Some good news from the latest RMLS™ Market Action letter. New listings for May 2017 reached 4,388, which was 5.9% higher than May 2016, at 4,144. This number doesn’t top the 5,182 new listings for May 2008, but then again, maybe that’s a good thing. For those who remember the Bad Old Days, 2008 was the beginning of the end for the real estate market; it was not until September 2012 that housing prices finally began to increase, after a hiatus of exactly five years, i.e. September 2007 was the apogee for housing prices, before they fell over the Abyss.This suggests to me [admittedly, without further research] that of the 5,182 new listings in May 2008, a number of them were likely reflexive sell-offs by folks who either: (a) realized they could not afford the home they bought with one of those infamous “liar loans” the banks were handing out like jelly beans, or (b) decided to try to recoup some equity after noticing that prices had been heading steadily south since September 2007. In short, the 5,182 number of new listings in May 2008 may have been high for the wrong reasons. Instead of having confidence in an active housing market, many homeowners may have decided to sell because they had lost confidence in it.
Does this mean that we should be fearful of May’s new listing numbers? Not necessarily. The perfect storm of 2007 – 2008 was a witch’s brew of toxic mortgages, created, in large part, by the banking industry making loans to anyone who could fog a mirror, and then selling off the paper to large retirement funds and municipalities with phony investment grade ratings. That model, known as the “secondary mortgage market” or “private label market” no longer exists to any measurable degree today.[1]
So let’s look at the numbers:
May Over April 2017.
- Closed sales for May 2017 were exactly the same as May 2016; but were5% over April 2017;
- Pending sales, at 3,435, were 3.6% short of the 3,563 offers accepted in May 2016, but were higher than last month, April 2017 by 11.2% (3,088);
- Market time decreased by three days in May 2017 (39);
- During the same period, inventory slid to 1.5 months;
- The average sale price for May 2017 was 7% higher than April 2017.
Year-to-Date; Jan. to May 2017 vs. 2016. Activity has been cooler so far in 2017, compared to 2016.
- New listings, at 16,696, are down 3.4%;
- Closed sales, at 11,510, are down 5.4%;
- Pending sales, at 13,469, are down 7.8%.
- However, the average home price year-to-date in 2017 was $423,800, 10.7% over the same period in 2016 ($383,000).
Does the lower year-to-date activity for 2017 over 2016 cast a shadow over the remainder of this year? Hard to say, but doubtful. There were two quarter point interest rate hikes affecting 2016; one in December 2015 and the other a year later. This year, we’ve already had two, and depending on inflation – which the Fed is watching[2] – we may have one or two more. But rates are still historically low.
However, there are two inter-related issues that remain problematic:
- Home price appreciation outpacing wage appreciation. This clearly impacts affordability; and,
- Low housing inventory.
Affordability speaks for itself; when prices appreciate faster than wage growth, it constricts purchasing power. But what is housing inventory, and how is it measured? According to the RMLS™ Market Action letter, “’Inventory in Months’ is calculated by dividing the Active Residential Listings at the end of the month in question by the number of closed sales for that month. This includes proposed and under construction homes.”
Clearly, unless and until housing inventory improves, i.e. until more homes become available for sale, thus giving buyers more negotiating power, we’re going to continue seeing a seller’s market, meaning they will dictate prices.
Inventory in the Portland Metro housing market has been below two months for all of 2017, and this May it was 1.5 months. A “healthy market” i.e. one in which buyers have a choice [ergo, the ability to walk away from purchasing an overpriced home, and find a comparable property at a lower price], is considered to be six months. Hmmm. That doesn’t bode well for buyers today, and this may account for why the year-to-date stats for 2017 are down from 2016; some potential purchasers may simply be discouraged, and so decline to play the game.
But how will more homes come to market today, if May’s 2017 new listings are the highest since 2008, and inventory is still abysmal? What’s missing from the equation is new construction. While it is starting to pick up, for three years, 2008 – 2011, new home construction tanked, resulting in thousands of housing units never being built.[3] And what we are seeing today, compared to a decade ago, is the number of in-fill construction projects being shoehorned into available parcels (or tear-downs), rather than large subdivision projects being built on spec. With memories of the Great Recession still in their rearview mirrors, many builders have been chastened, and are either out of business, or proceeding much more cautiously.
Although this is rank speculation, one source of more inventory might occur when higher prices result in sellers having fewer qualified buyers. The longer a home remains unsold, the greater the inducement is for the seller to reduce the price. Otherwise, the home gets “stale” and, in some buyers’ minds, becomes stigmatized. It’s like picking the last cantaloupe in the bin – why didn’t anyone want this one? Did others see something about it that I don’t?
That is exactly what happened during the aftermath of the Great Recession, i.e. buyers refused to pay the prices they were seeing, as short sale comps drove prices down for five straight years (i.e. 3Q 2007 to 3Q 2012). Granted, there were fewer and fewer qualified buyers, but rather than continuing to let their homes languish on the market, sellers eventually agreed to sell at prices buyers agreed to pay. Sellers were in the unenviable position of trying to decide, metaphorically speaking, the best time to catch a falling butcher knife. There was never a “good time”, but an offer had to be accepted if the seller was to get out from under the mortgage.
If stratospheric listing prices eventually drive down the number of qualified buyers, especially if appraisals cannot justify those prices, property will remain on the market longer, and prices will fall. Consequently, inventory will increase simply because there is a slower attrition of listed homes. Inventory will no longer be flying off the shelf.
How long that scenario will take is anybody’s guess. But given the schizophrenic state of the world right now, it would not be surprising that (even if inventory remained low and prices high) an event or two could conspire to shake public confidence in the economy enough to cause a downward tug on market values.
The take-away to keep in mind is a term used in statistics, and which has been applied to many other disciplines: “Regression toward the mean”. *** “Performance that is well above average usually doesn’t stay there forever; it usually comes back to earth. Performance that is well below average often gets better.”[4] In other words, time tends to balance out the extremes – just like life. ~PCQ
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[1] However, the long dormant subprime market, consisting of borrowers with marginal credit, has now been filled with FHA guaranteed loans, and one has to wonder if the proper safeguards are in place to avoid another foreclosure crisis in coming years. The difference between then and now, is that now, bank losses would be covered by Uncle Sam, at the taxpayers’ expense.
[2] Just to be clear, though seemingly counter-intuitive, the Fed wants to see the inflation rate increase, not decrease. In the sometimes bizarre world of economic theory, a certain amount of inflation – e.g. a 2% target rate – is viewed as good, since it means predictability and economic stability – as opposed to higher rates, which make long term business planning more difficult. As employment rises, wages rise (to retain employees and entice new ones), which means increased consumption and economic growth – something this country has struggled to do since the end of the Great Recession. Conversely, interest rate increases are viewed as tamping down growth (e.g. less borrowing). Since inflation had been so low for the past several years, the Fed did not want to increase rates, since it wanted to see more growth and economic expansion first. With the country at low unemployment now, in May, the Fed felt comfortable with a quarter point increase in the interest rate. There have been four since the end of 2015, but they have not created any large ripples, because the rate at the time was near zero. The Fed’s balancing act, comparing unemployment rates, interest rates, and inflation rates, is comparable to Goldilocks looking for a bowl of porridge that is “just right”.
[3] For comparison only, a U.S Census Building Permit Survey for Portland, Vancouver and Hillsboro, showed the follow numbers of permits for new homes: 2016 14,729; 2015 13,967; 2014 12,356; 2013 11,730; 2012 7,785; 2011 5,213; 2010 4,476; 2009 4,020; 2008 7,408; 2007 13,115; 2006 15,376; 2004 15,859; 2005 17,251.
[4] http://www.marketwatch.com/story/regression-to-mean-is-one-lesson-of-buffetts-career
