Rising supply, waning demand cool United States house bidding wars
An increase in supply of homes and rise in mortgage rates have between them brought an end to the surge in prices in US housing market
Mike Imgarten witnessed a frenzy of demand and a dearth of stock 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 are now off by more than 25 per cent from a year ago and, while stock remains tight, the supply of homes on the market has almost doubled, according to Erin Stumpf, his real estate agent.
In states such as California, Arizona and Nevada, where bidding wars have fuelled the United States' largest gains in home prices, booming markets are showing signs of cooling as buyers like Imgarten step back. Asking prices in September were lowered on about 25 per cent of listings, the biggest share in two years, while last month they were cut on 23.8 per cent, according to Seattle-based brokerage Redfin, which tracks 22 cities in the country.
The stock of unsold homes in the US 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, according to the National Association of Realtors.
"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.
A jump in borrowing costs since May has held back some buyers, while the government shutdown may have weakened confidence, said Michael Orr, director of the Centre for Real Estate Theory and Practice at Arizona State University. The average rate for a 30-year fixed loan jumped to 4.35 per cent last week, from 4.16 per cent, Freddie Mac said. That compares with 3.35 per cent 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 [estate agents] uneasy."
Mortgage applications for home purchases have tumbled 17 per cent since May on a seasonally adjusted basis and are down 6.9 per cent from the same time a year ago. Demand has "softened considerably", Joshua Shapiro, chief US economist for Maria Fiorini Ramirez, wrote in an advisory note.
Capital Economics last month lowered its 2014 home- sales forecast to 5.2 million from 5.4 million after pending residential sales for September slumped 5.6 per cent, the fourth straight monthly decline. The firm predicts prices will rise 4 per cent 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," wrote Paul Diggle, London-based property economist at the firm.
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 per cent, 23 per cent and 15 per cent, respectively, according to CoreLogic, compared with a 12 per cent rise across the country.
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 is owed, in the three months to end-June as prices gained, according to CoreLogic.
Prices for single-family homes climbed in 88 per cent 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 per cent; Las Vegas and Punta Gorda, Florida, which each had a 31.9 per cent gain; and Los Angeles and Phoenix, with increases of about 25 per cent, 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 US economics at Renaissance Macro Research 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 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 per cent of US home sales, buyers now need a minimum income of US$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 US$433,940 in the third quarter from US$339,930 a year earlier.
Fitch Ratings said earlier this month that many of California's coastal cities are more than 20 per cent 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," said Stefan Hilts, a director at New York-based Fitch. "Twenty per cent gains, in an economy that is still not better than it was pre-crisis, are not sustainable."
Some California sellers may be listing homes because they're concerned appreciation will slow, said Selma Hepp, a California Association of Realtors economist. The jump in mortgage rates significantly changed what buyers could afford, as the state is a high-cost market, she said.