The Housing Slowdown Portends a Less Than Happy New Year For Lenders

January 8, 2019 by Paul J. Sievers, Esq.

Real estate has been one of the best mechanisms for building wealth over the past several decades. Over the last few years, the market heated up in most metro areas to a fever pitch, creating a boon for sellers, a bidding war for buyers, and a sea of possibilities for speculators and those willing to invest in non-conventional loans.

However, as we all know – what goes up, must come down. The market cannot continue on this trajectory forever, and over the last few months, we have seen the housing market begin to slow down and, as expected, price rebalancing is becoming common in many metro areas. Average list prices nationally have only increased 7.3% in October over last year. Quite a drop from the 10 percent rise we saw last year.

How the market slowdown affects certain areas depends on several variables. So, we have broken down some of the more common aspects affecting the market.

Since we can’t evaluate every market, here’s a snapshot into the ten metropolitan areas that are seeing the most significant shift in pricing. Prices don’t necessarily decline all the time in each market, so we have focused on the metro markets that have seen the most dramatic shifts.

Market  Median list price Change in list price* Change in inventory*  Listings with price reductions*
1. Stockton, CA $397,050  +3.4% +34.7 +299.2%
2. San Jose, CA $1,099,050  -0.1% +129.9% +110.6%
3. San Francisco, CA $899,050   0.0% +41.7% +56.3%
4. Nashville, TN $350,045  -2.5% +32.0% +22.5%
5. San Diego, CA $659,400  +1.4% +41.1% +28.5%
6. Oxnard, CA $685,000  -2.1% +15.0% +31.4%
7. Honolulu, HI $692,550  -0.4% +21.5% +25.0%
8. Dallas, TX $335,050  -1.4% +15.5% +14.0%
9. Seattle, WA $555,050  +12.1% +59.8% +36.2%
10. Portland, OR $455,050  +1.1% +22.1% +11.8%
*Year-over-year changes between October 2017 to October 2018 Source: listing data


What’s causing the slowdown?

Rate Increases

The most common assertion is that mortgage rate hikes are making it harder for buyers to get into the home they can afford. Houses are staying on the market longer, while buyers are becoming pickier over the price they will accept. A slight uptick in rates can add hundreds to a monthly mortgage payment.

Mortgage rates are up nearly a full percentage point from this time last year. The average rate for a 30-year conforming mortgage has gone up from 3.90% a year ago to about 4.80% this week.

Real estate analysts say this uptick is having a real impact on housing sales, as homebuyers are forced into cheaper homes or fixer-uppers that come with a payment they can afford. More homeowners are standing pat instead of upgrading homes, waiting until rates stabilize enough to bring in buyers.

Price Increases

We all know that prices cannot maintain these levels or continue to increase forever. The fact is that in most metro areas, the prices just got too high. The high prices tend to squeeze blue-collar buyers out of the market, while those homeowners looking to move up may rethink an upgrade due to payment sticker shock.

Analysts critical of the lull in sales lay the blame on prices in certain markets going up too much too fast. During the summer, the insane rise in prices finally appeared to crack, and many buyers decided to wait out the market rather than buy at the peak.

The entire West Coast appears to be at the top of the heap with regards to being overpriced. At some point, the price per square foot doesn’t make sense to the average homebuyer.

Excessive Inventory

As the prices go up, sellers are more eager to sell and cash in. This willingness to sell at peak has led to excessive inventory of expensive homes on the market. The glut of homes is more than even the hottest market can absorb.

It now appears that many sellers are up against a wall since the perception was that the hot market would support their asking price. Now, as reality sets in and buyers turn up their noses at those high prices, sellers are forced to either lower their price or pull the listing, further contributing to the overall slowdown.

In many of the major markets, inventory, of both new and used homes, is outpacing demand. As this trend continues, we will undoubtedly see more realignment of pricing of housing in major metro areas during the coming months.

Here’s what’s coming:

For non-conventional lenders and professionals brokering non-conventional loans, the residential market slow-down portends significant challenges for 2019.  In the previously vibrant fix and flip space, for example, projects begun in 2018 with the best of intentions appear likely to fall well short of resale projections.  As a result, lenders face the immediate prospect of either extending loan terms or foreclosing.  Neither option – kicking the can down the road or moving an upside-down property into their REO – appear particularly attractive, as the rate hikes and excess inventory – two of the underlying causes of the down-turn – show no signs of abating in the short term.

Foreclosures and bankruptcies – already on the rise – look to only increase further.  Even worse, we are already seeing over-leveraged borrowers simply walk-away from partially-completed projects – leaving lenders with the difficult task (and accompanying tail liability) of completing difficult and expensive rehabs.

The secret to navigating this, or any other, tricky environment lies in getting ahead of the curve.  In these conditions, problem loans will not simply work themselves out.  Lenders need to consult professionals and formulate a strategy at the first sign of challenges.  The previously-prudent “wait and see” approach is about to get a prohibitively expensive.