Four telltale trends emerged recently with clues of how the spring market is likely to unfold. But these trends point in different directions.
1. Home prices are slowly moving towards stability.
2. Mortgage applications rates are highly sensitive to interest rates.
3. New housing is both increasing and decreasing (multi family v. single family).
4. More current homeowners are planning renovations.
In positive news, home price increases have slowed substantially. Most notably on the west coast in some of the markets that have seen the highest increases, such as Seattle, San Jose, and San Francisco. California’s overall rate of appreciation dropped from above 10% in February 2018 to 3% in December.
Nationally, home price increases consistently slowed for the last 10 months of 2018. February 2018 was the high with 6.8% annualized growth. December’s increase was near 4.6%. Still, values continue growing. Growing faster than wages (3.7% annually for January 2019) and faster than annual inflation (1.6% for January 2019). The good news is appreciation is slowing. The not so good news is it still exceeds other macro trends. Overall, the rate of appreciation remains a substantial hurdle to affordability.
Mortgage rates also remain a significant hurdle to affordability. President’s Day was February 18. For some, this is considered the earliest week of the spring sales season. It’s reasonable to expect a bump in mortgage applications about a week or two later. However, a very slight change in interest costs actually caused a disproportionate decrease in applications. Due to higher home prices, the average purchase application price for conforming loans ($484,350 or less) hit a record high for conventional loans (20% down payment). The number of annualized applications dropped 2% caused by a 0.02% interest rate increase coupled with a 0.02% increase in points (including the origination fee). The total application rate dropped 2.5% on a week to week basis.
Home prices and interest rates combined will be the biggest affordability obstacle for months to come.
Available homes / inventory has the possibility of stabilizing home prices if enough are built. However, there is no recent history of enough homes being built to meaningfully increase inventory. Still, January saw an unexpected rebound in single-family construction (but not permits) following four straight months of declines. This could be good for spring sales.
January had an 18.6% seasonally adjusted jump in housing starts. The increase was proportionately spread across the nation. What to watch for is if this increase continues into the heavy spring construction period. One probable cause of this year’s increase is the slow down that occurred at this time last year as interest rates rose and lumber tariffs came into play.
January permits also rose 1.4% to support 1.345 million annual units. But this isn’t as good as it seems. It was driven by a 2.4% increase in multi-family housing. Single family permits actually decreased 2.1%. Not good for the spring single family market.
More subtle trend information comes from a new survey released by LightStream (a division of SunTrust Bank). The survey found that 73% of current homeowners are planning renovations during 2019. The majority (27%) are planning improvements for their personal living satisfaction. Many changes were for retirement or a new baby. Both are long term commitments. Only 7% were planning improvements in anticipation of selling the home. Another indication of tight inventory this spring.
Early spring tea leafs point to inventory remaining tight. However, affordability issues will keep price increases in check.
Please comment with your thoughts about the spring real estate market. 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].