Is This the Season to Buy a Premium Home?
America is in the throes of a record three-year-long drought of homes for sale. Through July, the national inventory of homes for sale had fallen 18 percent since 2014. As summer ends, homes sell in 30 days or less, 37 percent faster than they did three years ago. Shortages have contributed to inflationary price increases, bidding wars among buyers and declining home sales are falling as buyers withdraw from real estate markets until conditions improve.
However, these averages tell just part of the story. Shortages are much worse for lower-priced, more affordable homes. In many markets, supplies of higher priced, or “premium priced” homes are adequate or even above normal. The period of time that homes spend between the day that they are listed for sale, and the point when their owners sign a sales contract is called “time on market.” It is a handy measure of whether supplies are adequate to meet demand. The median time on market for all homes sold this summer was about 30 days, according to the National Association of Realtors. According to the Institute for Luxury Home Marketing, in mid-September time on market averaged 164 days for homes priced over $500,000 − more than five times longer than the national median.
Another measure of “softness” is the percentage of owners who are forced to reduce their prices lack interest. Nearly half, 41 percent, of all homes over $500,000 reduced their prices in August, according to the Institute for Luxury Home Marketing. Even the highest priced properties are not selling well. According to a survey of agents from the Christie’s International Real Estate network, expensive properties sold for significantly less of their asking prices in 2016 as compared to 2015.
Why Supplies Differ by Price Tier
Several factors are causing the disparity in supplies of expensive versus more affordable homes. Some four to six million lower priced homes became foreclosures during the housing crash and were converted into rentals—that’s about the total number of homes sold in America each year. With demand high for rentals and appreciation zooming for these homes, few of their landlord-owners are interested in selling.
Another reason for the disparity in supplies of homes for sale is new home construction. During the housing downturn, thousands of local homebuilders went out of business, and many others have to take a long time to gear up production. Now that builders are back in business, most of the new homes they are building are premium priced because they are more profitable than smaller, more affordable homes. Some builders realize they can also do well appealing to the huge demand for affordable housing and more new homes are being built for middle-income families. Toll Brothers, which typically builds homes that cost nearly $1 million, has introduced a range of homes starting from $330,000 earlier this year, aimed at young and affluent first-time buyers. The cheapest Toll home now costs upward of $200,000.
Eventually, market forces will bring supply and demand into balance. For the near future, forecasters see no relief this year for the shortage of affordable. Some buyers, desperate to get out of high-priced rentals while mortgage rates are low, are stretching their resources to the very limit of what they can borrow to buy more expensive homes than they had planned. Fears are growing that many first-time buyers are becoming over-leveraged. They may find themselves paying so much for housing that they cannot save for retirement and may be made more vulnerable to defaulting on their mortgages should home values fall again or if they become unemployed.
While first-time buyers must be cautious not to overspend on a home, conditions this fall may be perfect for move-up buyers with good incomes who can use the proceeds from the sale of their existing home to make a large down payment on a new home. Making substantial down payment makes a home affordable, avoiding the expense of mortgage insurance and reducing the size of the monthly mortgage payment and total interest cost over the life of a mortgage.
Before making a decision on how much to spend, move-up buyers should consult a real estate agent and have their current home appraised so that they can accurately calculate their current equity and projected profit in their local market.
The Fall House-Hunting Season
For those who can afford to a premium priced home in their markets, conditions are ideal this fall. From Labor Day until the holidays, it’s generally a bargain-hunting time for buyers. Mortgage interest rates remain surprisingly low, at or below 4 percent. Sellers are super motivated to sell before the year ends and competition is less because fewer buyers are in the market.
This year the stars are aligned for buyers who can spend a little more on a home. The Institute of Luxury Home Marketing, which tracks price changes in top markets for homes priced over $500,000, reports that sales are so cool that generally, the market for premium-priced homes is now a buyers’ market. As a result, more owners will be reducing prices and will be open to bids below asking price. They’ll also be more willing to negotiated contract contingencies and other issues.
Home prices and price trends vary greatly from one market to another. A $500,000 home may be considered a luxury property in the Midwest but a mid-priced home in California.
Here are some comparative data for premium-priced homes in selected markets, including supplies of single family homes between $500,000 and $600,000 listed on Homes.com in mid-September, and demand/supply trends as well as time on market for homes over $500,000 as of the end of August.
Looking ahead to 2018, housing experts expect the shortages of affordable homes to centime, forcing overall prices to continue to rise and slow sales. Supplies of premium-priced homes may increase as more boomers downsize and new more homes are built, but demand may also grow should the economy remain healthy and incomes continue to rise.