When I walked into the kitchen and spotted business cards from the two agents who had already showed the home, I had an “aha” moment. There were only two cards. Six months ago there would have been a dozen or more. This was a bank REO, priced less than $300,000 and in pretty good condition. It has been listed for a week and only two agents had shown the house? Upon returning to the office and checking the status of the listing with the listing agent, I was further taken back to learn there were no offers on this property and the lender, who owned the property, was considering a price reduction. It was a clear sign that the real estate market was transitioning.
The cooling real estate market is a welcome change. The pent-up demand that resulted in a 30 percent year-over-year increase in the median selling price wasn’t sustainable and certainly not healthy for our long-term recovery. The rapid increase in home prices coupled with severe declines in housing inventory had many housing economists cautioning about another housing bubble.
The real estate market over the previous six months has been like a runaway train on a steep downhill grade. If it didn’t slow down, it was only a matter of time before there was a serious wreck. Fortunately, brakes have been applied. The market has responded to a number of economic factors that prevented a high-speed derailment.
The most significant breaking force has been increasing prices. It seemed like overnight houses selling in the $275,000 price range were all at once listing and selling at $325,000. The county median selling price bounced from $277,000 in January to $344,000 in May. August of last year the median selling price was $275,000 and this last month it was $360,000.
When home prices hit bottom in 2011 it was pretty predictable as to what was going to happen. Investors started buying. They had cash and pulled it out of low-interest-bearing accounts and bought homes. Then the “fence sitters” decided the time was right to buy and jumped into the market. Soon everyone who had thought about buying a home became aware that home prices had hit bottom and were out looking. As expected, inventory declined and competition for available homes became brutal. Sellers naturally took advantage of this window of opportunity and started bumping up their asking price.
The higher-priced listings on a limited number of available listings didn’t discourage buyers. They willingly paid whatever price sellers were asking and more. Homes were selling in days for more than the listing price and the appraised price. Sellers responded to this unbridled enthusiasm and raised their prices even higher. This scenario repeated itself through July. Eventually, this mini-boom ended.
Investors were first in the market when home values bottomed out and were the first to leave when prices got too high. Homes sold strictly as an investment usually account for between 7 and 10 percent of all home sales across the state but between April 2011 and this last spring investors accounted for 34 percent of all single-family home sales. It was the most significant percentage of non-owner occupied sales ever recorded. Investors now own more homes in California than at any time; while the percentage of homeowners continues to decline.
A huge influx in the number of homes for sale helped end the mini boom. Increasing prices allowed homeowners, who have been stuck underwater in their homes for the last six years, a window of opportunity to bail out. In May there were about 500 homes for sale in the county. Today there are 800. A 60-percent increase in inventory within a few months is unprecedented. The added number of listings has taken the pressure off of buyers having to make an immediate buying decision. Fewer homes are selling within days or receiving multiple offers. During May and June, 68 percent of the monthly sales were on homes that had been listed less than 30 days. In August the percentage decreased to 58 percent.
New listings in July and August are up 50 percent over last year. Sellers are responding to the increased competition by reducing their listing prices. Price reductions were pretty uncommon just a few months back. This last spring more sellers were increasing their listed price than reducing them. In April there were a total of 40 price reductions reported on county homes. Last month there were 260 price reductions.
“What’s happening is the market is attempting to balance itself between supply and demand,” said long time Placerville broker Jim Copeland. “In the short term in can be frustrating to deal with but it’s healthy for the long term.”
Typically, things quiet down a bit in the fall and winter. If interest rates climb from the 4.5 percent range into the 5s, as many economists expect, 2014 could be a much different market than 2013.
Ken Calhoon is a real estate brokier in El Dorado County. He can be reached at kencalhoon.com.