California Home Sales Dive, Prices Hit Wall, Millennials Blamed

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This must be part of the explanation why home sales in the expensive parts of California, which is where most people live, are collapsing: according to a Harris Poll on behalf of electronic broker Redfin, 92% of millennials who don’t already own a home do not plan on buying one in the future. Ever.

These people, now between 25 and 34, are in their peak home-buying age. They’re the much sought-after first-time buyers. They’re the foundation of the market. But not this generation. Homeownership rate among them, according to the Commerce Department, already plunged from 41% in 2008 to 36% currently; as opposed to 65% for all Americans [Here’s the Chart that Shows Why the Housing Market Is Sick].

These folks are not “pent-up demand” accumulating on the sidelines, as the wishful thinkers have proclaimed.

“Millennials who flock straight from college to San Francisco and other expensive cities are making a choice to spend their income on quadruple-digit rents and eight-dollar gourmet hot dogs from trendy food trucks,” explained Redfin San Francisco agent Mark Colwell. “This means they’re not saving for a down payment, further removing them from the housing market.”

So Redfin checked Census data to find the 20 Zip codes in the country with the highest population of educated millennials. Median household income in these neighborhoods is 50% higher than in all ZIP codes. Median home prices are on average $255,000 higher as well. And the average down payment for homes in these neighborhoods is $80,000.

A down payment that is out of reach for most millennials. A new report about consumer finances by the Federal Reserve shows that the median family headed by a millennial earned $35,509 in 2013 dollars, 6% less than their counterparts in the Fed’s first survey of this type in 1989. Actually, median households headed by someone under 55 also made less than their predecessors in 1989 (this is what inflation does to real wages; FOMC members who’re clamoring for more, or any, inflation should read these reports from other corners of the Fed).

Many millennials, burdened like no other generation before them with student loans and making less money than their predecessors, are coming to grips with something important: they’re locked out of the American dream of homeownership for years to come. These are the hoped-for first-time buyers, and they’re not buying.

For a while, they were replaced by buy-to-rent investors. Armed with billions from Wall Street, they plowed into the housing market starting in 2011. Their relentless buying has ratcheted up home prices in double-digit increments to the point where these high prices make that business model too difficult. And these investors have been pulling back as well.

The results are not pretty.

In the nine-county Bay Area, homes sales in August fell 12% from a year ago. In San Francisco, they plunged 20%. CoreLogic DataQuick cited “affordability issues.”

And yet, the median price in the Bay Area rose 12% from a year ago. In Alameda County, the median price jumped 19%. In San Francisco, the price rose 14% from a year ago to $940,000.

But wait…. That $940,000 in San Francisco, that’s down from $991,000 in July, and down 6% from the cool all-time high of $1,000,000 in June, and down even from February’s $945,000. Something is going the wrong way.

In Southern California, in the six-county Southland, sales dropped 7.7% in August from July, though they normally rise on average 3.7%. Year over year, sales plunged 19%, the worst August in four years. In Los Angeles, sales plummeted 19%, in San Bernardino 21%, in Riverside 23%.

“Affordability challenges” and investor purchases that had been reduced to “the lowest level in several years” is how CoreLogic DataQuick explained the phenomenon.

But the median price in the Southland rose 9% year over year, jumping 13% in Riverside and 14% in San Bernardino – the two counties where sales had gotten pummeled the most. Go figure.

“Prices are high enough to be a hurdle for a lot of potential buyers, even though mortgage rates have fallen in recent months,” said DataQuick analyst Andrew LePage.

There was a twist: sales of homes over $500,000 inched down only 0.6% from a year ago. But sales of homes below that dropped 16%; and sales of homes below 200,000 plummeted 36%. Turns out, prices at this level have been pushed out of reach for buyers in this category.

Purchases by absentee buyers – mostly investors and some second-home purchasers – dropped to a 23% share, down from the January 2013 peak of 32%, and the lowest since December 2010. Cash purchases plunged to a 24% share, down from the peak of 37% in February 2013, and the lowest since January 2009. Are the Chinese suddenly staying away?

This disconnect between plunging sales and soaring prices is precisely what happened when the prior housing bubble peaked. Sellers are the last to accept the trends as they cling by their fingernails to some notional value of their home and to the tens or hundreds of thousands of dollars in wealth that they thought they already had in their pocket, only to see them evaporate.

They’re finally getting the message, explained Paul Reid, a Redfin agent in Temecula. “A lot of what we’ve seen over the last six or eight weeks is people lowering their prices to get buyers in the doors.”

Orange County, the most expensive market in Southland, is leading the way: about a third of the asking prices have been cut. The dream is over: the price bubble that lasted for two years and that peaked in June with a year-over-year gain of 28% – even as volume was already plunging – has popped.

While a lot of sellers are cutting their asking prices, others do what sellers did when the last bubble began to implode: they pulled their homes off the market for a few months, hoping for better times.

“They feel the price can’t go anywhere but up,” explained Steve Shrager, an agent with Coldwell Banker. Which is like so 2006. “I don’t want to use the word correction,” he said, “but we’re in a bit of an adjustment period right now.”

Everything will eventually sell. It will just take some time, maybe a lot of time. And it will require some price cuts, maybe big price cuts. And maybe, just maybe, if prices fall enough, more millennials have a chance to chase after the American dream.

But for the few people who can play in that rarefied air, there’s a sweet spot: homes above $15 million. Read…. ‘Wealth Effect’ Kicks in: Luxury Homes Are Hot, Rest of Housing Market Gets Hosed

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  17 comments for “California Home Sales Dive, Prices Hit Wall, Millennials Blamed

  1. Vespa P200E
    Sep 13, 2014 at 8:41 am

    Something has to give when housing price goes up by 40% in 3 years. Granted it was “undervalued” in comparison to 2007 in 2011 but we’re where we were in 2007 with some cities above the 2007 level. This kind rise is simply not sustainable.

    I used to live in Irvine the hotbed of So Cal housing bubble due to excellent school district and heard from friends that it is becoming more of Chinatown with lot of cash buyers from mainland China. We used to call Irvine Caucasia even back in the mid 90’s… Rather not too attractive Riverside and San Bernadino county home rising is bad omen considering these counties were filled with foreclosure-ville development 7 years ago.

    I bought a house in Bay Area suburb east of SF and northeast of Sillycon valley in Aug 2011. Timing was good but that was because I relocated with stipulation that I buy a house within 6 months of my start date on a new job as part of the relocation package. Houses used to get scooped up within week in my 7-yr old development earlier this year but there are plenty of standing inventory now. I sense the the pricing has indeed reached another peak. Besides I think those who wanted buy already bought and classic supply & demand comes into play meaning pricing will fall until there is balance of supply & demand.

    History repeats and this time we’re talking about lot of cash buyers vs. no down/neg amortization/liar loans given to anyone with a pulse. I sense it’s not going to end well…

  2. VegasBob
    Sep 13, 2014 at 9:30 am

    Hooray! Maybe I can go shopping again. I’ve been wanting to buy a place in the Palm Springs/Rancho Mirage area for several years.

    Prices in the Coachella Valley hit bottom in 2011-2012 – crap shack 1 BR condos in the lousy parts of town that were around 50K-60K now sport wishing prices of 85K-125K. Mid-range units that were 80-90K two years ago now run around 130K.

    I didn’t buy two years ago because I didn’t like what I looked at. I certainly wouldn’t pay 50-70% more for those crappy units today.

    As for Vegas, condos generally fell 75% from the bubble peak, but then doubled between 2011 and today (i.e., from 25% of bubble peak to 50% of bubble peak). So the typical Vegas condo (excluding the hi-rises near the Strip) is now selling for about half its 2006 bubble peak. But Lake Mead is running dry, and it’s even money as to whether Vegas can survive another 5-6 years of drought. If lack of water forces depopulation, Vegas might wind up looking like one of the empty cities the Chinese built.

  3. Mel
    Sep 13, 2014 at 9:34 am

    I had always thought about buy-to-rent that if they can’t carry the home for themselves, they certainly won’t be able to afford to carry it for you. Optimists and narcissists I guess couldn’t believe that.

    Irregular verbs:
    I have refocussed
    You made a bad call
    He/she is a moron.

    Unless somebody repeated history, and securitized their eventual loss off onto somebody else.

  4. Si
    Sep 13, 2014 at 9:40 am

    The psychology of this is fascinating. I have been following the housing ‘re-boom’ in the US from afar (I live in the UK – we are not much better here) and although peoples’ financial memories are short, I think they are even shorter than we give credit for. Like the best military strategy we are herded into the ‘killing field’ once more to be slaughtered.

    Our capacity for delusion has been tested and we have passed with flying colours. The wheels will come off this as they will come off the tech IPO’s that make no money but are somehow worth a kazillion bucks.

    We are living in a game called ‘Wealth Transfer’.

    Yeah baby!

    Si

  5. Allan
    Sep 13, 2014 at 11:10 am

    “California Home Sales Crash” is a bit sensational don’t you think, Wolf? Be careful, your headlines are starting to resemble click-bait.

    • Sep 13, 2014 at 11:30 am

      Maybe….

      But when sales drop around 20% or more year over year in some of the key markets, “sales crash” seems to be about right. Those August sales numbers were terrible! Even a 10% year-over-year decline in sales is bad. These are not seasonal fluctuations but a comparison between August this year and August last year. Sure, I could have used “plunge” or “plummet,” but they all have about the same meaning.

      That said, I changed the title :-)

  6. Archy Don
    Sep 13, 2014 at 12:59 pm

    Julia and Pajama Boy (of DNC ad fame) can’t afford to buy a house and start a family today. Both are working part-time jobs. Julia’s BS degree is Psych qualifies her to wait tables and PJ Boy’s Masters in 18th Century European Art has him working part-time at a local art gallery. Their combined college debt is $72K. But they figure the feds will forgive those loans eventually.

    Meanwhile, wow, it’s California! Weather’s great and they can get out of their mini-efficiency apartment during the weekend and go to Starbucks to talk politics with their Obama-supporting friends.

    Life is good…or at least tolerable.

    • Petunia
      Sep 13, 2014 at 1:24 pm

      I think you are right about the couple you describe. However, they also saw their parents downsized, lose their home and sell everything of value they owned. Mom and Dad have advised them not to own anything in America and stay mobile.

  7. Petunia
    Sep 13, 2014 at 1:19 pm

    It could be that all the sanctions against Russian money are starting to kick in or kick us in the butt. LA/CA is a huge magnet for Russian real estate investors. If this is the case then watch out Miami.

  8. economicminor
    Sep 13, 2014 at 7:14 pm

    Interest rates are at a historic low which has allowed this *recovery* in housing to happen. There is a mathematical relationship between interest rates, income and house prices. Incomes for the majority haven’t gone up. In many cases incomes have actually gone down. So tell me, what happens when rates start climbing?

    But then I don’t really know what happens to interest rates during a deflationary depression.

  9. Sep 13, 2014 at 7:55 pm

    The housing market hit a wall in August across the country: http://investmentresearchdynamics.com/the-entire-housing-market-hit-a-wall-in-august/

    I live in Denver, which has been one of the stronger markets, and I can’t believe all the homes on the market, especially in the upper-middle/upper price range areas.

    The homebuilder stocks are one of the ways to express as short/bearish view of the housing market.

  10. mick
    Sep 13, 2014 at 10:18 pm

    Trillions of dollars printed,a massive cash buying frenzy by institutions, and the lowest rates in history only managed to prop up the market for 3 years. And even that has been localized.

    The jig is up, the Chinese are leaving with their money, and America is teetering on the brink, all just before the big one hits. This time there will be no “recovery.”

    • LG
      Sep 13, 2014 at 10:51 pm

      Mick you took those words right out of my mouth! I sold right before the 07 crash bought in 09 and I sold that last May with a 30% net profit . I do have another home that I am keeping for my daughter that I bought in 2000. I am no speculator I just buy low and sell high if someone is willing to pay for it.
      As for the future I believe we are looking at a 40% drop in real estate.
      Hedge accordingly. Things are about to get ugly.

  11. VegasBob
    Sep 13, 2014 at 11:47 pm

    One of my delusional wealthy friends thinks the economy is “firing on all cylinders” and that stock prices will shortly take off for the moon.

    I didn’t have the heart to tell him that I think the real estate market is fizzling out like a burned-out Fourth of July sparkler and that the reason oil prices are falling is because the world economy is rapidly slowing down…

    He’ll figure it out soon enough when his portfolio takes a huge hit.

    • economicminor
      Sep 16, 2014 at 12:12 pm

      The stock market is disconnected to the real economy which means disconnected to residential real estate prices. China just did a big QE and some of that money will keep the US stock markets afloat a while longer. We’ll see what Yellen says this week too. She is a supporter of Orwellian theology and many of the market participants are also.

  12. JM Hatch
    Sep 16, 2014 at 6:36 am

    China has cracked down hard on corrupt officials buying off-shore property. The days of cash purchases of housing in the high end areas favored by them are over for now. Depressing prices more are those in the 500,000 to $2m range were purchased by less sophisticated grafters in their child’s name, when China got Uncle Sam/IRS on board in checking for this overly simple dodge.

  13. Hal
    Sep 16, 2014 at 1:57 pm

    I have a place in a community that’s 20 years old out in Scottsdale. Prices per sq foot were increasing now this year are down ~10% from peak early this year.

    Not that many for sale right now as its pretty stable as an active retirement community. Yet prices soft up til now–will see what happens as we enter peak season and if prices decline and inventories rise, its a pretty good hint at whats happening.

    The good but phony stock market has increased asset base of those with portfolios–but I also know most do not have huge portfolios and most lost appetite for heavy stock investing long ago. Some made a ton and cashed out using it to buy a second home–but that’s not a torrid pace. Tepid at best.

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