The housing market is clearly slowing…
In research released today; according to Zillow:
- In April, the median home value fell 0.1% from March, the first time the market has posted a monthly decline in seven years.
- A more stable metric—year-over-year declines—shows U.S. home values up just 6.1% from last April. That’s below annual growth of 7.5% in April 2018.
- 16 of the largest 50 metros posted home value declines in April and have had flat or falling home values since January, raising our confidence that they indeed have reached a peak.
While one month does not make a trend, it is important to continue analyzing the ongoing data stream. We have discussed in prior analyses how the residential real estate market is more managed than in the past, specifically with respect to the mortgage market and with tighter zoning and more restrictive building codes. This management distorts the supply/demand dynamic, which results in higher equilibrium prices.
The latest changes to the IRC have placed higher priced homes at a comparative disadvantage to the lower priced segments and these results are clearly established in the chart above. This is one of the reasons why I prefer acquiring investment properties in the bottom half of the market. Another reason why I prefer the lower end of the market is because home builders can no longer profitably build in this segment. They stick to the higher priced areas and this is another reason why high-end value growth is lagging.
It’s expensive to sell an existing house and then buy another home. For example, if the sold house and the newly purchased home are roughly the same value, the out and in costs can be as high as 10%.
For example; broker commission, transfer & recordation taxes, title search and title insurance, closing charges and fees, and mortgage-related costs can be as high as $50,000 when a homeowner sells a $500,000 house and then buys another $500,000 property. This is why I generally prefer to hold on to properties and leverage them. Selling and buying homes are very expensive and only Realtors, title companies, mortgage bankers, and tax jurisdictions profit from home sales.
Bottom line; government market management from stem to stern and the exorbitant transactions costs are the primary reasons for the continual drop in home sales. Let’s face it; people just do not have that money to spend.
This is why I have been saying that Realtors should have cause for worry; people are tired of paying all that money and many Realtors are not that talented. I know first hand about the industry as I was a Realtor for several years and an investor since 2001, and have been observing the growing movement to circumvent the real estate agent. While the NAR publicly says it is not worried about Zillow or Redfin, privately it must be very alarmed.
Last week, Redfin announced a pilot program in Boston that allows home buyers to ditch the buyer’s agent and make a direct offer to sellers of Redfin-listed properties. Now the company wants to open up these direct home sales to buyers around the country. Next up will be Virginia, with more states to come this year.
…But a slowing market is helping landlords and long-term investors
The U.S. housing slowdown is turning out to be a gift to apartment landlords. After all, those people who aren’t buying still need somewhere to live.
Data from Zillow released Thursday shows that home-price appreciation continued to slow in April from a year earlier, driven in part by softening West Coast metros like San Jose and Seattle. The company also reported the first nationwide monthly price dip in more than seven years — albeit just 0.1%. At the same time, rent growth accelerated, climbing by 2.6% on an annual basis, after a lull in 2018.
Slowdown in U.S. Housing Market Is Helping Landlords Raise Rents – Bloomberg, May 16th
Rents and home values tend to move together over the long-term, said Skylar Olsen, Zillow’s director of economic research. “But, in this case, what we’re seeing is a little different.”
More broadly, the challenge for the U.S. housing market is scarcity. As millennials — one of the largest U.S. generations — reach prime homebuying age, they’re finding that the supply of entry-level houses hasn’t nearly kept pace with their numbers. That could force them to rent for longer as they save up to buy the homes that are available, Olsen said.
As an investor and landlord, I see brisk demand for my rental properties. My last listing (which I placed on Zillow) in suburban Maryland generated about 80 inquiries over a seven-day period. I had it rented in less than 10 days and Zillow’s leads eventually produce a better tenant candidate than what any Realtor can provide. Plus, Zillow is free, so I pay no commission and get a better tenant. I have observed that my rents rise slightly higher than the general rate of inflation. This seems to confirm what Zillow is concluding.