A theme that emerged from Dr. Lawrence Yun’s presentation this morning at the Residential Economic Issues and Trends Forum was “a return to normalcy.”
I am coming up on almost a decade in this industry, and I don’t believe there have been more than a few months of what would really be considered “normal.” I passed my licensing exam in October of 2009. My market at that time was flooded with inventory. For the first three years, I felt like I could show a buyer houses for days and still not get to everything.
In 2012, my local (Vancouver, Washington) market began to shift, and did so dramatically. Inventory fell quickly and the average sale price that year grew 4.9% (after falling over 10% in 2011). The following year, the average sale price was 12.7%. That started a streak of 8% or greater price gains every year that will likely continue through 2018.
At the time, it felt like the market flipped from being a buyer’s market to a seller’s market almost overnight.
In response to concerns about a cooling market or a potential bubble, Dr. Yun repeatedly spoke of a return to normal.
There have been headlines, both locally in my market and nationally, about softening prices and declining sales. While accurate (and somewhat dramatic) compared to the last 12 – 18 months, when considered over the past 10 years the recent activity is a small blip on a long-term positive trend.
Last year was the best year for home sales in decade. This year, new homes sales are still expected to surpass last year’s numbers. Existing homes are down slightly, but again as part of a long term trend the sales figures are still positive.
Of 150 Metro areas tracked by NAR, prices are up in 90% of them this year. The one’s most vulnerable to slight softening of prices are those that experienced rapid (and unsustainable) growth in previous years, or high tax that were particularly impacted by the Tax Reform bill.
The increase in price reductions, in many markets, is more reflective of an overly optimistic level of price growth than an actual decline. In my market, it was difficult for a while to determine an accurate list price, because whatever you listed it for you ended up getting multiple offers that were higher.
Both sellers and their agents became overly aggressive in their pricing, and as the market moves back toward balance, it’s clear that you can no longer count on the 1% to 2% monthly price increases that we experienced the last few years. As an anecdotal example, Dr. Yun shared that a broker in the San Francisco Bay Area said that a house that was listed for $3 million dropped to $2.7 million, yet just one year earlier the same house would have sold for $2.5 million. Price reductions on listings in many areas are reflective of the unrealistic expectation as to how quick prices would continue to grow.
Speaking on this shift Dr. Yun said, “as people realize the days of easy price gains are over, there will be a return to normal factors” when deciding whether to buy or sell. When people believed that the value of their home was going to continue to climb at 8% or 10% annually, they might delay selling to maximize the appreciation, ignoring factors that might typically make them sell and buy something different.
During the recovery, factors like schools, commute time, or size of the home took a back seat to maximizing return on investment.
Several indicators continue to point toward growth, albeit more tempered, in the housing market. Housing construction continues to lag behind population and jobs growth. There is a growing gap between total value of all housing and the level of mortgage debt. (During the previous housing bubble, the difference between value and debt shrunk dramatically.)
Some areas to watch, according to Dr. Yun, were housing starts and certain sectors of multi-family. Without sustained growth of new homes, the recovery of homes sales could stagnate. Higher end apartment units also seem to be softening, as more of those renters are deciding to purchase rather than continue to pay rapidly increasing rents.
As always, Dr. Yun provided a great presentation with more facts and data than I could possibly cram into one post, and while the last few years of the market have been exciting to watch, it is not sustainable for the long term. As for me, I personally hope that Dr. Yun is correct and that perhaps in 2019 or 2020, I may get to see a normal, balanced market for the first time in my career.