economist for the Realtors. The same thing happened after rates jumped in 2013. The Federal Reserve indicated it would reduce the amount of money it was putting into the economy. Mortgage rates surged, but then fell back again, and home sales recovered. The Federal Reserve has raised interest rates eight times since December 2015.

The more expensive it becomes to secure a loan, the less money buyers have left to spend on a property. Rates were up 0.82% year over year to reach 4.65% on 30-year, fixed-rate mortgages as of Sept. 20, according to Freddie Mac.

The weakness is not just rates, but high home prices. Home values surged dramatically in the last two years, as demand outpaced supply, especially on the lower end of the market.

Homeowners certainly aren’t oblivious to these factors — many of them are rushing to put their homes on the market to get as much as they can before prices begin to come down. The resulting higher inventory gives buyers a bit more power.

Factor #3. General Uncertainty

The housing market is a large part of the vast U.S. economy — so it’s going to experience a ripple effect in 2019 from changes in other parts of the economy. Such as employment, education, infrastructure, credit, politics, consumer sentiment, and many other components.

However, there’s one factor that all parts of the market need to thrive and work well together, and that’s predictability. That’s the security that you know what to expect with a reasonable degree of confidence tomorrow, next week, next month, and next year.

When it’s difficult to predict what to expect tomorrow, next month, or next year, we go through fear. Generally speaking, there’s an overall “wait and see” strategy on future movement — all of which results in challenges for the housing industry.

Even though the overall economy in the U.S. is robust, the feeling of uncertainty is growing. There’s quite a bit of unpredictability surrounding inflation, economic growth, jobs and wages, and future economic policy.

Although inventory is still historically low, it’s important to realize the increase we’ve experienced in mid-2018. In just several months, the amount of inventory is back to where it was at the end of 2012. Despite more “For Sale” signs going up, there is still a very real housing shortage. It’s not that a ton of people are purchasing homes that they can’t afford, rather there simply isn’t enough available properties on the market. Builders aren’t putting up enough abodes to alleviate that problem due to a variety of reasons, including a lack of available land, construction labor, and regulatory burdens.

A necessary answer to the inventory shortage is for the construction of new homes to increase. In addition to labor shortages in the construction industry and tariffs on Canadian lumber imposed, issues with zoning for new homes to be built has slowed down the process.

California home listings are up and now prices down a little.

Even though it’s still a sellers’ market, those selling their homes shouldn’t just expect to get full price offers anymore, with more homes available. The inventory should also help buyers find more negotiating power.

One factor that continues to keep the Bay Area a seller’s market is the strength of the local job market. Companies like Apple, Google, Facebook show no signs of slowing their growth. Nor in their hiring. This will continue to put pressure on the housing market in the Bay Area, where lack of inventory due to high demand has been the number one reason behind its astronomical price growth.

“The FHFA announced that it is increasing the conforming loan limit for Fannie and Freddie mortgages in nearly every part of the U.S. After not increasing the maximum conforming loan limits on mortgages or 10 years, the Federal Housing Finance Agency has now increased the conforming loan limit for the third straight year.

While no one knows exactly what will happen with home prices in 2019, if you have the right sources of information and know where to look, there is enough evidence to make a sound educated decision