Being a recent new home buyer (as well as a home seller), I’ve been following the housing market of late. I’ve been trying to figure out the trends, and where things are going. This is mostly out of self-interest; I need to protect my investments. But how to read the tea leaves.
The Sacramento Bee is reporting that the Sacramento region’s housing market is continuing to cool off, resulting in greater inventory. Greater inventory, in turn, often results in price reductions. In Sacramento, this is especially true for the $400K and up range. In July, the monthly inventory of resale homes for sale in Sacramento, Placer, El Dorado and Yolo counties combined shot up to 7,263 – the highest for any month since September 1998. As of Thursday morning, the inventory had risen another 26 percent to 9,141 homes. Is this the typical end of summer cooling that occurs in the housing market, or a harbinger of something else?
Sacramento? Try the entire Bay Area. The San Francisco Chronicle noted that the Bay Area housing market is also slowing down, with sales falling nearly 11% and prices dipping below record territory for the first time this year. The median price for a single-family home in the nine counties last month was $643,000. Sales are decreasing, but prices are still rising.
It’s not just Northern California. The Los Angeles Times indicated that, as prices continue to rise, signs of a real estate slowdown continue to grow. The Orange County Register is having similar comments. Price gains in Riverside and San Bernardino counties, the region’s two hottest markets, slowed for the first time in about a year. San Diego County’s increases continued to decelerate, while sales there dropped nearly 16%, the region’s biggest dip. Sales overall in the Southland fell 5.8% versus the year-ago period. In Huntington Beach, there was actually a decline for houses prices above $800K. Some think this is just the normal cycle. Some experts blame the slowdown on reduced affordability and rising mortgage rates. In the San Fernando Valley, the median price has reached $600,000. Sales are slowing, but prices aren’t (yet) dropping.
How much of this is due to the media? There are an increasing number of articles (Houston Chronicle, Washington Post) about the crazy California market, and the increasing level of risk out here. These articles are emphasizing how Californians are increasingly sinking more than half their incomes into mortgage payments, taking on enormous debt, forgoing down payments and signing interest-only or adjustable-rate mortgages. The San Jose Mercury News notes that one out of five recent buyers have committed more than half their total earnings to homeownership. Of course, there’s risk and there is risk. First time buyers doing 100% down take more risk than those putting 20% down. The income of the buyer also makes a difference.
There is also the rising tide against McMansions. It’s being reported in the Daily News, as well as hitting the nationals in CNN. When mention this? If McMansionization is permitted, there will be more houses with more square footage, increasing inventory and potentially lowering prices. If McMansionization is restricted, there will be less inventory, as well as more folks needing to move to get more space, raising prices.
Often, the slowing of the markets is due to interest rates rising. We have seen the fed, after all, regularly increasing interest rates. Yet, even with the most recent increase, according to the LA Times, long-term mortgage rates are continuing to fall. Average rates on 30-year, fixed-rate mortgages fell to 5.80%, down from last week’s 5.89%, which had been the highest level in four months. Rates on 15-year, fixed-rate mortgages, a popular choice for refinancing a home mortgage, averaged 5.40%, down from 5.47% last week. Yet rates on variables (probably pegged to the fed) continue to rise. What will rates continue to do? Economic indicators are showing the economy is slowing and prices are rising, primarily due to energy costs. These costs are actually serving to temper inflation, but I’m betting the fed won’t stop the rate increases.
Many recent folks have probably used some of the newer loans out there, often the “option ARMs” (where you have a choice of a payment that results in negative amortization, an interest only payment, or a fully amortized payment). With such loans, the interest rate changes monthly. There may or may not be a prepayment penalty. When one has such a loan, the game is figuring out the right time to refinance, such that you take advantage of the low teaser rates, and then move into a 30-year fixed rate before the variable adjusts above the fixed rate. If you went in riskier (i.e., less down), you also have the worry that you won’t be in an equity position to refinance if rates fall.
Right now, the 30 year rate is 5.80%. Checking a few banks, I’m seeing rates such as 5.875% for jumbos. It’s been fluctuating, and who knows how it will change with further fed changes. Taking a look at an Interest Rate Comparison site, I see rates as low as 5% (1.875 pts) to 5.375% (0 pts). The variable rates have been slowing rising. My most recent statement had a 5.07% rate, up from 4.85% the month before. Guessing the timing. It’s just hard. Time to check with our Mortgage Broker, I guess.
