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Home Price Cuts are Already Happening

By Brian Kline | October 17, 2018

The shift is geographic and economic but there are strong indications the U.S. real estate market is shifting more in favor of buyers. According to an October 11, 2018 analysis report by Trulia, July and August data shows that the number of homes for sale that have reduced the sales price at least one time is at the highest level since 2014. Underpinning this is that price growth has slowed and the number of homes available for sale is marginally increasing.

Prices Cuts Begin Before the Slow Selling Seasons

This isn’t an indication that the bottom is falling out of the market. Rather that after years of rapid price rises the market is becoming stable. Of particular note is that year on year, the number of price cuts rose in 63 of the 100 largest metros. Also significant is that the highest number of price cuts is happening in the more expensive neighborhoods. Although people seeking more moderately priced homes aren’t yet likely to find bargain prices, the trend indicates affordability should increase as we head into the holiday and winter seasons.

Somewhat surprising is these price cuts occurred during the hot summer selling season (July and August). Also indicating this is a period of price stabilization is the price reductions have not been dramatic. In the year ending August, 2018 the national median price reduction was 2.6 percent. Considerably less than the 12 months preceding 2012 when the national median reduction was 4 percent. You’ll find data for most affected metro areas in the Trulia research report along with another link to other metro areas.

Starter Home Affordability is the Issue

Some of the most expensive markets are seeing meaningful increases in inventory.  Nationally, inventory continued declining during the summer of 2018. The third quarter saw a total inventory reduction of 2.5 percent year over year (smallest since early 2015). However, inventory in some of the pricier metro areas has actually risen slightly. These include San Jose, San Diego, Ventura County, Oakland, and Orange County. In Seattle (the 10th most expensive market), inventory is up 45 percent from a year ago.

Rising interest rates have combined with home price increases to further challenge affordability following years of price increases that were sustained by low interest rates. In the most extreme markets (San Francisco and San Jose) buyers need to spend 134.0 percent and 109.9 percent of income respectively towards a mortgage for a starter home.

Value appreciation has also been slowing which corresponds to sales prices decreasing. As the affordability issue begins stabilizing, those best positioned to take advantage are people that have been saving for a down payment. They already have money in the bank and the habit of making it happen. Stable prices could mean a purchase is only a few short months away.

However, bargain hunters shouldn’t be completely optimistic. Nationally, during the same year ending in August, of all prices changes that occurred 88 percent were reductions. That means inversely, 12 percent had price bumps upward to some degree.

Story is Improving for Upgrade Buyers

Inventory of starter homes continues declining at a slower rate and premium inventory is increasing significantly. At the same time, trade-up inventory has finally turned the corner. Year-on-year trade-up inventory actually rose a scant 0.6 percent. Logic indicates that as people owning starter homes prepare to upgrade, more starter homes will come on the market.

This is further evidence of how sensitive real estate is to specific locations. Although most of this data comes from major metro areas, it all seems to be trickling downward and probably outward. Aggressive pricing for premium homes is near (if not at) the end of the cycle. The effect is now flowing to the upgrade market and can be expected to soon take root in the starter home market. Just as this is happening in large markets, all things being economically equal, the same can be expected to roll out to smaller markets.

Please comment below with your national and local thoughts. Also, our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions, inquiries, or article ideas to [email protected].

Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 12 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.

Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years with articles listed on Yahoo Finance, Benzinga, and uRBN. Brian is a regular contributor at Realty Biz News
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