It's not a buyer's market yet, but shifts are occurring
Housing-market dynamics are shifting in buyers’ favor, although it’s not quite a buyer’s market yet, according to new data from First American Financial Corp..
First American, a California-based risk-services company, reported that its Real House Price Index decreased 0.4 percent between January and February of this year. The index measures the price changes of single-family homes and is adjusted for the impact of income and interest rate swings to better represent housing affordability.
A higher index score means lower affordability. Take, for example, the 11.1 percent year-over-year growth in the index in 2018, driven by rising mortgage rates that offset increases in household income. The first two months of 2019, however, have seen mortgage rates retreat and income growth continue, resulting in higher affordability and a diminishing index score.
“In February, mortgage rates fell 0.9 percentage points compared with the previous month and were only 0.04 percentage points higher than one year ago,” said Mark Fleming, chief economist at First American. “Flat mortgage rates are a welcome change for homebuyers following 2018, and the 2.8 percent year-over-year growth in household income helped boost affordability.
“The result? House-buying power increased 2.4 percent in February compared with one year ago, and 1 percent compared with [January].”
Fleming cautioned that it’s still too soon to declare a full buyer’s market, with unadjusted home prices still rising and supply continuing to lag. Despite the month-over-month decline, First American's index rose 2.9 percent year over year.
“It’s quite likely,” Fleming said, “that price appreciation will accelerate again.”
Still, six markets in particular — all on the West Coast — saw year-over-year local declines in index scores. San Jose, California, led the way with a 5.5 percent decrease, followed by Seattle (4.5 percent); San Francisco (2.1 percent); Los Angeles (1.6 percent); Portland, Oregon (1.1 percent); and San Diego (0.3 percent).
“These coastal markets all have something in common: they were the tightest and hottest markets of 2018,” Fleming explained. “In the first half of 2018, rising millennial demand amid a backdrop of limited inventory and increasing mortgage rates put pressure on affordability, causing buyers to take a step back. But now, affordability is on the rise and the main reason is rising inventory.”
Indeed, San Jose, Seattle and San Francisco posted year-over-year supply jumps of 124 percent, 89 percent and 52 percent, respectively, according to Realtor.com’s February data.
“As inventory enters the market, buyers have more options, bidding wars are less likely and sellers are more likely to reduce list prices,” Fleming said. “In fact, these three markets experienced the greatest yearly growth in the number of listings with price reductions.”
First American’s short-term data offers more cause for optimism: Although the six aforementioned markets were the only metros with year-over-year index-score reductions, 37 of 44 top markets tracked by the company showed month-over-month declines.
“Across the nation, homebuyers are benefiting from lower-than-anticipated mortgage rates, rising wages and a slowdown in unadjusted house-price appreciation,” Fleming said.