2015 Q2 – Where Have All the Homes Gone?
Q2 2015 Summary:
Sales Volume Up: Up 44% from Q1. Up 9% from Q2 2014
Inventory at Record Lows: Up 2% from Q1. Down 19% from Q2 2014
Loan Rates Up: The Benchmark 30-year fixed rate went up about 0.5% to end around 4.2%
Home Values Up: Median sales prices up ~6% from Q1. Up ~5.5% from Q2 2014.
Govt. Role: Fed Funds rate low/constant. Long-term effects of QE3 still in play.
Foreclosure/Short-Sale Activity Down: New filings & inventories down
2015 Q1 – The Details
Q1 ended with most buyers (and Realtors) wondering why some sellers were sticking hard to their seemingly too high prices. But with no new inventory coming on market and rates on the rise, buyers jumped off the fence and started buying in droves this quarter, keeping up every step of the way with new listings on market. In the past few years, we have had big pushes in the early spring and this year is no different, but the 3 months of Q2 2015 had higher sales volume than any in the last 2 years. If you looked at the Stats Link, you saw that sales volume skyrocketed the first month of Q2 and stayed nearly level all quarter. And, with pending sales even higher in June, that tells us that Q3 is likely to continue with high sales volume despite the usual summer slowdown that is experienced at this juncture. Thus, although Q2 sales volume is following typical seasonal trends, we are surpassing typical seasonal increases as Sales Volume hits recent record highs.
It is common for Q1 to start off with a low inventory after the previous year’s holiday season and this year was no exception. The typical seasonal norm is that inventory starts climbing slowly throughout the year until it peaks in the early fall, however, that was not the case this year. Inventory has stayed in virtually the same spot all year, coming up only a fraction of what is typical at this time, down almost 20% from last year at the same time. With sales/demand high and inventory/supply low, you don’t need an advanced economics degree to know that prices are on the rise. The “Months Supply of Inventory” is the statistical representation of the supply demand curve and it is at it’s lowest point in years.
Rates started Q2 at recent lows around 3.75 after staying fairly level all of Q1. But out of the gates, rates pushed their way upwards most of the quarter until peaking around 4.25% near the end of Q2. Some economists cite uncertainty in Europe as one of the causes of the rate hike, but now that the Greece crisis has a resolution, I’m hoping that will have a downward effect on rates in the short-term. However, most economists expect rates to rise in the mid-term, so it is possible we’ve seen the end of sub 4% loan rates for now. The Fed is expected to continue to hold their recently purchased bonds & keep the Fed Fund rates low for the time being. (note: see Govt role below for more detail).
Their are multiple factors that I read in economic reports signaling an inevitable rise in rates, but when will this happen? There is the threat of inflation, rise in Fed Fund rates, and the govt selling off some of their bond assets, all of which will push home loan rates up. When this happens, be prepared for rates to go back to 5-6%. It could happen in 3 months or 2 years – your guess is probably as good as mine, but if you don’t think rates will go back up soon, talk to your parents and view the historical rates chart below…we are still hovering near all-time lows right now at about 4.20%.
Home loan rate charts: click the images to enlarge
Long Term Rate Chart: 1992 – 2015 Short Term Rate Chart: 2015 weekly
The median & average sale prices have gone up about 6% in the last year. That is a fairly level and healthy growth rate. For Q2 specifically prices took a big jump throughout the quarter and most of our yearly equity gain since last year’s high in May was realized in the last 3-4 months. As noted above, the supply/demand curve is heavily skewed right now with high sales volume and extremely low inventory. We had a small peak in pricing last spring in May, then prices dipped, then came back to that May high point in Q1 before taking off in Q2. We are very near pricing from the peak of the market values from late 2005. What does the future hold? My predictions are below…
The Fed continues to keep the Federal Funds rate at .25%, which continues to spur economic growth, but the Fed expects to raise the Funds Rate by end of 2015. The Federal Government discontinued their stimulus bond buying program (aka QE3) last year. While the government has no plans to buy new bonds, it must be noted that they have no plans to sell the current inventory. Here’s a blurb from a Businessweek article that I think summarizes this well:
“Even after the purchases end, (quantitative easing’s) effects will persist. How could that be? The Fed will still own all those bonds it bought, and according to the agency itself, it’s the level of its holdings that affects the bond market, not the rate of addition to those holdings. Having reduced the supply of bonds available on the market, the Fed has raised their price. Yields (i.e. market interest rates) go down when prices go up. So the effect of quantitative easing is to lower interest rates for things Americans actually care about, such as 30-year fixed-rate mortgages.”
Thus, until the fed starts selling these bonds or raise the Fed Funds Rate, there will continue to be downward pressure on home loan rates due to government intervention.
I will be deleting this item from my market updates at the end of this year. With prices approaching the peaks seen in 2005, foreclosure & short-sale inventories are down to low levels and aren’t a notable market factor anymore. You can view the full stats at my favorite foreclosure site:
While it’s not that hard to predict the short-term if you have the correct statistics at hand, mid & long-term economic trends are quite elusive and usually prove me wrong. As a real estate broker, I am entrenched on the front lines of the current local market, but don’t have the knowledge or time to follow macro-economics. As such, I don’t make predictions past the short-term and do not advise you to make financial decisions based on my predictions. That said….
Currently, San Diego inventory remains extremely low and is not following typical seasonal trends this year as it has for about 3 years now. Rates moved a bit upward, but that has done nothing to stifle demand which is strong and continues to keep up with any new supply of listings. We also have a record amount of pending sales currently, so there is only one thing to predict in Q3. We are right in the middle of a pricing increase, which I expect to continue through the end of Q3.
It is my guess that rates will remain relatively level the next 3 months, but I do expect rates to increase again relatively soon thereafter. My best guess is that we will see a moderate gain in home values over the next 3 months as we’ve seen a huge increase already in the last 4 months. How much? I expect moderate increases in the near-term, so a 1-3% increase in Q3 sounds very realistic to me. Depending on how much of a spike we see in Q3, it is quite possible that the end of Q3 & Q4 will have a slight pullback. That of course depends on a change in the supply/demand curve right now.
So where have all the homes gone you ask? My answer to this question is that builders stopped building at the end of the last peak almost 10 years ago. The amount of new inventory of homes being built is very small, is incredibly expensive (average new home is $900k) and has been outpaced by an increase of population in San Diego. I remember reading about this 5-6 years ago when we were still in a very depressed market. I thought that this day would be far off, but it went fast. This economist felt so assured that our market would soon be roaring back due to the lack of overall housing stock to support the local population growth and he was right…. It’s quite possible that we will continue to have a “low inventory” market for years to come.
Thank you for reading – I appreciate your time as well as your comments. Here are a couple additional resources if you are thinking about buying, selling or just curious about your home’s value:
And thank you for your referrals – they are the foundation of my business at over 90% the last 3 years.
Broker / Owner
73 Degrees Realty
ps. feel free to check out my San Diego Green Homes site if you have a passion for living green/sustainably and contact me (cell: 858-761-1707) for a free consult regarding how to green your home.