What Does the Recent Rash of Price Reductions Mean to the Real Estate Market?
What Does the Recent Rash of Price Reductions Mean to the Real Estate Market?
August 24th, 2018
Last week, in a new report from Zillow, it was revealed that there has been a rash of price reductions across the country. According to the report:
- There are more price cuts now than a year ago in over two-thirds of the nation’s largest metros
- About 14% of all listings had a price cut in June
- Since the beginning of the year, the share of listings with a price cut increased 1.2%
- This is the greatest January-to-June increase ever reported, and more than double the January-to-June increase last year
Senior Economist Aaron Terrazas further explained:
“A rising share of on-market listings are seeing price cuts, though these price cuts are concentrated at the most expensive price-points and primarily in markets that have seen outsized price gains in recent years.”
What this DOESN’T MEAN for the real estate market…
This doesn’t mean home values have depreciated or are about to depreciate.
A seller may put a home worth $400,000 on the market for $425,000 hoping a bidding war will occur and an overanxious buyer will pay more than its actual value. That has happened often over the last few years. If the seller gets no offers and reduces the price to $400,000, it doesn’t mean the home dropped in value. It is still worth $400,000.
Home prices will continue to appreciate over the next 12 months. In this same report, Terrazas remarks:
“It’s far too soon to call this a buyer’s market, home values are still expected to appreciate at double their historic rate over the next 12 months, but the frenetic pace of the housing market over the past few years is starting to return toward a more normal trend.”
What this DOES MEAN for the real estate market…
This does mean that sellers should be more conservative when it comes to the price at which they list their homes – especially sellers in the upper end of each market.
Sellers have been listing their homes at inflated prices hoping a super-hot market will deliver a buyer willing to pay virtually any price to ensure they don’t lose the house. That strategy has worked somewhat successfully over the last two years. However, the time that strategy would have worked may have passed.
Again, quoting Aaron Terrazas in the report:
“The housing market has tilted sharply in favor of sellers over the past two years, but there are very early preliminary signs that the winds may be starting to shift ever-so-slightly.”
How the San Diego market compares with the national report
National reports are great but as we all know, the real estate market is very local. Below are some charts specific to the San Diego real estate market. These charts are:
- INTERACTIVE – hover over the lines and you can see the live data for each month
- Represent each MONTH of activity – meaning this represents what is going on RIGHT NOW
- Includes single family, attached and detached homes
San Diego Median Sales Price
The median sales prices continues to trend upwards, however, there are dips as you go month-to-month due to the seasonality of the market.
- 2015 – The median sales prices dropped from June to October 2015
- 2016 – The median sales price largely held flat from June to September 2016
- 2017 – The median sales price had a net drop from June to October 2017
- 2018 – Holding flat from June to July 2018
For 2018 – Overall, it is not uncommon to see a drop in median sales price from June to October 2018. This is due to lower inventory which results in fewer data points and the ones on the market are more motivated to sell during this time.
Note – Rotate your screen if you are not seeing the whole chart. I have an iPhone 6s and had to rotate my screen to see 2018 data. You can also CLICK on the data points to see the dates and values for each month.
San Diego Months of Inventory
A balanced real estate market is about 6 months of inventory.
The below graph represents inventory based on PENDING sales, not CLOSED sales. By using PENDING sales, you can get a more accurate picture of how fast the buyers are absorbing the inventory RIGHT NOW. If you use closed sales, data, you would be looking at the rate of properties that closed based on June data.
As you can see, rising inventory through July is normal and we are currently at 2.6 months. Even if inventory continues to rise after July 2018, it will still be considered a seller’s market until we reach the balance point of 6 months of inventory. After 7 months of inventory, it becomes a buyer’s market. There is still a long way to go to cross that bridge.
Sales Price to Original List Price Ratio
As stated above, sellers become overzealous in their pricing strategy. Many homeowners think that pricing their homes a little OVER market value will leave them with room for negotiation when, in actuality, it just dramatically lessens the demand for their houses. Once the market shifts, they have to start reducing the price.
As you can see, each year, there is a reduction in sales price to original list price as a result of sellers accepting less for their homes and/or reducing their price. However, overall, we’re at a 98.6% ratio which is still strongly in favor of the sellers.
Bottom Line
Prices are not depreciating. Instead, what we are seeing is a seasonal market consistent with historic norms. Even if the market does swing more than it has over the past few years, we’re still a long way from a depreciating market and falling prices. If you have any questions about the market or the value of your home, feel free to contact me.
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