The housing market is slowing down in the Golden State and the nation as a whole. In California, home sales volume has declined consistently throughout 2019, with home prices just 1%-3% above a year earlier.
In yet another sign of the housing market’s slowdown, bidding wars are far less common in 2019.
Nationally, in June 2019, 12% of offers submitted by Redfin agents faced competition from at least one other offer. This is down significantly from a year earlier when 52% of offers faced competition.
Here in California, the downturn is even steeper. The percent of offers facing a bidding war as of June 2019 were at:
- 28% in San Francisco, down from 65% a year earlier;
- 19% in San Diego, down from 61% a year earlier;
- 14% in Los Angeles, down from 67% a year earlier;
- 12% in Sacramento, down from 50% a year earlier; and
- 6% in San Jose, down from 74% a year earlier.
One metro area in particular stands out from this list: a year ago, San Jose was the most competitive major market in the nation. Now, it’s the third least competitive with just 6% of offers seeing competition. A precipitous drop, to say the least.
Redfin’s analysis suggests homebuyers’ declining interest may soon reverse due to the continued interest rate decrease, prompting mortgage funds to be obtainable at a lower cost. That’s an enthusiastic way of looking at it — and we are far less optimistic.
Don’t expect bidding wars to return anytime soon
Most forecasters and housing experts agree: 2019 is a transition year for the housing cycle.
Home sales volume peaked in 2018 and has steadily trended downward. Similarly, home prices declined for several months at the end of 2018 and beginning of 2019, only to rebound marginally in Spring though nothing more significant than a seasonal adjustment.
Sure, interest rates have decreased in 2019, but this decrease has taken place as the Federal Reserve (the Fed) has attempted to wrest the economy from a complete nosedive into the next recession. Lowering interest rates in the months leading up to a recession is a typical move by the Fed, as it seeks to gently ease the economy — including the housing market — into the next inevitable recession.
Therefore, while lower interest rates will increase buyer purchasing power, enabling homebuyers to qualify to purchase larger principal amounts, it will not organically create more homebuyers. Discouraged by talk of a coming recession, an unstable stock market and the growing realities of a continuing global trade war, most would-be homebuyers are thinking twice before taking on more debt — particularly debt the magnitude of a home mortgage.
Forecasts point to the next recession arriving by mid-2020. The yield spread — that time-tested and reliable recessionary crystal ball — went negative in June 2019 and continues to decline below zero, assuring forecasters a recession will follow within 12 months of the inversion.
Once the next recession arrives, expect housing to begin to recover around 12 months later, starting in 2021. Once it’s clear that home prices have hit their bottom and the economy is rebounding, homebuyers will return in greater force. This return will be strengthened by demographic forces, as retiring Baby Boomers downsize and relocate to more accessible locations, Generation Y renews their delayed entry into homeownership and Generation Z takes over the reins of the first-time homebuyer generation.
Only then will bidding wars once again be the norm — not the exception.