San Diego Housing Market News and Analysis
May-June 2013 Data Rodeo -- Price Explosion
Submitted by Rich Toscano on July 14, 2013 - 4:56pm
This chart of the Case-Shiller index (with my estimate based on median price per square foot over the last two months) shows just how different the character of this year has been:
There was a plodding upwards of prices last year, for sure, but so far this year, prices haven't so much been plodding as exploding.
For a more granular look, here are the month to month changes in the median price per square foot:
The condo series is a bit of a wild animal so I usually ignore it; the underlying trend it better expressed by the more staid detached home series (blue line). But even that has been on fire: the detached home median price per square foot is up 23% from a year ago, and up 16% in the first six months of 2013 alone.
This price surge has been due, as I've written about incessantly, to ridiculously low inventory and even ridiculously lower mortgage rates. One of those conditions persists; the other has changed somewhat drastically. More on that below; first, here are the above two charts starting at the peak of the bubble, followed by the same thing but for the regular median price (vs. price per square foot):
Onto some supply and demand stuff... sales continued their pattern of being similar to, but typically slightly higher than, last year:
Inventory seems to have arrested its plunge, finally, and ever so slightly turned up:
The increase is more pronounced if we look at active listings only, which should be some comfort to potential buyers (as active inventory is more "real" than contingent, which is in kind of a limbo state):
Here's a linear look at total inventory, putting the small bounce in perspective:
This has slightly improved months of inventory, but it remains extremely low on an absolute basis:
And of course, we look at months of inventory because it is a good predictor of near-term price pressure, as the following graph shows. The dramatic nature of the recent monthly price increases can be seen on this graph too. All things equal, it predicts more strong upward price pressure to come.
But all things are not equal... as everyone has heard by now, there has been a dramatic increase in interest rates over the past couple of months:
This is big, in my view. Low rates have been a big driver of housing demand, for both investors (who are seeking out yield wherever they can find it) and residents (who are compelled to buy due to the favorable rent-vs-buy comparison enabled by super low rates). This rate increase will almost certainly undercut both sources of demand.
To what extent, I don't know, but this illustration helps demonstrate the impact: eyeballing it, the average mortgage rate prior to the recent surge was in the range of 3.5%. It's now about 4.5%. A buyer who is trying to hit a certain dollar-amount budget for a monthly payment just saw the size of the loan they can afford drop by over 11% in about two months. That has got to have an impact.
It could be slow to feed through to declining demand... in fact, there may have been an early opposite effect in which buyers feel like they should rush to buy before rates go up further (this is what drove the final peak-volume mania phase of the housing bubble in spring 2004). But it seems to me that this must cool off the housing market as buyers find they can afford less, and investors see that yields from other investments are less absurdly low. This is to say nothing of the impact that a tightening of credit conditions might have on our over-levered economy in general.
So the recent move in rates could be a pretty big deal. We will see, I suppose. In the meantime, the housing market continues to be supported by the level of inventory, which has finally started to turn up a bit, but remains extremely low overall.
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|* Rich Toscano is a registered representative of and offers securities and investment advisory services through Girard Securities, Inc., a registered Broker/Dealer, Registered Investment Advisor, and member FINRA/SIPC. Pacific Capital Associates is not a subsidiary or affiliate of Girard Securities. The views and opinions expressed on this site are not those of Pacific Capital Associates or Girard Securities, Inc. The information on this site should not be construed as investment advice.|