Second Quarter Market Update: Shortages Continue, and Prices Still Rise

by Steve CookJuly 4, 2018

If you liked last year’s real estate markets, you will love 2018. The same factors that are making homes less affordable and making owners happy with new-found equity are still driving local markets across the country. Buyers will need time, patience and persistence to find the right home this year. Owners who have been waiting for the right moment to sell might make their move now.

The three-year shortage of homes for sale is continuing this year, driving prices even higher. In many markets, they have reached a tipping point where hard-working, dual-income families cannot afford to become homeowners. Steadily rising mortgage rates coupled with prices driven by shortages are making conditions more difficult for buyers that they were last year.

House For Sale

2018 Opened With a Whimper

Through February, a time when multiple listing services are restocking supplies in advance of the spring sales season, inventories were 8.1 percent lower than a year ago. Supplies nationwide have fallen year-over-year for 33 consecutive months. Rising prices have caught some housing economists by surprise. Within the first three months, forecasters at both Fannie Mae and Freddie Mac revised their price projections for the year.

Not all markets and not all price tiers are seeing home values appreciate at the same rate. For example, since 2009, homeowners in California and Colorado saw more than a 60 percent increase in their home prices while homeowners in Delaware saw only a 3 percent increase. Luxury-priced homes are plentiful and prices are soft, but affordable starter homes are scarce and are appreciating much faster than premium-priced homes.

The National Association of Realtors’ Pending Home Sales Index, a forward-looking indicator based on contract signings, fell 0.5 percent in May to a reading of 105.9. The index is down 2.2 percent on an annual basis. NAR Chief Economist Lawrence Yun says this year’s spring buying season will be remembered as one of “unmet expectations,” with pending home sales at the second lowest level in the past year. He says inventory shortage is the main culprit. “Realtors in most of the country continue to describe their markets as highly competitive and fast-moving, but without enough new and existing inventory for sale, activity has essentially stalled,” Yun says.

“Homes with a purchase price less than 75 percent of the local area median had price growth of 9.0 percent during the year ending January 2018. Homes that sold for more than 125 percent of median appreciated 5.3 percent over the same 12-month period. Thus, first-time buyers are facing acute affordability challenges in some high-cost areas,” said Frank Nothaft, chief economist at CoreLogic.

This year’s buyers — especially first-time buyers — must be patient and prepared to move quickly when attractive properties hit the market. Buyers should sign up for email alerts from Homes.com and monitor new listings promptly. In late summer and fall, buyers have more leverage because many sellers who hope to close before the year ends will sweeten incentives and even cut prices. First-time buyers should be careful to budget conservatively and resist the temptation to make an offer that they can’t afford.

Sellers looking for the best time to sell should be getting their homes ready weeks in advance for the spring sales season, the time when more buyers are in the market than any other. Homes are selling in 37 days, eight days faster than a year ago. Even though inventories are tight, sellers who spend the money to get their homes in shape to sell will recoup their investments and sell their homes faster than those who list their homes “as is.” Both buyers and sellers are well-advised to work with an experienced Realtor in today’s volatile real estate markets.

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Here’s a quick look at selected market conditions as the third quarter begins.

Sacramento, California

Prices in Sacramento hit a 12-year peak in May. The median sales price in Sacramento County hit $360,000 in May, the highest price in any month since 2006. With prices rising at double-digit rates, high prices are prompting “bubble” talk, and in May and June, sales are slowing as buyers find fewer affordable properties.

Sales will continue to slow until inventory picks up. Buyers should monitor new listings closely and be pre-approved and ready to move.

Nashville, Tennessee

The median price for a single-family home reached $300,000, and condos reached $226,000 in the Nashville market in May as the inventory drought choked supplies.

A widening gap between prices and wages is making Nashville’s affordability picture worse than many other markets its size. Prices have risen 89 percent over the past six years while wages have grown just 10 percent. After rising to record levels twelve months ago, sales slipped 4.5 percent in May, and they may remain sluggish through the summer as buyers wait for more favorable conditions. Should sales remain weak, buyers may find sellers to be more flexible in the fall.

Nashville’s booming economy has helped to increase the metro’s population by 45 percent. Developers are responding with new construction that will help ease the inventory crisis.

Denver, Colorado

Denver home prices are also pushing the limits of affordability, especially for first-time buyers. The Rocky Mountain metro is no stranger to soaring demand, slim supplies, and rising prices. “A family looking to buy the same house today as a year ago would see its price increase by 8 percent, and its mortgage rate up a percentage point, translating to a 20 percent higher monthly payment than the last year,” says CoreLogic’s Frank Nothaft, “but incomes sure aren’t up 20 percent from a year ago.”

However, during the first half of the year, Denver’s real estate economy is showing signs of improvement. Denver closed 2017 with the lowest number of active listings of any month as far back as the statistics go. Over the past six months, new listings have increased steadily over 2017. In June, inventory decreased by 4 percent year-over-year and continued to sell at a rapid pace, moving 10 percent more quickly than in June 2017. Metro Denver experienced a nearly 25 percent month-over-month surge in the number of homes and condos available for sale in May versus April, a sign that price increases are motivating homeowners to sell and developers to build new homes. The number of listings sold increased by 6.45 percent compared to the previous month. While both new listings and homes under contract are up year-over-year, the new listings were up more, driving inventory up to a three-year high for May.

As the home sales season settles down next quarter, inventories of active home listings should improve. Coupled with diminished demand, stabilizing inventories should slow price appreciation over the next two quarters.

New Construction

Orlando, Florida

Orlando’s home prices have been on a tear this year, rising at double-digit rates in three of the first five months of the year. By the end of May, prices were up 8.45 percent over 2017. Soaring prices discouraged buyers, and sales were down over 9 percent from last May.

New listings still trail last year’s level, but only by 1.3 percent. In June, sales fell two out of the first three weeks of the month.

“We are experiencing an unusual market filled with buyers who want to buy, but sellers who don’t want to sell out of concern that there is no place for them to go,” said Bill Nimkoff, president of the Orlando Regional Realtor Association.

Typically, home sales in Orlando remain strong through the summer months and taper off after Labor Day. Should the drop-off in sales continue through the summer, it will be a sign that many buyers can’t afford the recent price increases.

Seattle, Washington

Seattle home prices in May hit a new peak price for the market, 15 percent above prices in 2017. Owners responded to record prices by placing their homes on the market, and total active listings in King County went up for the second month in a row after years of declining inventory, increasing 36 percent in May compared to the previous year and 3.8 percent over 2017. Data from the Northwest Multiple Listing Service showed weakness in May sales, a likely consequence of persistent inventory shortages and rising prices.

Time will tell whether May’s new listings were an anomaly or a sign that the market is seeking to right itself after three and a half years of rising prices and falling inventories. Such a turnaround would have national implications, since Seattle, like Denver, has led the nation in terms of tight inventories.

“What we are experiencing is actually a good thing as inventory leans toward a more balanced market,” remarked George Moorhead, designated broker at Bentley Properties.

Virginia Beach, Virginia

In many ways, Virginia Beach is a hidden real estate gem that has so far been immune to the inventory shortages plaguing the rest of the nation. The beach resort’s affordable prices and accessible East Coast location make it a popular market for vacation home sales and retirees.

Recently ranked the second best market in the nation for buyers, Virginia Beach had a 4 percent unemployment rate and a median sales price of only $255,737 for a single-family home at the end of last year. Homes sold for an average $11,959 below listing price and houses were on the market an average of 104 days.

Of the 50 largest housing markets in the country, Virginia Beach has the lowest average down payment, at 6.8 percent , due to the large population of military buyers using VA loans. Among beach resorts, it is ranked eighth nationally for its low median price. Virginia Beach also recently ranked second by ATTOM Data Solutions among metro areas with a population of at least one million for its “flipping rate” of 9.9 percent of all homes sold in the first quarter of 2018.

Prices in Virginia Beach have increased only 3 percent in the past year, about half of the national average. With its low prices, healthy income levels and accessibility, Virginia Beach is a bargain for investors as well as vacation home owners and retirees.

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About The Author
Steve Cook
Steve Cook is editor and co-publisher of Real Estate Economy Watch. He is a member of the board of the National Association of Real Estate Editors and writes for several leading Web sites, including Inman News. From 1999 to 2007 he was vice president for public affairs at the National Association of Realtors.