Amid Growing Inventories, Home Price Gains Continue Slowdown

Mike Sorohan msorohan@mba.org

November 28, 2018

S&P Dow Jones Indices, New York, reported home price increases slowed for the second consecutive month. Other reports suggest rising mortgage rates, lower demand and rising housing inventories are having an impact on overheated housing markets.

The S&P CoreLogic Case-Shiller Indices reported a 5.5% annual gain in September, down from 5.7% in August. The 10-City Composite annual increase came in at 4.8%, down from 5.2% in August; the 20-City Composite posted a 5.1% year-over-year gain, down from 5.5% in August.

Las Vegas, San Francisco and Seattle reported the highest year-over-year gains among the 20 cities. In September, Las Vegas led with a 13.5% year-over-year price increase, followed by San Francisco at 9.9% and Seattle at 8.4% increase. Four of the 20 cities reported greater price increases in the year ending September from August.

Month over month, before seasonal adjustment, the National Index posted gain of 0.1% in September. The 10-City and 20-City Composites did not report any gains for the month. After seasonal adjustment, the National Index recorded an 0.4% month-over-month increase in September. The 10-City Composite and the 20-City Composite both posted 0.3% month-over-month increases. Nine of 20 cities reported increases before seasonal adjustment, while 18 of 20 cities reported increases after seasonal adjustment.

"Home prices plus data on house sales and construction confirm the slowdown in housing," said David M. Blitzer, Managing Director and Chairman of the Index Committee with S&P Dow Jones Indices.

The report said as of September, average home prices for the MSAs within the 10-City and 20-City Composites are back to their winter 2007 levels.

"Supply and demand are falling into balance in the housing market," said Ralph B. McLaughlin, deputy chief economist and executive of research and insights for CoreLogic, Irvine Calif. "On the supply side, slow but steady growth in inventory is providing relief to homebuyers. On the demand side, years of price growth outpacing income growth, as well as rising mortgage rates, is making the cost of buying homes increasingly expensive."

Zillow, Seattle, reported 3 percent more homes on the market in October than a year ago. Inventory had declined on an annual basis for 44 straight months before seeing positive growth.

High cost markets that had been among the nation's hottest saw some of the biggest gains in inventory, Zillow said. San Jose, Calif., saw the biggest annual increase in inventory, adding nearly 1,500 homes to the market to increase inventory by 93.1 percent from last October, when it reached its lowest recorded level. San Diego, San Francisco and Seattle also saw big gains in the number of homes for sale.

"In yet another sign that the housing market is cooling, we're finally starting to see inventory return after several years of annual declines," said Zillow Senior Economist Aaron Terrazas. "The combination of tight supply and strong demand have pushed up home values in recent years, but markets always ebb and flow and there is no doubt that the tides that have buoyed sellers are shifting."

Zillow reported home value appreciation held steady in October at 7.7 percent, with the median U.S. home worth $221,500. San Jose and Las Vegas saw the strongest home value appreciation; these two markets have led the nation's largest markets in annual home value growth for the past year. Nearly half of the 35 largest metro areas saw slower home value growth in October than they did a year ago. The biggest slowdown was in Seattle, which fell from 12.6 percent annual growth to 7.1 percent. Home value growth increased the most in Indianapolis, from 5.5 percent in 2017 to 11.9 percent in 2018.

Terrazas noted buyers "are not out of the woods yet: While there are more homes for sale, rising mortgage rates are quickly eating into what they can afford to pay," he said. "First-time buyers have benefited from flat or falling rents over the past year--making it somewhat easier to save for a down payment--but the decline in rents could be short-lived if higher buying costs push some people back toward the rental market."

Redfin, Seattle, also reported homes for sale rose by 1.3 percent from a year earlier, the highest level of inventory growth since September 2015. National inventory growth continues to be driven by big increases in softening coastal markets such as San Jose (110.9%), Seattle (73.2%), San Diego (38.2%) and Boston (17.3%).

However, Redfin noted while the number of homes newly listed in October rose by 5.4 percent year over year, the number of completed home sales continued to sink, dropping by 5.7 percent from 2017. Home sales declined in 59 of the 71 largest metro areas that Redfin tracks. Seattle, San Diego and San Jose, where high home prices mean that rising mortgage rates have the largest effect on affordability, are seeing the biggest increases in inventory coupled with decreasing sales. The biggest sales declines were in some of the most expensive metros, including Seattle (-19.6%), San Diego (-15.7%), and Honolulu (-22.9%).

"An increase in interest rates effectively makes home-buying more expensive because buyers have to pay higher monthly mortgage payments even if the sticker price hasn't changed," said Redfin Chief Economist Daryl Fairweather. "Some homebuyers are adjusting their price range down, and others are backing out of home-buying entirely--deciding that renting is a better deal. Sellers are now realizing buyer demand isn't what it used to be and are dropping their prices. When buyers and sellers are on the same page, the market moves quickly, but since sellers were slow to react, we've seen a slowdown in the housing market."

Also last week, RE/MAX, Denver, reported home sales fell for the third consecutive month in October, leading to its first oted year over year increase in inventories in 10 years.

The company's monthly National Housing Report said home sales declined by 4.6% from a year ago, the third consecutively monthly drop (11.6 percent in September, 1.1 percent in August) and the eighth month of 2018 to record lower sales than 2017.

As a result, said RE/MAX CEO Adam Contos, inventory is slowly being replenished, with the number of homes for sale in October increasing 1.0% over October 2017. October 2018 was the first month to show a year-over-year increase in inventory since October 2008 when two and a half times as many homes were for sale. The Months' Supply of Inventory is now 3.5, compared to 3.3 a year ago.

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