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Bottom line: There is a big, air-pocket under house prices that will pull everything lower this spring, as the dominant cohort of end-user, shelter-buyers in search of “affordable” houses meets a tight, sticky, price-sensitive “affordable” market, looks upward in price-band, and finds an uncertain, loose, and far less-price-sensitive, less-affordable market willing to negotiate.
In other words, there is a lot of supply sitting above what most end-user, shelter-buyers can afford relative to what they can afford. As such, some sellers of less-affordable houses will reach down to hit the bit. Those incremental sales “comps” will reprice the entire market. This is the exact opposite of how it worked on the way up over the past four years.
IMPORTANT NOTE ON HOUSE SHOPPING: I am not licensed to give consumers help or advise. But, if I were shopping for a house this year, I would:
- figure out what the typical, end-user, shelter-buyer can afford in the area I am looking;
- find where the typical buyer’s affordability range is vs mine ;
- analyze the quantity of listings sitting above my target price vs below;
- If I noticed more supply sitting above the market, where there will be less demand, I would ask my Realtor to include those houses in my search and make offers for higher priced houses at only what I could afford to pay. There could be a lot of takers out there this year;
- Remember, in “mismatched markets” — where the majority of supply is sitting at prices higher than the majority of buyers can pay — there is no such thing as an “offensive” offer. What’s offense is tell me, I can’t offer what I want for a house.
Everybody constantly says “supply” is so low. That’s true, but over-broad and must be qualified: Rather, there is a low supply of houses that end-user, shelter-buyers can truly “afford”. There are plenty of houses for sale they can’t afford. Further, there is no shortage of houses in the US “in which to live”.
Unwinding the Past 4-Years Could be Swift
Most “Unaffordable” Housing in Years
Below is a great Trulia article supporting my ideas on how individual, investors, and speculator sellers pumping remodels, rehabs, full redo’s, flips, in-fill’s and new-builds have suddenly “repriced” the nation’s housing stock much higher than the typical end-user, shelter-buyer can afford.
For example, if I buy a house for $300k, put $50k of labor and material into it, and resell for $400k, this “comp” impacts all similar houses. But, this house didn’t rise 33% in “value”. It’s simply a different house than before with $50k in materials and labor under the hood and greater intrinsic value.
This divergence between list prices and end-user, shelter-buyer “affordability” widens as you move up price band and is particularly volatile at the middle-to-high end. In fact, I have not seen the high-mid to higher end market so soft since 2007 with 10% to 20% list price reductions in all states, common.
Bottom line: Because the incremental buyer sets the price of all houses, the speculative activity of the past several years – in more ways than not, very similar to 2002 to 2007 — has led to the most unaffordable housing in a generation; volatile and inaccurate house price indices; and an inevitable gap lower in list/sales prices this spring and summer when less price-sensitive sellers meet job, income, and mortgage constricted end-user, shelter-buyers.
Trulia Findings are Interesting:
• Lack of starter and trade-up homes is indicating unbalanced markets. We found a 5.7 and 5.3 percentage-point shortfall of listings relative to search interest in the starter and trade-up price categories and an 11 percentage-point surplus of listings relative to search interest in the premium price category, averaging out to 7.4 percentage points. This is what we call our “market mismatch score.”
• Searchers and sellers are drifting apart when it comes to price. This compares with a market mismatch score of 6 and 5.6 during the 4th quarters of 2014 and 2015, respectively.
• Starter and trade-up homes are most sought after. 26.9% of all searches were for starter homes while only 21.2% of listings were at that price level.
• The gap between searches and listings is similar in the trade-up category with 30% of all searches chasing only 24.3% of listings.
• Premium buyers have it easiest. This leaves potential buyers in the premium category with the best chances of experiencing a less competitive home buying process with only 43.5% of searches viewing 54.5% of all listings.
Mismatched Markets: America Is Looking For Starter Homes in a Premium Home Market