Homebuyer demand was 5% lower in May 2016 than the same time last year, according to the Redfin Homebuyer Demand Index, which measures homebuyer activity nationwide. This continues the year-over-year national decline in demand experienced each month thus far in 2016.
Redfin’s index was recently lowest in 2014. The following year saw more demand from homebuyers, but 2016 has lost this momentum.
Redfin’s index concludes demand is withering nationally, but what about demand in California?
California real estate agents need to take this national conclusion with a grain (or handful) of salt. As all practicing agents know, California has a largely autonomous market that frequently functions independent of the country. Thus, these results are to be viewed skeptically as it is:
- based on several metropolitan areas across the nation, which can be misleading for local markets; and
- reliant exclusively on Redfin user data, and thus it only includes visits to Redfin’s site and requests for tours and offers submitted by Redfin clients.
That being said, there are several reasons to suppose homebuyer demand may be in fact struggling in California.
The number one culprit is rising home prices, which have been on a tear since 2012. Low-tier homes, the number one choice for first-time homebuyers, are 11% higher in price than this same time last year as of March 2016. Mid-tier homes are 7% higher and high-tier homes are 6% higher.
This gels with Redfin’s survey of homebuyer clients, which shows their biggest concerns are:
- “affordability” (the cost of home prices compared to incomes); and
- competition from other homebuyers.
In fact, in much of California, most homes continue to sell above their listing price. This indicates competition remains tight. [See the accompanying graphic]:
Data provided by Redfin, a national real estate brokerage
Home prices and competition are dissuading homebuyers, and their lack of involvement will cause prices to trend down within a year of falling sales volume.
The historical trend is that home prices take around 9-12 months to react to slowing demand.
Annual increases in California monthly home sales volume have decelerated in recent months, from an 18% year-over-year rise in mid-2015 to just 2.8% in March 2016. When the sales volume trend continues, we will see a flat-to-down annual performance in the second half of this year.
Rising mortgage rates and the reduced buyer purchasing power that comes with higher interest rates will further depress sales volume and prices. Depending on performance in the global economy and movement by the Federal Reserve, this rate increase is expected around late-2016.
But this is just a speed bump in California’s otherwise expanding economy. With the return of jobs and rising incomes, young first-time homebuyers will soon be ready to enter the market and the large Baby Boomer population will be ready to retire and buy replacement homes. first tuesday forecasts the next real estate boom to occur in 2019-2021.
And in the meantime, be wary of placing too much stock in national figures. As all competent agents know, real estate is a local business.
To read more about our forecasts for the market, see: Market Timeline.
