As you probably already know, Bay Area home sales started to sputter last summer amid affordability constraints, stock market volatility, and rising mortgage rates. But following up on the lowest January for Bay Area Homes Sales in 11 Years, February signaled a big rebound in sales activity for the Inner Bay Area. In addition to being a 26% Month-to-Month increase in sales, it was a 2.5% Year over Year increase, the 1st Year over Year increase in sales volume since last March.
This could end up being just be a “glitch on the radar”, but at the very least it’s an indication of market stabilization amidst a softening, yet strong Real Estate market. Inner Bay Area residential inventory is still up 59% Year-over-Year at this point, but a month ago it was up 100% Year-over-Year. The recent falling back of mortgage rates might be a serving as a band-aid for a cooling Bay Area Real Estate market and although rates have climbed back up a bit this month, there’s no reason to think rates are going to skyrocket over the next year or 2.
Sales volume has been noticeably sluggish since the mortgage rate rise which began in January/2018 reduced the buyer purchasing power of Bay Area residents. At the same time, personal incomes haven’t risen enough to keep up with the rise in home prices, causing home price affordability to bottom out. For example, personal incomes rose 6% in 2017 in Santa Clara County. While this was a couple of percent higher than the statewide average, it was still well below the ~15% year-over-year increase in Santa Clara County home prices that year.
And the Bay Area income increases are not all that they seem. The high cost of housing in the Bay Area has pushed out many low- and moderate-income residents. So, while average incomes have increased in the region, the rapid pace of increase is at least partly due to many residents being forced to move to less costly areas and being replaced by middle-high income tech workers. Thus, despite these relatively large income boosts, incomes actually need to increase much faster to meet the area’s rate of home price rise if home prices and rents are to be maintained. Home prices will need to fall in line with home buyer incomes, especially since rising mortgage rates have reduced buyer purchasing power since early 2018. After 8 straight years of rising, home prices have began to trail off since this past summer. Many expect home prices to continue to be flat at best in 2019 as we head into the next economic recession, forecasted to arrive in 2020.
The median price paid for all homes sold in the San Francisco Bay Area in January was $730,000, down 7% from $785,000 in December and up just 2.2% from $714,500 in January 2018. The 2.2% year-over-year gain in the Bay Area’s median sale price in January was the lowest in 2 years, dropping sharply from the median’s 13.8% annual increase in January 2018. On a year-over-year basis, the median sale price has risen for 82 consecutive months (since April/2012). But those gains have been shrinking since last Spring and have been in just the single digits each month since this past September 2018. June 2018 saw the highest ever median sale price at $875,000.
The smaller annual gains in home price median in recent months reflect much slower home sales amid year-over-year inventory gains. As I have been saying throughout this “new/changing market” since July, changes in home prices moving forward will hinge largely on the direction of mortgage rates, inventory, the Bay Area job market, and incomes. January’s year-over-year declines in the median sale price in Alameda, Napa and San Mateo counties likely reflect, at least in part, a change in market mix, where a lower share of sales occurred in higher-cost areas. Home sales of $500,000 or more accounted for 73.7% of all sales in January 2019, down from 77.1% in December 2018 and up from 72.1% in January 2018
Moving forward, one other trend to consider is the rising use of ARM (Adjustable Rate Mortgage) loans. ARM loan usage dropped out of favor in the aftermath of the housing crisis of the late 2000’s. ARM loans, with their changing interest rates, were among multiple factors blamed for the wave of homeowners losing their properties to foreclosure when they couldn’t make their payments. Now ARMs are making a comeback.
In December 2018, 9.2 % of all new mortgage loans had an adjustable rate, up from 8.9% in November and a far above the 5.6 % of mortgages that were ARMs in December 2017, according to the Origination Insight Report from Ellie Mae, a software company that processes 35% of all mortgages in the United States. The number of ARMs in December 2018 was the highest share recorded since Ellie Mae began tracking loans in 2011. While the use of ARM loans is a way for Bay Area home buyers to stretch affordability, over-usage of these loans could lead to a wave of short sales and foreclosures some time in the 2020’s.
Overall, the Bay Area Real Estate market continues to trend flat due to rising inventory and seemingly maxed out price affordability. While mortgage rates moved higher last week for the 1st time in a month, the February drop in rates may have given the market a needed boost. February’s rebound in market activity could be a sign of at least a "stronger" 2019 to come than expected.
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