Has the market changed, or is this a normal seasonal variation?
Short Answer: The market is balancing, and the seasonal variation is temporarily exaggerating the change. We see continued price softening over the next couple of months, followed by a comparatively robust spring.
September By the Numbers
- Median sale price ($392,500): 3.3% up from September 2017 ($380,000), 3.7% down from August 2018 ($407,500).
- Number of homes sold (2,272): 14.6% down from September 2017 (2,660), 23.4% down from August 2018 (2,967).
- Number of homes on the market (7,082): up 18.1% from September 2017 (5,998), up 2.2% up from August 2018 (6,929).
- Months supply of inventory (3.1): up from September 2017 (2.3), up from August 2018 (2.3).
- Number of pending home sales: (2,471): down 9.5% from September 2017 (2,730), down 10.5% from August 2018 (2,760).
The Numbers That Drive Real Estate
- Number of Home Sales
- Home Prices
- Months Supply of Inventory
- Mortgage Rates
A Few Rules of Thumb and Other Generalizations
- U.S. housing prices have risen about 4% per year since 1890, the time of the Second Industrial Revolution. Remember that when comparing current values to the peak of 2007 and the bottom in 2012.
- Conventional wisdom holds that six months supply of unsold homes is a balanced market. We think that number is obsolete; more on that later.
- The median price of homes sold in Portland has tended in recent years to rise sharply in the first half of the year and fall back a bit in the second half of the year. We don’t know why. We have simply observed that over the past several years sale prices have averaged a 10.5% increase in the first six months and a 1.5% decrease in the second six months.
- Mortgage rates, even at five percent, are still historically low, and they are almost certain to keep rising. A 1% rate increase will reduce borrowing power by about 11%.
- Affordability is a major issue for younger buyers, many of whom also carry student loan debt.
- The 2017 tax act limitations on the deductibility of property taxes and cap on the size of mortgage debt on which interest can be deducted appear to be affecting higher-end homes.
Number of Home Sales
Total home sales have leveled off nationally and been slowly declining in Portland since early 2016. One reason is that new home construction lags demand. Another is that people are staying in their homes longer for reasons ranging from low fixed mortgage rates on their current homes, a lack of suitable replacement housing in the case of many down-sizers, and a lack of affordable choices for younger buyers.
Portland median home prices have fallen two of the past three months, and we expect that October will see another decline. We also think that this is both seasonal and part of a long overdue correction, and that median sale prices will level off soon.
Home sale prices continue to follow the sawtooth pattern of recent years, rising sharply in the first half of the year then falling back in the second half of the year. Portland sale prices rose 10.0% from December 2017 to June 2018 (precisely our prediction last December, possibly by coincidence), and have fallen 6.1% in the three months since then (thus far far exceeding our prediction of 2.0%). This does not mean that your home is worth 6.1% less than three months ago. It does mean that the mix of homes available combined with a higher percentage of motivated sellers results in homes selling for less in the fall than in the spring, with notable exceptions in various neighborhoods and at various price points. Promotional plug: This is where consulting us to dig into the particular circumstances around comparable home sales really pays off.
Months Supply of Inventory
After spending the past few years hovering between one and two months, the supply of inventory jumped in September to 3.1 months. Based on past expectations that should be inflationary, as the conventional wisdom has been that six months inventory of homes for sale represents a balanced market, and fewer months supply favors sellers.
What if that is no longer true? We think that technology, specifically buyers’ ability to get good information faster on mobile devices, has sped up the process. For instance, a few years ago buyers started screening open houses on Zillow’s smartphone app, so that they visited homes closely fitting their needs earlier in their house hunt. What if a balanced market is now four months? What would that look like?
If a balanced market is four months, we are now entering that range. That meets with peoples’ experience in the current market. It’s not a buyers’ market, but it’s not an extreme sellers’ market, either.
Today’s 30 year mortgage fixed rate is slightly over five percent. That is low. The average rate since 1971 is 8.10%, and after removing the high interest rate years of the eighties’ recession the average rate is 6.26%. We think rates will continue to rise, and that the chance of them exceeding six percent in the near future is very high.
The drop in the median home price since June more than offset the rise in interest rates so that, by the official metrics, homes became slightly more affordable in September compared to June.
Short Term Forecast
Inventory is up and pending sales are down, so expect October to show another drop in the Portland area median sale price. It’s still a long ways from a buyers’ market, though, as inventory levels continue to favor sellers.
Home buyers should buy now. Rising interest rates will affect you more than potential price drops. To paraphrase the old proverb, the best time to buy a home was 2012; the second best time is now.
Home sellers should wait until early spring to put their homes on the market, or at least until the chaos of the current market settles a bit. The risk here, of course, is that rising interest rates or other economic conditions sour the market for you then. We don’t think that is a significant risk in the next six to nine months.
Your home and needs are unique. Please call or email us any time to discuss how the market affects you.
Phil Wax, Bob Broad, Emily Morris, Kyung Kim, Karen Gibson