In July, I Stuck My Neck Out to See a Housing Market Turning Point in San Francisco Bay Area’s Sonoma County: Here’s an Update on My Neck

Now even the surface of the market has softened, not just the underlying dynamics.

Last summer, I stuck my neck out and said that the housing market in Sonoma County in the San Francisco Bay Area had experienced a turning point in July, based on data and boots-on-the-ground observations by Thomas Stone, a broker in Sonoma County, which showed how the housing market was deteriorating beneath the surface while prices had just hit a record.

So here is an update on my neck sticking out this far, based on data through April 2019. The red in the charts below indicates data since July 2018.

Spoiler alert: the median price has now reacted.

Back in June, 2018, the median price of all homes sold in the county hit $660,000, same as in March 2018, a record. In July 2018, the median price dropped from the high, but given the volatility of median prices, the drop might just have been noise, rather than a reaction to the deteriorating dynamics of the market.

“The median price is the last metric to move, and it has met its inflection point in July,” I said at the time, sticking my neck out as far as possible.

It didn’t take long for the median price to zigzag lower. In April, at $610,000, it was down 6.2% from April last year. This is the spring selling season, off the lows in the winter, and seasonally, prices nearly always rise from those lows, and they did so this April but not enough. The median price in April was where it had first been in October 2017:

On a year-over-year basis, the median price movements turned negative in November. April (-6.2% year-over-year) was the sixth month in a row of year-over-year price declines:

So here are the underlying dynamics.

Supply of homes listed for sale started soaring last July after years of an often proclaimed “inventory shortage.” By August, supply reached 1,216 homes, a number not seen in years. In November, December, and January, supply was up 90% year-over-year. In April, supply rose 33% from April last year to 974, the highest supply for April since the end of Housing Bust 1.

This chart shows the number of homes for sale in the county (green line, right scale), and the percentage change from the same month a year earlier:

Home sales in April fell 6.3% from April a year ago to 370 homes. Lower prices stimulate some sales: In the five months through December last year, sales had dropped between 16% and 26% year-over-year.

To average out the seasonality and clarify the longer trend, the chart below shows not only home sales on a monthly basis but also the 12-month moving average (teal line): In April, the 12-month moving average at 377 was down 14% from the 12-month average in April 2018, and down 12% from the average in April 2017:

Forget the six-month-supply rule.

Many years ago, six months’ supply was considered a balanced market. This was when it took months from listing a house to closing the sale. Now, housing market participants rely on technologies that speed up the process: Online listings that are instantly viewable by everyone (rather than printed listings that took a long time to get to the potential buyer), online research tools, drone videos of the home, automated income verification and credit approvals for lenders, etc.

These technologies impact every part of the market. Homes can enter escrow within 24 hours of being listed for sale. In the prior era, it took at least 30 days to have the first open house. The time of the entire process, from listing to closing the transaction, has been shortened from months to just days or a couple of weeks. And these homes disappear from the market much faster – which lowers the months’ supply number.

So the old rule that six months of supply signifies a balanced market went out the window over a decade ago. Then the rule was that four months’ supply signifies a balanced market. But that rule may already have gone out the window too because in many markets where prices have been edging lower on a year-over-year basis, supply is still below four months, and what should be a seller’s market, has already turned into a buyer’s market, including in Sonoma County.

In Sonoma County, months’ supply of homes for sale – the number of homes for sale divided by the number of homes sold – jumped from 1.8 months in April 2018 to 2.6 months in April 2019. By the classic calculations, this is still a market with a supply shortage; but with today’s technologies, 2.6 months means reasonable supply (prices have started to edge down) though it may still be the wrong supply, with homes being priced too high:

The “Absorption Rate” (the number of closed sales divided by the number of homes for sale) in the chart below shows the percentage of the supply that has been “absorbed” by the market. The spike late 2017 to 94% was in part due to the wildfires in the county. By September 2018, the absorption rate plunged to 30%. In April this year, it was 38%:

This isn’t a collapse of a market, but just some of the hot air easing out of it. All this data is for the county overall. There are big differences by submarkets and price points.

For example, in Santa Rosa, the county seat, where some neighborhoods were destroyed by the fire, “open houses for homes priced below $800,000 are seeing 40 to 50 groups come through in three hours, which is a lot,” said Thomas Stone, the broker. “And I’m seeing a lot of multiple offers for homes that are well priced, more than last year.”

And that’s the key: If a desirable home is priced where the market is, it will sell. If sellers try to obtain aspirational prices, the home will sit.

And one more thing: “Places that are suitable for vacation rentals bring large premiums — too large, in my opinion,” Stone said. Yeah, the new thing; everyone is going to make a killing with vacation rentals.

Condo prices fall year-over-year in New York. In San Francisco, SoCal, & Seattle, year-over-year price gains shrink to nearly nothing. Despite the hype, Boston prices have started to decline. Denver, Dallas & Atlanta eke out records. Read... The Most Splendid Housing Bubbles in America, April Update

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  45 comments for “In July, I Stuck My Neck Out to See a Housing Market Turning Point in San Francisco Bay Area’s Sonoma County: Here’s an Update on My Neck

  1. WES says:

    Wolf, your neck is safe for the time being!

    Yes, housing prices seem to have dipped slightly in the US, Canada, Australia, and New Zealand.

    However the drop in housing prices has been rather small compared to the drop in the number of houses being sold/bought.

    Current housing prices still have no correlation to what young people can afford thus keeping them completely shut out of the housing market.

    If I were a young person with rock in hand, I believe I would want to find a central banker and stone them to death!

    Simply using the same rock to break a central banker’s window just doesn’t bring the same level of satisfaction!

    • WES says:

      Funny! Just after posting my comment, an add popped up asking if I was still looking for a home!

      Clearly big brother is watching me but his AI seems seriously confused!

      Thank God AI can be so stupid at times!

      I love playing games with Google’s seriously demented AI.

      Right now Google is bring industrial slurry pump ads to my attention!

      Before that it was large Marine desiel engines! Man is Google’s AI smart!

      Little garbage in, big garbage out!

      • alex in san jose AKA digital Detroit says:

        Google’s AI is always good for some yucks. It’ll decide I’m more comfortable in Spanish, or that I’m really itching to go to South Korea (been 2X, it was ok). And God forbid I mention Tektronix oscilloscopes or network analyzers, ‘cos those things will be following me around. Did I mention Tektronix oscilloscopes and network analyzers? LOL!

        I’d been looking at Japanese clothing called samue for a while, and so I keep getting ads for those. I actually click on those ‘cos it helps Wolf and the clothing looks nice. Unfortunately, a set costs on the order of $100.

        So, click on the odd ad, to keep the ads odd!

      • Mary says:

        You do wonder. Recently both my NYT and LAT feeds have been featuring a set of ads with truly disgusting closeups of gunk pulled out of blocked drains. What have I done to make Google think I need to see this?

      • Wisdom Seeker says:

        AI means Artificial Insanity, not Artificial Intelligence…

    • noplacetolive says:

      Precisely. Modulo, what counts as young these days?

      • John Taylor says:

        For housing, young continues up to the early 40’s and fizzles out around the mid 40’s. Id bet there’s a huge difference in the homeownership rate between people aged 42 vs 48, at least with my personal sample of friends it seems to play out that way.

  2. SocalJim says:

    Things are doing better down here in Socal. Here is a clip from today’s OCRegister ….

    Southern California house prices are still rising, a new analysis shows, despite other recent housing reports to the contrary.

    But they are increasing at the slowest pace in seven years, a sign that home sellers are succumbing to a year of decreased home sales.

    For example, Los Angeles County house prices increased 2.3% in March from a year earlier, according to the CoreLogic Home Price Index released Tuesday, May 7. Orange County’s prices were up 1.4% from March 2018 levels, while the Inland Empires saw prices increase 4%.

    Those were the smallest house-price gains in Los Angeles County and the Inland Empire since mid-2012, the year the housing slump ended. It was Orange County’s second-smallest gain.

  3. Howard Frtiz says:

    You know I never considered that purchasing a home is much faster now than it was before. I vaguely remember signing stacks of papers for my mortgage back when dinosaurs roamed the earth and beer came in steel cans.

  4. Ehawk says:

    Hopefully that SB50 bill passes. We need to deal with zoning bs and allow more multi-family housing in key areas to shorten commutes and help bring more affordable housing to all of us, and much lower prices.

    Too many yuppies still got the mentally of ” I’ve got mine, forget you, not my problem” NIMBY. Time to be the progressives they profess to be.

  5. Matt says:

    3 weeks ago my mother in law out her home up for sale as is in Harford county Maryland at 11 a m on a saturday. First showing was at 1 that very same day. Half hour later bid papers where being signed. Sold. This was in a area where home have been sitting for sale 2 or more years. She is downsizing. Getting rid of it.

  6. NARmageddon says:

    Great data. Neck is safe.

  7. Double D says:

    We are planning on selling our home in Contra Costa County – East Bay, CA probably in the spring of next year. I spoke to our buyers agent today when we bought the house 5-1/2 years ago & he said he isn’t seeing anything drastic in the local market right now other than some increased supply. He said people are working & interest rates at about 4% are still attractive for prospective buyers. Houses in move-in condition are selling. Those not & not priced right are sitting with price drops. I am seeing an inordinate number of price drops in our area.

    W e can all see the warning signs that the next housing bust is not too far off in the future. After experiencing 2009, I know what the top feels like and this feels like the top. 2009 was a precipitous drop & this time may be worse. There may be another year of relatively calm water before we start seeing more serious deterioration.

    • LessonIsNeverTry says:

      All depends on employment. Areas that had a crazy jump last summer are negative but not crashing. Seems an uneasy truce at the moment, with a slight edge to buyers. Except at low end, of course, where investors are in a frenzy.

      A crash will need sellers at the margin to be forced to sell. The increase doesn’t even need to be large. At current prices I suspect a 1.5% UR increase would start the avalanche.

      • Curt says:

        @Lesson correct, the gov BLM site showed 600k job loses in 2009. I don’t have CA job loss stats, I’m sure BLM has by state. IMHO the housing top was caused by too much preditory loans (exploding etc) to un-qualified borrowers combined with job loss caused good and the marginal to stop paying their mortgage and attempt to sell all at once. A perfect storm of many simultaneous events,, but the biggest was massive job losses, then a stock pile of weak mortgages. Dod Frank then the latest tax bill has gone a long way to muting any pull back in my view.

        We will see the housing top by watching jobs and spendable income dropping. We are seeing income, jobs increasing at present.

    • Wisdom Seeker says:

      LOL. You don’t know your tops! 2009 wasn’t the top in California RE… That was fall 2005, at least in the bubble zones.

    • cd says:

      The top was in 2006….

  8. 2banana says:

    I just got back from an open house showing in Sonoma County…

    And I kid you not.

    The was a “loot box” right in the middle of the living room.

    The Realtor was pushing me to open it. Said it would only be a “micro-transaction.”

    I declined and got the heck out of there.

  9. Tom Stone says:

    A good example of how quickly you can close a deal would be 1217 Belvedere Ln, 95472.
    4 Days on the market, it was originally listed at $929K on a Friday and sold for $1.1MM.
    Having the basic ( Well, Septic, Pest) inspection reports available for the buyer helped.
    1530 Sq Ft on .86 acres, 3 Br, 2 Ba.
    it had been permitted for a vacation rental in the past and there’s an illegal studio granny over the Garage.
    Cute, great location and views.
    I showed it on a Saturday Morning, the eventual buyer’s agent was writing an offer when we showed up at 10 A.M.
    Even with the income projected from turning it into a short term rental (VRBO, AirBnB) the numbers don’t work for me.

    • sue says:

      Tom Stone, Your example is Sebastopol where I’ve been looking to buy for 3 years… Are you saying you’d wait to buy….a year, 2 years, whatever it takes for prices to drop??? Thanks, Sue

      • Tom Stone says:

        Sue, I expect prices to drop somewhat in Sebastopol over the next 2-3 years.
        Not as much as other parts of the County because the quality of the demand for Sebastopol is much different than it is for Santa Rosa as a whole.
        I’ve been living in Sebastopol 14 years and there has consistently been a low inventory and more buyers than sellers.
        The last few years have seen quite a few buyers who want the climate and culture here and who are willing and able to pay whatever it takes to buy the property they want.
        1217 Belvedere is a good example.
        Whether it makes sense to buy now or wait depends on your particular situation.
        When you buy a house to live in, a home, the intangibles should take precedence over the tangible factors.
        If you know you will have to sell for any reason within 5-10 years the price you pay is an important consideration, if you plan to stay until they haul you out on a gurney appreciation doesn’t matter.
        Quality of life is important, and we all have a limited lifespan.
        If you can comfortably afford to pay today’s prices and it’s where you want to spend your days, go for it.
        If you are buying within city limits pretty much any agent will do, if it is a country property be sure that you have an agent familiar with the issues that can come up with them, from climate and water availability to the new septic requirements.
        Good hunting!

  10. Ron says:

    Just sold my House in Contra Costa took 4 days and moving to Sacramento. Sacramento is unreal as Bay Area investors buying and selling rental property since the Bay Area is overpriced. Inventory in Elk Grove area disappears quickly most of the resales need considerable upgrades in HVAC, roof, water heater etc as most of the resales in many areas have been long term rentals or the owners simply could not afford to upgrade. 95% of the resales have laminate floors throughout and one today I noticed a flip house had it on the shower wall. I purchased a new builder home as home resale price points with the low inventory are off the chart and will not stand the test of time.

    • cd says:

      I was there in the last Bay Area move in….
      it will fall faster and harder than the bay area….no money to support the prices in employment….

      cycles are easy to spot

    • Serhei says:

      The flip house next door has the standard flip house renovations (such as a kitchen layout that makes the TARDIS look logical, deathly blue fluorescent lighting and the cheapest pressure treated wood fence — bends in 3 months i.e. buyer’s problem), but the flippers neglected a sagging gutter, so a squirrel moved into the roof while they were trying to wait out the market slowdown. We joked that this was a ‘very rich squirrel’ since it was sole occupant of a house worth over 1 million dollars on paper. Then it raised a family of baby squirrels.

      Meanwhile the house was still trying to be sold. The comedic value of listening to real estate agents come into the house and then hear squirrels scribbling around in the attic was immense.

  11. SocalJim says:

    The China trade wars could backfire on US stocks, bonds, and real estate.

    The logic is so simple. When the US runs a large trade deficit with China, China lands up with excess dollars. Much of these dollars are brought back to the US then invested in US stocks, bonds, and real estate. As far as the real estate, most of it lands up in select east and west coast US cities.

    So, if a trade deal brings down the trade deficit, less dollars will need to be invested in US assets, and that could put downward pressure on all US assets. Of course, the Fed will immediately restart the printing presses … stay tuned.

    • Ethan in NoVA says:

      Foreigners should be prohibited from buying real estate in the US. We’re usually not allowed to buy in their countries. Trade imbalance.

    • Wisdom Seeker says:

      Re “So, if a trade deal brings down the trade deficit, less dollars will need to be invested in US assets,”


      When someone buys something, the money exchanged isn’t created or destroyed. There’s always the same amount available to be “invested in US stocks, bonds, and real estate”. What would those US$ have done if they weren’t spent on Chinese goods? They would have bought goods from the US or elsewhere. But someone would still have the $$ and need to do something with it!

      In fact, when the US does NOT run a large trade deficit with China, and that credit stays within the US, and is probably more likely to be invested in US assets rather than Chinese ones.

      • SocalJim says:

        The trade deficit costs jobs which slows the economy. To offset the trade deficit damage, monetary policy is eased which results in more money being created. It is the second order effect of USD creation that negates your argument.

        • Simplicit says:

          Both of you make valid points, however my guess would be the that the positive benefits of a lower deficit would have a more solid long lasting domestic consumer consumption benefit, outweigh negative deficit foreign investments.

  12. Anon1970 says:

    Did Sonoma County home prices get a temporary artificial boost form the massive fires in Oct. 2017?

    • Tom Stone says:

      Anon, Yes.
      It varied by property type and price tier, overall a little less than 10%.
      That’s gone now.

  13. Wisdom Seeker says:

    Wolf, could you clarify that “Absorption Rate” is literally 1 / (Months of Supply)? They’re based on the same numbers (Units for sale, units sold), just presented differently, right?

    • Wolf Richter says:

      Yes. When the absorption rate =100% it means that closed sales = units available for sale. In other words, 1 month supply. This shows up in the chart right above the absorption chart, with those two columns that dip to just above 1.

  14. GSW says:

    I found the title of the below article amusing (I know we arent supposed to drop links on the site); apparently if you are not buying at these levels, you’re just financially illiterate, according to the CAR.

    Couldn’t possibly be that we are in a bubble that is already showing cracks, and might not be the best time to jump in.

    Renters lack financial knowledge to buy
    March 7, 2019

    LOS ANGELES (March 7) – While low affordability is the biggest obstacle most renters face in becoming homeowners, 14 percent of California renters can afford to purchase a home but are foregoing homeownership partly because they don’t have the financial knowledge to do so, according to research findings by the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.).

    • Bobby Dale says:

      Maybe people without the financial knowledge to buy a house should continue to rent, as renters they are forced to prioritize rent payments. Anecdotally, I have seen several long term renters buy homes and either lose the house to foreclosure or fall behind on payments then struggle to ever catch up. Realtors have an amoral urge to “educate “ these people in finance.

      • Erle says:

        I don’t call the Realtors as that is a trademarked name. They are brokers, and have no responsibility to teach sixth grade arithmetic to the “buyers”.
        For twenty dollars or less one can buy a financial calculator from any dump in town. The cheapest are the bestest for the twats that are going to buy high. I recommend Texas Instruments as the most durable, the most powerful for the ditch price.
        If you are cool you will buy HP, but that was a long time ago and I ain’t so cool.

  15. Erle says:

    I get a kick out of the crybabies in SFO and LAX. Some dump that you will pay 800k for and does not even have a basement can be had for 80k, marked down from 135k from nearly ten years ago. All new roof and all of the crap that FHA demands for illegals to buy is right here in south eastern Wisconsin.
    I thought that you smarties in SFO are able to telecommute, or whatever it is called, you might spread out like a measles plague.

  16. Erle says:

    I have tossed some half decent dough into the beer glass fairly recently.
    This fixation on SFO/LAX housing is hardly a boohoo to knobs like me that paid off the mortgage at twelve years or less.
    Steep in your own sauce, and blow a kiss to the FED when you circle the bowl.

  17. Erle says:

    I apologize if my impertinent comments triggered anyone on either coast.

    • 91B20 1stCav (AUS) says:

      @Erle-remember, whatever your state, eventually we’re ALL eventually called upon to soldier. Whether we will still be able to do so successfully at this point in history is open to question. Never had any issues with Wisconsin (other than too many cheeseheads and closet Cubs fans moving here (California) over the years, helping to spike housing values along with the other millions from the rest of the U.S.), but how is that Foxconn deal coming? May you, and everyone here, find that better day…

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