We’ll be covering the following:
- Mortgage rates had little impact on home prices in July;
- The Bay Area housing market has slowed due to inventory; and
- The impact of the above trends on affordability and pricing strategies.
Mortgage Rates had Little Impact on Home Prices in July
We’re officially in our country’s longest economic expansion. The National Bureau of Economic Research reports that as of July 2019, we broke the 120-month record of economic growth experienced from March 1991 to March 2001.
In May, the unemployment rate dropped to 3.6%, which is the lowest we’ve seen since 1969. Consumer spending is up a point from last year, and retail sales are up over the last few months.
Despite this economic growth, the Federal Reserve (the Fed) lowered the Federal Funds Rate by a quarter point on July 31st, signaling that the economy needs a bit of a push.
First, despite this record-setting run, Gross Domestic Product (GDP) only grew cumulatively by 25%, which is far slower than previous expansions. Furthermore, the Consumer Price Index (CPI), which is a measure of overall inflation, sits stubbornly below the Fed’s target of 2%.
The Fed seems to be wrestling with the reality of slowing growth, an aging workforce, and low inflation across the United States. In fact, they labeled the rate decrease a ‘readjustment’ to get interest rate policies in-line with this new economic paradigm.
The Federal Funds Rate indirectly affects consumer borrowing costs, including mortgage rates. For example, Freddie Mac reports that the 30-year-fixed mortgage rate, which fell to 3.75% last week, is down by more than one percentage point since 2018.
This illustrates that for now, low-interest rates are here to stay.
Despite rates maintaining record lows, home prices went down by 3% in the Greater Bay Area in June, as compared to the previous month, and down 8% year-over-year. Both the average price per square foot and sales price are down as well.
Normally, there’s an inverse correlation between interest rates and home prices in that lower mortgage rates are usually a boon to the housing market. This month, however, mortgage rates had little impact on the market overall.
Greater Bay Area Home Prices and Sales
Median Home Price vs 30-year Mortgage
Greater Bay Area Median Home Prices
Greater Bay Area Home Appreciation
The disconnect between mortgage rates and home prices poses a problem for the Fed’s efforts to stoke economic expansion. It also exposes a couple of concerns in the housing market, especially in California and the Greater Bay Area.
The first matter is affordability. Since June 2009, when the U.S. economy started its current expansion, the median price of existing homes rose by almost 60%, far outpacing the median earnings growth of 24%.
In the Bay Area, where prices are still near all-time highs, we see more significant gaps. The charts below illustrate home prices and wages starting in 2011—the year when both began climbing—and ending in 2017, with the most recent data we have.
House Price vs Household Income
Home Prices vs Household Income
During this six-year period, home prices increased by 76%, while household income only grew by 31%. The widening difference between home price appreciation and wage growth in San Francisco means that housing is becoming increasingly less affordable.
This divergence between home prices and incomes suggests that low rates are usually good. However, this is not the case if they are caused by uncertainty in the rest of the economy, and certainly not when they reach this far into an economic expansion.
Analysis by County
While California and its cities typically trend together, prices vary widely right now. For example, the median price of a home in San Francisco is almost 4X higher than the median price of a home in Solano, even though the approximate sizes of the median homes are fairly similar. Furthermore, San Francisco saw the highest median home price in June at $1,762,500, while Solano saw the lowest at $448,000.
Bay Area Median Home Price
Mean Price Change by County
Every county in the Greater Bay Area, except for San Francisco, saw median home prices decline on a year-over-year basis. It should be noted, however, that San Francisco’s July data shows a 2% decrease in year-over-year median home prices, which is a sharp reversal from June. The price per square foot data by county for the month of June tells a similar story.
Bay Area Price Per Square Foot
Price Per Square Foot Change by County
Sales Change by County
Every county except for Napa saw a decrease in sales, both in year-over-year and month-over-month. Napa saw a 19% year-over-year increase.
Jordan Levine, Deputy Chief Economist at the California Association of Realtors, points to changes in the tax code as one reason for slowing sales when he says.
“I think part of that is inventory, but I also think that’s where we are starting to see some of the cracks of the tax reform side too. …Fundamentally what we did is we removed the incentive from home ownership from our federal tax code. What we saw this year from the preliminary numbers this year is that 90 percent of folks took the standard deduction going forward. …That seems to have undermined the motivation for folks to enter the market. Low rates are great, we prefer lower rates to higher rates, but it’s not giving the market that kick in the pants that we were expecting.”
Changes to the tax code limit the interest-rate deduction for homes above $750,000. This change has the most significant effect on homes in the $1 to $2 million range.
Despite monthly payments on median-priced homes being cheaper today than they were a year ago, we’re not seeing the number of transactions we should be seeing. This suggests there may not be a big rebound.
Supply Change by County
June’s supply data shows supply going up in every county on a year-over-year basis. Normally an increase in supply indicates that inventory is higher, but in this case, inventory has actually held flat or decreased across the Greater Bay Area. To best illustrate this point, we can look at the change in San Francisco County’s active listings.
Active Listings Yearly Change
Having a shortage of inventory normally correlates with increasing home prices, but both fell in June. One possible explanation for this comes from Leslie Appleton Young, VP Chief Economist at the California Association of Realtors:
“The lack of supply of housing will eventually create a situation where the demand moves somewhere else.”
Even with June data showing that the Greater Bay Area housing market is slowing, becoming more affordable, and backing off all-time high prices, the market still favors sellers.
|Even with June data showing that the Greater Bay Area housing market is slowing, becoming more affordable, and backing off all-time high prices, the market still favors sellers.|
Buyers vs Sellers Market
Leslie Appleton Young warns:
“It is absolutely crucial to price the property correctly, and by that I mean don’t overprice it, or you are going to be following the market down. The pricing strategies that worked in the market in 2017 don’t work in the market in 2019.”
One of the biggest mistakes a seller can make is pricing their property too high because they think they can command a price that is no longer consistent with the latest market data. Consequently, the property remains on the market for longer than usual and often faces a series of price reductions. As a result, the final sales price falls well below the price the sellers should have listed the property at in the first place.
Yes, it’s a seller’s market, but sellers should be more diligent than ever when pricing their homes.
The Greater Bay Area housing market remains one of the most dynamic in the country because it’s defined not only by the country’s macroeconomic factors, but also by the tech industry, the IPO market, and foreign buyers. For this reason, the county regularly sees more variance in month-to-month median prices.
Greater Bay Area Historical Median Price
The President of the California Association of Realtors, Jared Martin, recapped the month with the following statement:
“With softer price growth and interest rates at the lowest levels in nearly three years, monthly mortgage payments on a median-priced home have fallen for four straight months. This allows homebuyers to save hundreds of dollars a month on the same home or to potentially consider a slightly more expensive home for the same monthly cost. Combined with the long-term benefits of homeownership on personal wealth and quality of life, 2019 is a good time to purchase a home for the long haul.”
The biggest takeaway for today’s buyers and sellers? Buy smart; price smart.