“bubble watch‘ delves into trends that may indicate upcoming economic and/or housing market problems.
Buzz: California cities are leading the nation’s home price brewing cooldown.
sauce: My trusty spreadsheet analyzed two recent home price reports. Black Knight Report on Median Selling Price In July in the 50 largest markets in the US Case-Shiller price index for 20 metropolitan areas Track the price change of individual homes sold for the three-month period ending June.
Neither valuation calculation has been kind to California.
Six markets in California ranked as the worst performers as Black Knight tracked price declines from its spring peak. Case-Shiller found his six down his markets across the country in June. In California he is three.
Real estate insiders suggest these could be seasonal dips. But why are Black Knight’s 10 markets with the biggest declines, and Case-Shiller’s 6 of his declines all located between the Pacific Coast and Denver?
Simply put, soaring mortgage rates and heightened consumer anxiety this year have shaken the foundations of extremely high pandemic-era home prices, especially in California.
Consider the math of the Black Knight…
San Jose: Prices in July were down 10% from their peak (the biggest drop among the 50 metropolitan areas).
San Francisco: 7% off peak (3rd dip).
San Diego: 6% off peak (4th dip).
Los Angeles – Orange County: 4% off peak (5th dip).
Sacramento: 3% off peak (No. 7 dip).
Riverside-San Bernardino County: 3% off peak (No. 8 dip).
Other top drops were Seattle (8%), Denver (4%), Portland and Phoenix (3%).
What Case-Shiller shows is…
San Francisco: 1.3% off June vs. May (second biggest drop of 20) — first drop in 24 months.
San Diego: 0.7% off in a month (third drop) — first drop in 32 months.
Los Angeles – Orange County: 0.4% off in one month (No. 4) — first drop in 30 months.
Other drops: Seattle (1.9%), Portland and Phoenix (0.1%).
Remember what matters most to house hunters: the monthly payments required to finance your purchase.
According to Black Knight’s “Affordability” index, the typical U.S. home hunter needs to spend 36% of their income on home payments, compared to an average of 24% over a 25-year period. So today’s house hunter has a third less purchasing power than the norm.
Andy Walden, Black Knight’s vice president of enterprise research, said:
how is it bubbly?
On a scale from zero bubbles (no bubbles here) to five bubbles (five alarm warnings)… 3 bubbles!
Falling home prices are actually good news for the health of the housing market.
Forget about running out of homes to buy. Demand is collapsing as rising interest rates and soaring prices are straining the finances of many buyers.
The frenzy of supply for pandemic-era homeownership has severely skewed prices and expectations. Markets are cooling as potential buyers feel prices are falling or are becoming less profitable for both ownership and investment.
Yes, it’s an amazing rapid change of scenery. The year began with the real estate industry expecting a modest easing in homebuying. It includes a surge in mortgage rates from historically low levels to levels last seen in 2008.
As a result, sales activity this year has fallen to the listless pace seen during the Great Recession.
What is certain is that the Fed will not cut interest rates this year. With affordability squeezing demand, lowering prices is the smartest way to get your home-buying sanity back.
This creates a big question: How much of a discount do you need to get people back into buying?
Jonathan Lansner is a business columnist for the Southern California News Group.he can be reached at [email protected]