More price cuts are occurring across California and the nation in 2017 as sellers are increasingly unable to get their overly optimistic initial list prices.
Homes for sale undergo a price cut to revitalize buyer interest when the property stagnates on the market without getting the attention of buyers. Slower home sales volume and price cuts go hand in hand.
As of May 2017, for sale price cuts increased in:
- Los Angeles, where 12% of listings saw a price cut, up from 10.5% a year earlier;
- Riverside, where 12.1% of listings saw a price cut, up from 11.6% a year earlier;
- Sacramento, where 11% of listings saw a price cut, up from 9.8% a year earlier; and
- San Diego, where 13.9% of listings saw a price cut, up from 12.2% a year earlier, according to Zillow.
A similar and telling phenomenon is happening in the rental market. Asking rents are also being cut in California’s major metros, as noted by Trulia. The largest increase in price cuts for rentals is in Oakland as of April 2017, where 15% of rentals saw a price cut compared to 12% a year earlier.
In contrast, Bay Area holdouts San Francisco and San Jose saw a slight drop in price cuts. In San Francisco, just 8.7% of homes saw a price cut in May 2017, and in San Jose 9.1% of homes experienced a price cut.
High-tier homes for sale see more price cuts than mid- and low-tier homes.
For instance, in Los Angeles about:
- 14% of high-tier homes have price cuts;
- 12.7% of mid-tier homes have price cuts; and
- 9.4% of low-tier homes see price cuts.
In San Diego, just over 16% of high-tier homes for sale see a price cut before ultimately being sold. Accordingly, this segment of San Diego’s market is experiencing the most frequent occurrence of price cuts among the price tiers in California’s other metros.
On the other side of the spectrum, the fewest number of price cuts are in low-tier homes in San Jose, where just 7.4% of homes have a price cut.
The good news is that while price cuts are on the rise in most major metros, the percentage of California homes experiencing price cuts is still below the national average of 13.6% in May 2017.
The slowdown ahead
There’s little doubt about it, a slower housing market is rippling across much of California.
After modest gains in 2015, home sales volume leveled in 2016. This flat performance is giving an encore presentation so far in 2017. Further, with higher mortgage rates on the horizon, home sales aren’t likely to improve by year’s end.
Why are home sales slowing?
The answer lies in three very important words: buyer purchasing power. Got it memorized?
Buyer purchasing power is determined by:
- mortgage interest rates; and
- income.
Mortgage interest rates rose at the end of 2017, the “Trump jump” caused by surprise election results. This reduced the amount of principal homebuyers qualified for without an increase in income. Homebuyers who are told they now qualify for a lesser home than when they first started looking can choose to:
- quit the market;
- settle for a less expensive home; or
- offer less money for the same type of home they previously qualified for.
Homebuyer response to reductions in buyer purchasing power will be a mix of the above. But their combined actions are a drag on the housing market, pulling sales back and prices down (once stubborn sellers get over their sticky price delusions).
However, housing is a fickle beast. Given enough time—several months up to a year—homebuyers get used to the new norm of higher rates. Coupled with lower home prices and the excitement of a buyer’s market, homebuyers will soon propel home sales volume and prices back into gear.
In the meantime, buyer’s agents can help their homebuyer clients get the best interest rate by encouraging them apply to multiple lenders.
Seller’s agents are best served by helping their sellers price the listing right from the start. With the correct price already in place, the listing won’t wither away on the market, ultimately selling for less than it would have before it received the devastating, but all too common, stigma of a price cut.
