By Bob Shanahan
Homes sales in the U.S. dropped 5.5 percent in the month of September, recording the fourth straight monthly decline as the housing market continues to show signs of peaking with mortgage rates on the rise.
New home sales sold at an annual rate of 553,000 in September as the annual rate of home sales has dropped more than 15 percent since May. The strength of sales seen in the first five months of 2018 has been eliminated and the real estate bubble is getting ready to pop.
The economy is not as strong as the mainstream media and the Trump administration would have you believe. A greater share of newly built homes are staying vacant with a lack of qualified buyers able to purchase them. There are now 7.1 months’ supply of new homes on the market across the country, the highest number since March 2011 when we were at the low point after the bursted bubble precipitated by the subprime mortgage crisis.
The dropping unemployment rate, at a nearly 50-year low, means nothing if households aren’t making enough money to qualify for a mortgage or pay their rent. The National Association of Realtors stated that existing home sales dropped 3.4 percent in September to an annual rate of 5.15 million. Higher borrowing costs are the main culprit in declining sales as the average 30-year mortgage rate has skyrocketed over the last year from 3.88 percent to more than 5 percent today. In addition, the average sale price for homes has plummeted 0.6 percent over the last year to $377,200. Declines in home sales were the starkest in the expensive housing markets in the Northeast and West.
In the country’s most expensive housing market, the San Francisco Bay Area, an income of $117,000 can put you in the low income bracket, according to HUD. Many households can no longer afford to live in the areas they work in and so are forced to move away from urban centers and deal with the increased commute time or move to another area altogether. An astonishing 46 percent of Bay Area residents say they plan on moving out of the region in the next few years.
Bay Area home sales have dropped significantly in recent months, but prices continue to rise. Core Logic added up all the Bay Area home sales for September and discovered that the number of sales reached the lowest level since 2007. There have now been four straight months of year-over-year declines in the number of homes sold.
Here are some statistics on the troublesome Bay Area housing market:
- Across the nine-county Bay Area, 5,970 homes sold, an 18.9 percent decline from September 2017
- A continuing trend of declining home sales since the summer: June down 8.6 percent year-over-year, July down 0.5 percent, and August down 9.8 percent
- The September decline of 18.9 percent is the exact same sum of the three summer months’ combined
- The month-over-month decline from August to September was an eye-opening drop of 22.1 percent, double the historical average monthly decline of 11.5 percent over the past 30 years
- The only thing that has increased in the Bay Area was home prices, which finished 9.3 percent higher year-over-year in September
- The median sale price for a home in San Francisco is $1.3 million and the Bay Area median price is $815,000
The housing affordability problem in California is not only due to rising prices and lagging incomes. It also has to do with anti-development policies from local governments and local populations’ resistance to construction of dense housing near large employment centers.
Baby Boomers have made things even worse, exacerbating a housing mismatch among the country’s two largest generations. As Boomers age and downsize from their suburban and exurban homes, many of these large homes in dated subdivisions will sit empty and unwanted. Millennials want smaller homes and desire urban homes closer to or in the city. They now have to compete with Boomer households with much larger incomes for urban housing. Millennials do not desire big yards and homes they have to drive to a long ways away from their jobs like their parents did. Therefore, many downsizing empty-nesters will fail to find buyers for their suburban homes and first-time home buying Millennials will not be able to afford single family dwellings in the city because they are too expensive.
Randy Shaw, author of a new book, Generation Priced Out: Who Gets to Live in the New Urban America, discusses how urban Boomer homeowners have fought density in their backyards, blocking construction of much needed affordable housing, dense single family, and apartment developments in and around the urban centers of America. This trend is especially apparent in the pro-environment, anti-development, anti-business state of California. The Boomers’ resistance to new development has also hindered the building of more housing in areas we need it most, creating a low stock of available homes where people want to live and pushing prices higher and higher.
“Discussions around a lack of affordable urban housing often focus on developers and speculators as the villains, but homeowner opposition to new apartments is a large part of the problem,” said Shaw.
Rising interest rates cannot be ignored in this current climate. Potential homebuyers are becoming a smaller group as evidenced by total mortgage application volume falling 4 percent earlier this month compared to the week before, following a drop of 16 percent from the year before, according to the Mortgage Bankers Association’s seasonally adjusted index. With fewer mortgage applications comes fewer homes purchased, resulting in the declining home sales I referenced earlier.
“Housing supply has been quite constrained for several years. As a result, the housing market has been out of whack, with home prices increasing at twice the rate of income growth,” said Michael Fratantoni, the MBA’s chief economist. “That was not sustainable.”
With incomes failing to keep up with rising home prices, rising interest rates have made affordability an even bigger problem. Average interest rates for 30-year fixed-rate mortgages increased to 5.15 percent this month for loans with 20 percent down payments. This is the highest rate we’ve seen since April 2010. Interest rates are rising as the Fed sees an improving economy and rising wages. Though interest rates could not stay near zero percent forever, the increasing rates will now accelerate our march toward the next recession.
Mortgage applications have been declining for more than a year and the mortgage application volume was 33 percent lower than a year ago. Rising interest rates have cut into the number of eligible borrowers significantly, making housing less affordable and getting us closer to the big pop we’ve all been waiting for. Will real estate be the first canary in the coal mine?
A solution to this problem is to build more housing. Sounds simple in theory but in practice it has proven near impossible. In California, especially, the housing shortage was exacerbated by the wiping out of the construction sector following the last recession. But local development and land use policies have failed to open up housing projects for construction. While new construction has ticked up slightly in recent years, it is still nowhere near where it needs to be. Environmental review processes, increasingly expensive development fees, and lengthy development review timelines have made housing increasingly difficult to bring to the market. The rising affordability crisis in California is undoubtedly a supply-demand issue and local governments have failed to streamline the development process to bring more housing to growing parts of the state.
Many housing policies in California prohibit higher density multifamily housing developments that are more in line with demand. Many Californians cannot afford to buy a house in the city of their choice yet, so they need to rent. But many cities have been unable to work with developers to bring much needed supply to these locales. Affordable housing has similarly been almost nonexistent, contributing to the vast inequality in the Golden State.
Suburban sprawl is over in California and the rest of the country. City planning departments need to work with developers in the private sector to make more land available for housing development and redevelop underutilized and vacant buildings into new housing. More dense housing communities must be built around transit corridors in high-demand areas in growing metropolitan areas. The gap between supply and demand must be narrowed. This can be done by reducing costs and opening up the possibility of building more housing closer to employment centers, transit stops, and other amenities. Furthermore, affordable housing and middle class housing must be prioritized so that first time home buyers can enter the market and homeowners looking to sell can move up into the next tier. More money must be made available for affordable housing and multiple housing types like condos and duplexes and triplexes must be permitted in urban neighborhoods to make single family housing in urban areas for Millennials and first time homebuyers more affordable.
The housing bubble will pop if we don’t make these necessary changes to our policies. Rising interest rates will accelerate the coming recession and if we don’t build more homes now, the trickle effect from declining home sales will destroy the rest of the economy sooner rather than later.
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Bob is a freelance journalist and researcher. He remains forever skeptical of the mainstream media narrative and dedicated to uncovering the truth. Bob writes about politics (in DC and CA), economics, cultural trends, public policy, media, history, real estate, Trump Derangement Syndrome, and geopolitics. Bob grew up in Northern California, went to college in Southern California, and lived 4+ years in Seattle. He now lives in sunny Sacramento. His writing also appears in Citizen Truth and has been posted on ZeroHedge and Signs of the Times.