My husband is a very analytical and orderly guy. He loves looking at charts and economic trends. So, you can imagine his frustration when his rational approach is interrupted by unforeseen events… the banking crisis, COVID, unusual weather patterns and global conflict (and this was in just the last 3 years). So, as a loving wife, I decided to help him get his groove back by asking him to do some historical analysis on our local real estate market. The findings may surprise you and shed some light on a few current myths.
Myth #1 – We are Now in a Buyer’s Market
It is true that unit sales fell dramatically in the first quarter of this year. In fact, the last time we saw such a rapid decline was in the aftermath of the Financial Crisis of 2007/2008.
Source: Bridge MLS for quarters ending March 31 for Single Family Homes in zip codes 94602, 94605, 94608, 94609, 94610, 94611, 94612, 94618 and 94619.
Yet, the similarity ends there… our current drop in sales is predominantly the result of a shortage of listings. Homeowners remain reluctant to part with their properties due to potential capital gain taxes, existing low-rate mortgage financing and the fear of not finding a new place to live. In fact, available inventory is so thin that I would argue that we can’t get a true picture of real demand because most available homes are facing no competing properties. Further fueling the shortage are unrealistic homeowner expectations of their property’s worth that don’t reflect the roughly 9% drop in value from a year ago.
One factor that may begin to influence buyer demand (aside from higher rates) is the reduced appetite of local lenders to provide jumbo loans in the wake of the current banking crisis. At this moment though, just about every home in our market that is properly priced is quickly snapped up, leaving the seller firmly in control.
Myth #2 – Rising Interest Rates Are Driving Lower Prices
A lot of people are scratching their heads when it comes to the stubbornly high home prices considering the massive move up in interest rates. Yet, historically, rates have been even higher with far more unit sales.
Sources: Bridge MLS for quarters ending March 31 for Single Family Homes in zip codes 94602, 94605, 94608, 94609, 94610, 94611, 94612, 94618 and 94619; Freddie Mac
To be clear, higher interest rates do increase the cost of homeownership. But in our market, it has not proven to be a main driver of prices. What is more interesting is the reliance on the stock market to fuel the purchase of real estate. In fact, the following chart would suggest that the level of the S&P 500 has been highly correlated to and a leading indicator of the direction of home prices.
Source: Bridge MLS for quarters ending March 31 for Single Family Homes in zip codes 94602, 94605, 94608, 94609, 94610, 94611, 94612, 94618 and 94619; closing quote of S&P 500 Index at the end of the first quarter each year.
As the stock market reacts to a slowdown in rate hikes and inflationary data, it will be interesting to see whether home prices follow suit.
Myth #3- Every Year, Housing Prices Become Less and Less Affordable
There is no doubt that housing is expensive in the Bay Area. But has it become less affordable over time? To test this theory, we looked at the relationship of required mortgage payments (on the median priced home) to the median household income in Alameda County over the last 26 years.
Sources: Median Household Income in Alameda County from U.S. Census Bureau through 2021, 2022 was estimated; Mortgage rates from Freddie Mac, Bridge MLS for median prices of detached homes in zip codes 94602, 94605, 94608, 94609, 94610, 94611, 94612, 94618 and 94619. Mortgage payment amount calculated for a conforming 30 year fixed rate mortgage on 80% of a median home price at the average mortgage rate for the year.
In 2019, approximately 42% of Alameda County’s Median Household Income was required to cover a 30-year conforming mortgage payment on a median priced home in our market. This was well within the range of figures which have, with rare exception, bounced between 30-50% over the last 20 years.
Beginning in 2020, COVID supercharged real estate prices. Confined to the home with nothing else to spend money on, would-be homeowners all simultaneously jumped at the chance to get into the market. We are already seeing this short-term aberration unwind and should ultimately settle back down to the longer-term trends. In short, the data appears to suggest that once the impact from COVID subsides, housing is no more or less affordable than other times in recent history.
The Big Picture
I have been a Realtor for over two decades during periods of high rates, low rates, technology boom and bust. The one constant throughout my career is that there are always people in every economic cycle that need to move due to life events, health reasons and job opportunities. Although I’m not a fortune teller, I would bet that at the macro level, we’ll see higher turnover in housing stock in the next 3-5 years as the massive Baby Boomer generation reaches retirement. And, once the “move-up” buyer returns to the market, we should enjoy greater availability of entry level homes. In the meantime, if I can be of any assistance in helping you assess your options and plan for your next move, don’t hesitate to get in touch.