More Deals Falling Through After Appraisal

Though the appraisal process can be waived, and it’s not all that infrequent — about 25% of transactions, as of August — when the appraiser disagrees with the buyer and seller on a home’s value, things can get awkward. For all-cash offers, the appraiser’s opinion doesn’t have any direct effects, though it can still influence the buyer or seller’s decision to stick with the deal or not. But for contracts involving a loan, the lender frequently will only lend up to an amount based on the home’s appraised value, even if the buyer offers more than that. And quickly rising prices make appraisal values frequently lower than the asking price, while many buyers are actually offering over the asking price.

Appraisers’ inability to keep up with a fast-paced market is slowing down many transactions. Buyers want to buy quickly, but appraisals take time. More disastrously, deals are forced into renegotiation when buyers find the appraisal is too low for them to qualify for a loan for the amount they expected. This results in 23% of deals being delayed after the appraisal process. About half of these delayed deals end up completely falling through.

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Many Joint Owners Don’t Share a Last Name

In recent years, co-buying has skyrocketed. This refers to a situation in which a home is purchased jointly by multiple owners. And nowadays, more and more of them don’t share a last name, with this value jumping by 771% since 2014. Of course, there could be multiple reasons for not sharing a name, and they could even be married, but chances are they’re not.

Buying your first home is not easy in the current economic climate. Millennials, who make up the largest chunk of prospective homeowners, have inherited astronomical home prices, crippling student debt, a weak job market, and negligible wage growth. Most can’t afford a home on their own — so they ask their friends or roommates to co-buy a house with them. The percent of co-buyers identifying as neither a married nor unmarried couple is only 3%, but that’s still up from two years ago when it was only 2%. The percent of unmarried couples co-buying also went up from 9% to 11%, as Millennials as a generation are also tending to marry later or not at all, whether for financial or personal reasons.

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2022 Market Projections

Next year is expected to be a bit calmer than this year was. An estimated 439,800 sales are projected for this year by the end of the year, but the model predicts only 416,800 for 2022, a 5.2% decrease. It had increased 6.8% in 2021 from 2020. House prices will still be going up, albeit at a much slower rate. The median home price will have increased over 20% this year. It’s only expected to increase about 5% next year. This will also mean a 3% decrease in housing affordability, from 26% to 23%. The forecast assumes that the pandemic situation can be kept under control, primarily focusing on low supply during a recovering market. 2022’s market is likely to be better for prospective homebuyers who were pushed out due to heavy competition. Those who already couldn’t afford to buy still won’t have much luck, but the slowing rate of price growth is hopeful for them.

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Home Equity Gains Are a Buffer Against Foreclosure

The foreclosure moratorium is over now, putting many homeowners at risk. However, unlike the previous recession, homeowners actually have options this time around. Home prices are high, rather than low, meaning home equity has also increased. This will allow many homeowners to sell their homes instead of being foreclosed on.

The average annual gain in equity this year was $51,500, the highest point in the past 11 years. It’s also five times the value last year. Another important statistic is negative equity, which CoreLogic started tracking in 2009. Fewer homes than ever since the statistic has been tracked have negative equity, at only 2.3%. At the state level, Louisiana is somewhat struggling at 7.8% negative equity share. Among metros, Chicago has the highest negative equity share at 5.2%, but also the second lowest amount of negative equity — meaning more people have lost money than average, but those who have haven’t lost very much. Conversely, San Francisco has the lowest negative equity share at 0.6%, but the highest amount of negative equity.

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Renters Overtake Homeowners in Suburbs

Homeownership has been a mainstay in suburban areas, where the typical house is a single-family residence or possibly a duplex. Residents in these areas have tended to be middle- or high-income earners. All of this is starting to change as the demographic is switching to Millennials and Gen Z homeowners. The majority of residents in suburbs are now renters, unable to afford to purchase a home.

Millennials and older Gen Z people inherited the effects of the Great Recession, which delayed their careers and consequently their ability to own a home. This also compounded with student debt, since Millennials are a highly educated generation. All the while, prices are increasing but wage growth is stagnant. While some of these people recovered somewhat since the Great Recession, others were still trying to get back on their feet or were just entering the job market when the 2020 recession hit. Most of Gen Z is still not old enough to own a home, so it’s unclear whether this would extend to them as well.

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Competition Starting to Soften

The 2021 housing market has experienced heavy competition from buyers, with most sellers receiving multiple high-priced offers. The peak was back in April, with nearly three-quarters — 74.3% — of listings generating at least two offers. While the numbers have been dropping off, with July’s percentage at 62.1%, it wasn’t until August that it fell just slightly below the prior year’s percentage for the month, at 58.8%.

The percentage is still over half, but that’s generally pretty normal. The current numbers are to be expected as far as seasonal variation. What’s even more indicative of a return to normality is the drop in number of offers and speed of sale. Agents are noticing decreases from 25-30 offers to 5-7 offers. In addition, a bit fewer offers are above asking price.

That’s just national averages, though. There are still some highly competitive markets, and the most competitive ones are actually becoming more so. 8 of the 10 most competitive markets actually had an increase in bidding wars between July and August.

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August HPSI Flat, But Not Unchanged

Fannie Mae keeps track of the Home Purchase Sentiment Index, or HPSI, each month. From July to August, the change in total value was negligible, from 75.8 to to 75.7, though it’s down 1.8 year-over-year. But the HPSI is a composite of six different categories, and none of them were without change. Three categories increased and three decreased.

Notable changes were an increase in those who believe it’s a good time to buy and a decrease in those who expect home prices to increase over the next 12 months. While the number who think it’s a good time to buy is still not a majority, it’s approaching a third at 32%. In July, only a bit less than half — 46% of respondents — expected home prices to increase. In August, this dropped to 40%. Only 24% of respondents believe home prices will decrease.

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Larger Homes Now More Important Than Nearby Amenities

In July, the Pew Research Center conducted a survey that asked the following question: Would you prefer a community where homes are larger, farther apart, and farther from amenities, or smaller, closer together, and closer to amenities. The answer was 60% for the former and 39% for the latter. When they conducted a similar survey in 2019, before the pandemic, the numbers were significantly closer: 53% to 47%.

Because each of the two responses involves three separate categories, it may be difficult to tease apart which one respondents were most focused on, or if they were considering all of them equally. The survey didn’t ask that question, and it’s unclear why the three separate factors were lumped into one question. Still, we may be able to guess what changed since the pandemic. It’s already established that the advent of work-from-home has caused an increase in desirability of larger homes, with room for a home office, larger kitchen space, and additional personal entertainment space. For a time, lockdowns and increased reliance on delivery services also meant that people weren’t really going to stores or restaurants anyway, so they didn’t care how far they were. It’s possible that social distancing has conditioned people to want their homes farther apart as well, but this seems either unlikely or a negligible factor.

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Average Length of Homeownership Going Up

For a few decades, the average period of time that a family stays in their home before selling has hovered around six years. However, in recent years, this number has climbed up to around nine years. Why the increase, and what does this mean for the housing market?

There could be multiple factors contributing to the increase, but a couple are fairly easily understood. The market crash in the late 2000s led to a price decrease, which encouraged sellers to wait longer for home values to go back up. Even once prices starting increasing again, not everyone was confident in the stability of the market or their own personal economic stability. Another reason is that the largest market group is currently Millennials, who have a relatively low homeownership rate, in no small part due to various economic factors largely outside their control. Not being homeowners, they aren’t able to sell, so they have no impact on the average length of homeownership.

Average length of homeownership is an interesting statistic to follow, but since it hasn’t changed in so long, it’s not entirely clear what the impact could be. One could guess that it would have a negative impact on available inventory. This could be a problem for anyone looking to buy, but also could further contribute to increasing average length of homeownership for people who don’t actually want to stay in their current homes, but have no option.

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August 2021 Real Estate – A Good Market by Any Measure

Sales Volume Down

Back in 2019 the first eight months of the year saw 5,706 homes sold. During the same period in 2020, in the early response to Covid-19, sales dropped off by 12% to 5,003. As the market came out of the Covid doldrums in 2021, sales took a dramatic 57% jump. It’s most easily seen looking at the sales volume for the Harbor area in March on the chart below.

Part of that jump was the approximately 700 sales which didn’t happen in 2020. We don’t know how many of those “deferred” transactions have jumped back into the market. As of August the South Bay sales were at 6845, a 20% increase over the 2019 sales for this point in the year.

Seeing that a huge part of the March increase came in Harbor home sales tells part of the tale. The biggest piece of that market in recent months has been entry level or first time home buyers. Closely following are investors in small income properties.

Stories from the street imply that the growth in ADU additions and conversions has had an out size impact on that market as well. Both homeowners and landlords benefit from having additional living spaces.

For right now, the pandemic appears to be fading, which would tend to boost sales. Similarly, the low mortgage interest rates continue to support the market. At the same time we’re moving into fall and winter, when sales typically slow. August showed just a hint of a seasonal downward movement. September should be a directional indicator.

Sales Prices Up

That jump in sales volume was accompanied by a bigger jump in the median price of the homes selling. Pent up demand and low interest rates combined to create bidding wars and drive median prices up. As of the end of August, the median price of a home at the Beach was $1.7M. That number was $1.5M in 2019 and $1.4M in 2020.

Median prices on Palos Verdes trended about the same at roughly $100K more per unit.The Inland cities and the Harbor area both showed mosest increases in the $50K neighborhood.

Area Sales Dollars Slowing

The monthly sales value of homes sold across the Los Angeles South Bay for August declined in all areas except the Palos Verdes Peninsula.

Compared to July, the number of sales on the Hill increased 8% in August, with a 2% increase in median price. That translated into a $150M increase in monthly sales since the first of the year.

Activity in the Inland cities has been stable for three months already, having risen about $50K per month since the first of January.

Monthly sales at the Beach and in the Harbor area pulled back for a second month in succession. Looking at the blue line for the Beach, we see a sharp drop in July which softened considerably in August. The Harbor area shows a steady decline over the same period.

As of August monthly sales totaled ~$150M higher than the beginning of the year at the Beach. During the same period monthly sales totals were up ~100M. As we move into the fall and winter season these numbers should slow somewhat.

Statistics – by Month, by Year

Interestingly, the number of homes sold in the Beach cities was unchanged from July, while the median price increased 6% at the same time.

There were 175 homes sold in both months. So how did Beach homes grow from a median price of $1.6M to a median price of $1.7M in one month? In July, 27 of those properties sold below $1M. In August, only 20 sales closed escrow for under $1M. The entire market simply moved up, pushing the median price up $100K in one month.

On a month to month basis, prices are holding or increasing across the board. At the same time we’re seeing slowing or flat sales everwhere but Palos Verdes. Continued slowing for the season is to be expected.

There’s still a lot of buyer traffic at open houses, but sales volume is slowing and buyers are showing price resistance. There’s also some chatter out there about what’s beginning to look like inflation in the real estate market. My crystal ball is showing a slow steady ride through the next month. It’s all cloudy after that.

Owning a Starter Home Still Better than Renting

Many renters feel like they will always be stuck renting. For some of them, that may unfortunately be true. But for those who are able to afford to buy but are afraid of mortgage debt, you may actually be better off buying a home. It’s true that sale prices are still increasing, but so are rent prices, which hit new highs in July in 40 of the 50 largest metro areas. The median rental price in the US is $1607 as of last month. The median mortgage payment for a starter home is about 15.5% less than that.

Of course, there are many factors that can adjust these numbers. Rent prices and home prices both vary depending where you live. It may not be easy to find a starter home in some neighborhoods. In areas with rent control, your rent may be relatively low if you’ve been in the same place for a while. Mortgage payments depend on your down payment as well as the home’s price. If you’re a renter, it’s not a guarantee that you should go out and look for a home right now, but you certainly shouldn’t dismiss the idea.

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Uneven Recovery Exemplified by Second-Home Demand

Our recovery from the 2020 recession has been described as a K-shaped recovery. Generally speaking, this means that the recovery occurred at starkly different paces for different segments of the population. More specifically for 2020-2021, while wealth decreased for many groups, it actually increased for those who were largely unaffected by the circumstances of the recession — in this case, primarily job losses and lockdowns. Many of those who were able to keep their jobs and continue to work from home during lockdowns enjoyed their reduced daily spending and lower mortgage rates.

This led to a increase in demand across the board, but notably in one sector of the market: vacation homes. Those who were affluent enough to possibly purchase an additional home were encouraged to do so by low mortgage rates and increased savings, and higher-income jobs are actually more likely to be able to be done from home. In California, the trend was first made obvious in October 2020, which saw a 120% increase in second-home demand from the prior year. The trend continued, though, demand for second homes increased 178% between April 2020 and April 2021. Rising prices dampened the effect, but it only slowed when lenders tightened restrictions on mortgages for second homes and lockdowns ceased being much of a factor.

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Mortgage Delinquency Rate Down, But Many Are Serious

Mortgage delinquency rate reached its lowest level since before the recession in June of 2021, at 4.37%. This is down from 7.6% in June of 2020, approximately a 42% decrease. The significant decrease can be attributed to both fewer new delinquencies as well as more mortgage holders catching up on payments.

That’s where the good part ends, though. A delinquency of over 90 days is considered a serious delinquency, and this category accounts for 3.2% of homeowners, or 1.55 million. This is a rather significant proportion given a total delinquency rate of 4.37%. And when forbearance programs end — which is slated to happen very soon, on September 30th — it’s likely that about two-thirds of these will still be behind on payments.

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Average Credit Score is Increasing

While everyone agrees the pandemic and recession were terrible events, there’s at least one good thing that came out of them: People are paying more attention to their credit. The sudden loss of jobs made consumers realize that in the event of a huge financial crisis, they’re going to be heavily reliant on credit. It also didn’t hurt that the government and media were both more focused on helping people learn to understand and utilize their credit better. As a result, the average FICO score increased by 8 points over the past year, up to 716.

There are a few ways of improving your credit score that people surely have been taking more advantage of. During lockdowns, some people had fewer expenses, allowing them to instead use their money to ensure that they made payments on time instead of letting them become late or missed payments. The stimulus bills also helped, letting people pay down existing debt in addition to not accruing additional debt. To top it off, the percent of hard credit inquiries, which temporarily decrease credit score, has decreased by 12.1%. A large part of this is because fewer new lines of credit are being opened, since a hard credit inquiry is required to open one.

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Builders Still Skeptical Even as Lumber Prices Drop

Builder confidence plummeted in April 2020 after the start of the pandemic and recession. As time went on, they slowly regained confidence since demand was high. But demand was too high, and lumber prices accelerated upward, causing builders to hesitate again. Builder confidence is below the levels from the start of 2021, though higher than it was in mid-2020.

Now, lumber prices are starting to fall back down. But the reason for that is decreasing demand and rising interest rates, the exact opposite of what caused prices to rise in the first place. With demand decreasing and prices now on a downturn, builders still aren’t sure whether it’s a good or bad time to buy lumber. They’re expecting more vacancies, which means less need for new construction.

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Mortgage Rate Surpasses 3%

While mortgage rates are certainly not high, we can no longer safely call them low. The average rate for a 30-year fixed conforming loan is considered low when it’s below 3%. They’ve been slowly increasing. In the first half of August, it barely qualified at 2.99%. Now, the number sits at 3.06%.

As a result of increasing mortgage rates, demand for refinances has also decreased, dropping by 5% as soon as the rate passed 3%. Applications for purchase loans are less sensitive than refinance applications, and dropped only 1%. Despite the decreases in number of mortgage applications, the total dollar volume is still high, as a result of high prices fueled by heavy competition.

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Market Has Begun to Slow

After an intensely competitive market, things are finally starting to slow down, with pending sales dropping by 12% nationwide since May. We’re not quite sure if that’s good or bad, though. Part of it can be attributed to seasonal variation — the market does start to slow heading into Q4 — but it never slows this much. It’s unclear whether the steep dropoff is because the market was already incredibly hot, or because buyer demand has lost its momentum. Either way, 2021 was decidedly not a normal year for the real estate market.

And it will continue to not be a normal year. Foreclosure moratoriums have ended, but people are still protected from evictions until September 30th. After that, expect a huge increase in supply as a result of distressed or forced sales. The good news is that rising supply will prompt decreasing prices. But demand is already decreasing, and we aren’t sure yet if it’s going to continue to decrease. People are going to be forced to sell, but may not be able to find buyers. Experts expect that demand will still be high enough in California to soften the blow, and we shouldn’t see prices plummet too far until 2023.

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Most Americans Embrace Digital — As Long As It’s Secure

While it may seem like it was pandemic restrictions that forced the US further into the digital era, most people are actually not uncomfortable with it at all. In a recent survey, 81% of respondents trust online transactions. They don’t necessarily trust all online transactions, though, and they disagree on what exactly makes a transaction feel safe to them.

Predictably, some of the older generations aren’t aware of all the options available to them, such as online notorization services. Perhaps not so predictably, the older generations are actually the most likely to feel safe with digital forms of security. These include two-factor authentication (53% of older respondents), security questions (61%), and PINs (49%). The younger generations, on the other hand, would rather talk to an actual person (53% of younger respondents), even if the discussion is held remotely by phone or online, and don’t want to go through too many online steps to make a transaction go through (22%).

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Work-From-Home Upgrades Include Significant Remodels

We’ve mentioned a few times that people now working from home more often have been making purchases to make their home more comfortable to live in. This doesn’t merely extend to smart technology, entertainment centers, or upgraded appliances, though. Home renovation projects increased by 25% in the first half of 2021.

36% of people renovating are trying to make better use of the space their have by remodelling rooms, including basements and attics. In many cases, this is probably to create a home office space. 12% have decided they want an entirely new room and are building an addition. 17% are aiming more for the comfort and entertainment aspect, and have opted to add a pool or hot tub. Such renovations are likely for personal reasons as a response to the work-from-home model, but they will also add value to the home later down the road.

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Bay Area Wage Growth Prompts Misleading “Affordable” Label

In San Francisco and surrounding areas, wage growth has recently outpaced home price growth. Some real estate analysts are now calling the area “affordable,” since prices are dropping relative to wage growth. That label discounts a few rather important factors, though.

First, the majority of wage growth in the area was for high income jobs. These people were already homeowners with stable, high-paying careers. Wage growth doesn’t actually help them purchase a home, it just gives them more disposable income — which they aren’t necessarily lacking.

Second, only in San Francisco itself are home prices actually dropping. In the rest of the region, they’re still going up. And throughout the entire region, they remain exorbitantly high. The Bay Area is one of the most expensive regions in the world.

Third, wages actually may not have gone up at all overall when factoring in unemployment. Unemployed people aren’t considered to have an average wage of $0.00. They’re just not counted in the data. Therefore, the unemployment rate doubling to 5.45% in May from pre-pandemic numbers may have caused average wages to become artificially inflated. Not to mention that no home is actually affordable to unemployed people.

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