Homebuyer demand is the single most important factor of the housing market. However, measuring demand can be tricky for a state as massive and diverse as California. Demand varies immensely by metro and neighborhood — and even street.
Redfin’s Housing Demand Index is calculated using the change in home tour requests and offers submitted by homebuyers represented by Redfin agents. An index number of 100 marks the average demand level during 2013-2015. [See RPI Form 150]
Nationally, housing demand fell abruptly in March 2017, to an index number of 108, down from 132 at the end of 2016. This was represented by a seasonally adjusted 23% fewer offers written in March than February 2017.
Here in California, the Housing Demand Index in March 2017 was mixed at:
- 113 in Los Angeles, up from 81 a year earlier;
- 62 in Oakland, down from 68 a year earlier;
- 108 in Orange County, down from 119 a year earlier;
- 108 in San Diego, up from 93 a year earlier; and
- 77 in San Francisco, down from 83 a year earlier.
Viewing these California metros, Oakland saw the lowest demand for homes. An index number of 62 indicates demand was just over half of what it averaged during 2013-2015. However, demand here peaked at 175 just as recently as November 2016. One local Oakland agent attributes the sharp decrease in demand to buyers exiting the market due to the steep rise in prices and a shrinking inventory.
Los Angeles saw the highest demand from homebuyers in March 2017. Prices continue to climb in Los Angeles, with low-tier homes averaging 9% higher than a year earlier as of February 2017. Coupled with news of the Federal Reserve’s (the Fed’s) plan to continue to increase interest rates throughout 2017, homebuyers are getting anxious.
Editor’s note — Consider Redfin’s housing demand index with considerable reservation. This index is calculated using only Redfin homebuyer activity, which represents a small portion of the total market and is not necessarily representative of the entire ecosystem.
It’s all about the demand
Some analysts will have you believe that lack of supply is the biggest motivator of the housing market. But supply is ultimately a result of homebuyer demand. A tight inventory of homes for sale is always relative to the amount of demand from homebuyers.
So how will homebuyers respond to today’s market? Several factors exist in 2017 to persuade — and dissuade — homebuyers from purchasing this year:
- higher mortgage interest rates on the horizon may encourage buyers to buy now rather than wait even a few months, particularly as interest rate have declined slightly in the first few months of 2017;
- steadily increasing home prices simultaneously discourage buyers who are put off by today’s higher prices and incentivize them to buy rather than wait for them to rise further (given their consistent upward direction since 2012);
- rental vacancies are at an historic low in 2017, meaning renting continues to get more expensive in California, making homeownership a more attractive option (for those who can qualify at today’s high home prices); and
- the economy continues to improve, with jobs growing at a healthy rate in California.
Agents — what direction do you see homebuyer demand heading in your local market? What do you think the biggest influencer on demand is? Share your thoughts in the comments below!