Mike Imgarten witnessed a frenzy of demand and a dearth of inventory during a two-month house hunt in Sacramento, California. Fearing he would pay too much after a surge in prices, he said he took a break from searching in June.
Sales in Sacramento now are off by more than 25 percent from a year ago and, while inventory remains tight, the supply of homes on the market has almost doubled, according to Erin Stumpf, Imgarten’s real estate agent.
“Several homes I drive by on my way to work have had for-sale signs up for a couple months, while before, they’d be gone within a week,” said Imgarten, a 29-year-old civil engineer.
In states such as California, Arizona and Nevada, where bidding wars have fueled the country’s largest gains in home prices, booming markets are showing signs of cooling as buyers like Imgarten step back. The surge in values, combined with higher mortgage rates, is reducing affordability while also encouraging more sellers to list their properties, indicating that price growth will slow after the biggest increases since 2006.
Asking prices in September were lowered on about 25 percent of listings, the biggest share in two years, while last month they were cut on 23.8 percent, according to Seattle-based brokerage Redfin, which tracks 22 cities across the country. The inventory of unsold U.S. homes climbed in September from a year earlier for the first time since 2011, while contracts to buy previously owned residences plunged the most in three years, data from the National Association of Realtors show.
“We are shifting from a frenzy to where buyers are taking a step back and being more analytical and unwilling to just make rash decisions,” said Ellen Haberle, an economist for Redfin.
While the pullback coincides with the time of year when sales typically slow across the country, the dropoff in heated areas such as Phoenix is far greater than expected, Michael Orr, director of the Center for Real Estate Theory and Practice at Arizona State University, said in a telephone interview.
A jump in borrowing costs since May has held back some buyers, while the government shutdown may have weakened confidence, Orr said. The average rate for a 30-year fixed loan jumped to 4.35 percent this week, from 4.16 percent, Freddie Mac said in a statement today. That compares with 3.35 percent in May.
“We have buyers, but they’re on strike,” Orr said. “This caught everybody by surprise, including me. The suddenness has made a lot of Realtors uneasy.”
Mortgage applications for U.S. home purchases have tumbled 17 percent since May on a seasonally adjusted basis and are down 6.9 percent from the same time a year ago. Demand has “softened considerably,” Joshua Shapiro, chief U.S. economist for Maria Fiorini Ramirez Inc., wrote in a note yesterday.
Capital Economics Ltd. last month lowered its 2014 home-sales forecast to 5.2 million from 5.4 million after U.S. pending residential sales for September slumped 5.6 percent, the fourth straight monthly decline. The firm predicts prices will rise 4 percent next year, half of this year’s projected gain.
“The sharp drop in pending home sales last month suggests that the steady rise in mortgage interest rates has hit sales activity harder than we had thought,” Paul Diggle, London-based property economist at the firm, wrote on Oct. 31.
Reduced demand in Western states that were at the forefront of the rebound could return the country to a more normal balance between buyers and sellers after an inventory shortage sent values surging. Nevada, California and Arizona had the biggest year-over-year price increases in the country in September, at 25 percent, 23 percent and 15 percent, respectively, according to CoreLogic Inc., compared with a 12 percent rise across the U.S.. The gains are a lagging indicator because they’re based on contracts signed months earlier.
A reduction in homeowners in negative equity, which had been limiting sales in markets hard hit by the housing crash, has enabled more people to list properties. More than 2.5 million homes returned to positive equity, where the property is worth more than what’s owed, in the three months through June as prices gained, according to Irvine, California-based CoreLogic.
The U.S. supply of homes increased to 5 months in September, from 4.9 months a month earlier and an eight-year low of 4.3 months in January. A six-month inventory is considered equilibrium between buyers and sellers.
Prices for single-family homes climbed in 88 percent of metropolitan areas in the third quarter, according to the National Association of Realtors. Among the areas with the biggest gains were Sacramento, where prices jumped 41.8 percent; Las Vegas and Punta Gorda, Florida, which each had a 31.9 percent gain; and Los Angeles and Phoenix, with increases of about 25 percent, the group said. All of these cities are seeing the number of homes available for sale expand.
“What has been holding back sales is the fact that nobody wants to sell at the bottom,” said Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York. “The rise in inventory indicates that sellers are confident in the persistency of the price increases.”
Price gains have been accelerated by investors flipping houses and institutional purchasers such as Blackstone Group LP building businesses of acquiring single-family homes to rent. Many of those buyers are pulling back in the cities with the fastest price growth, said Sam Khater, senior economist for CoreLogic. In most of those areas, prices are outpacing gains in buyer incomes, he said.
In California, which accounts for about 10 percent of U.S. home sales, buyers now need a minimum income of $89,170 to purchase a median priced, single-family home and have to earn almost twice as much to buy a house in San Francisco, according to the California Association of Realtors. The median price of an existing home in the state climbed to $433,940 in the third quarter from $339,930 a year earlier.
Fitch Ratings said last week that many of California’s coastal cities are more than 20 percent overvalued. The calculation was based on the long-term relationship between home prices and factors including incomes, borrowing costs, rental rates and population growth.
“We don’t really see growth in the demand drivers to be adequate to support this level of price increases,” Stefan Hilts, a director at New York-based Fitch, said in a telephone interview. “Twenty percent gains, in an economy that is still not better than it was pre-crisis, are not sustainable.”
California markets where homes are in the shortest supply also account for many of the country’s biggest percentage increases in listings, according to Realtor.com, a listings site operated by Move Inc. Inventories in September jumped 48 percent from a year earlier in the Riverside area, 25 percent in Los Angeles and 14 percent in Orange County, Realtor.com data show.
“The recovery is very fragile,” Khater said. “The reason why supply is going up is partially the softening of demand in the hardest-hit areas.”
Some California sellers may be listing homes because they’re concerned that appreciation will slow, said Selma Hepp, a senior economist for the California Association of Realtors. The jump in mortgage rates significantly changed what buyers could afford because the state is a high-cost market, she said.
Contracts to purchase homes in September fell 8 percent from a year earlier in the state, according to a California Association of Realtors index.
“The frenzy has died down,” Hepp said. “The question in the summer of this year was, ‘is this sustainable, or is this a bubble again?’ Now the data is showing that we’re returning to more of a traditional market.”
As would-be buyers get used to slightly higher rates, they may be returning to the market, said Donald Tomnitz, chief executive officer of D.R. Horton Inc., the largest U.S. homebuilder by revenue. While the Federal Reserve has pledged to a continuation of the bond buying responsible for keeping borrowing costs low, an improving economy is fueling speculation that the central bank would end the program soon.
Buyers are “beginning to become more comfortable with where rates are today,” Tomnitz said on his company’s earnings conference call this week, during which he said October sales were improved from prior months. “If you’re waiting for a better rate and a better house price, you’re going to wait and you’re going to find higher rates and higher house prices.”
Janet Yellen, the nominee for chairman of the Federal Reserve, said today she is committed to promoting a strong economic recovery and will ensure monetary stimulus isn’t removed too soon.
Fewer properties are going under contract in Nevada and Arizona. In the Las Vegas area, the number of single-family home listings without accepted offers on them at the end of October, jumped 73 percent from a year earlier, according to the Greater Las Vegas Association of Realtors.
Phoenix-area listings, not including those already under contract, were up 32 percent in October from a year earlier and the number of signed contracts to buy homes last month plunged by about a third, according to Arizona State’s Orr.
Demand slowed after institutional investors began withdrawing from the southern Nevada market a few months ago, said Dave Tina, president of the Greater Las Vegas Association of Realtors.
“We did a catch up from being as low as we were,” Tina said. “It created a positive mental outlook on the city and that’s what we needed. Now we’re going to see normal raises in prices, not the craziness of 32 percent.”
Investors are getting concerned because the longer it takes to sell a home, the more it costs them, said Steve Turner, owner of Scottsdale, Arizona-based Coyote Capital Investments, which charges 18 percent for six-month loans to buyers of investment properties.
His clients who purchase, repair and resell houses would be happy with moderate price growth as long as it is predictable, Turner said.
“Slow growth gives everybody a chance to figure out a longer-term strategy,” Turner said. “It’s the peaks and valleys that gives everybody angst.”
Stumpf, the Sacramento real estate agent who represents Imgarten, said demand slowed because institutional investors bid up prices and then pulled away. For traditional buyers, “affordability just got snapped” with the jump in mortgage rates, she said.
“Six months ago, if I listed a property under $400,000, I would expect multiple offers within a few days,” Stumpf said. “Now, I might get one offer within the first couple weeks.”
Imgarten resumed his house hunt this month, sensing that the market has cooled. He wants to avoid the frenzy, which drove him to bid $265,000 in June for a three-bedroom home listed for $253,000. As part of the offer, he agreed to bring extra cash to the table if the appraisal came in below the contract price.
“The bidding wars were creating a false market,” Imgarten said. “Now is a good time to jump back in and see where we’re at.”