Are homebuyers giving up the search in 2018?
Nationally, Redfin’s Housing Demand Index peaked in mid-2017 at just over 132 points and has since declined to 116 in May 2018. This translates to a 12% drop in demand over the past year.
Redfin’s Housing Demand Index is based on the number of tours Redfin users request and how many purchase offers Redfin buyers place. For reference, an index number of 100 equals the average level of demand experienced between 2013 and 2015. Therefore, while demand has declined over the past several months, demand today is still higher than in 2013-2015.
Here in California, the situation is more dramatic. From each metro area’s most recent peak in mid-2017 to May 2018, the demand index has fallen:
- 42% in Los Angeles;
- 27% in Orange County;
- 24% in San Diego;
- 15% in San Francisco; and
- 12% in Oakland.
Compare these metro areas to the national average 12% decline and it becomes clear that buyer demand in California has fallen at a more significant pace.
Editor’s note — Use Redfin’s Housing Demand Index with a grain of salt, as it represents only a tiny slice of the housing market.
Why demand is uncertain
Less demand from homebuyers is a big problem for real estate professionals. Homes don’t sell and transaction fees remain unearned without buyer activity. So, what’s holding them back?
Three big factors have piled on over the past several months to deter would-be buyers from purchasing today.
First, mortgage interest rates have continued to inch higher in recent months. The average 30-year fixed rate mortgage (FRM) rate in June 2017 increased 0.6 percentage points from a year earlier. For the average income earner in California, this mortgage rate increase represents a loss in purchasing power of about $23,000. The ability to qualify for less mortgage has undoubtedly discouraged homebuyers.
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Along with decreased purchasing power, homebuyers have needed to contend with rising home prices. California home prices are on average 9% higher than a year ago as of April 2018. This is a double whammy for homebuyers who have already seen their purchasing power reduced due to higher mortgage rates. Without a major income change, as the months go by homebuyers across the income spectrum are only able to qualify for less desirable homes.
Finally, low for-sale inventory has frustrated the search of would-be homebuyers. This inventory shortage is most acute in the low-tier, where most first-time homebuyers operate.
The result for real estate professionals has been flat home sales volume in 2018. At the same time, new agents — lured by talk of quickly rising home prices — are becoming licensed each day. California’s rising agent population alongside flat sales volume contributes to the declining number of sales-per-agent completed each year.
When will these trends reverse course, giving agents more to work with?
The Federal Reserve has hinted it will continue to increase interest rates through 2020 before letting rates fall back. But first tuesday forecasts home prices will dip before then in response to months of higher rates and falling demand, likely in 2019.
Once rates fall back somewhat and home prices have a chance to cool, homebuyers will return in greater numbers. Until then, forward-thinking agents can prepare for the next couple of years to be slower than previous years.
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