Welcome to our June newsletter. This month, we’ll continue to update you with important information about your local real estate market during these unprecedented times. We know homeowners have questions about home values and the equity they have built up these past few years. Potential buyers want to understand changing market conditions and how to negotiate the best offer for themselves. With that in mind, an overview of the numbers indicate the Peninsula/South Bay’s housing market is looking quite strong. This month’s topics include:
- Key News and Trends Impacting Your Local Market: In April, median single family home prices remained relatively stable and fell by only 1% statewide compared to March. Many homeowners are refinancing while interest rates are low, and technology is helping homes sell during social distancing.
- June Housing Market Update: The number of homes under contract had risen every week for seven straight weeks before dipping slightly during this second week of May; this indicates a recovery may already be underway. Housing inventory has also risen for the last seven weeks and many sellers are choosing to stay in the market. Sale-to-list prices remain strong indicating that home prices are stable.
Key News and Trends Impacting Your Local Market
Peninsula/South Bay home prices remained relatively stable in April. Furthermore, home and condo prices fell only slightly statewide. California median home prices declined 1% according to the California Association of Realtors.
Typically, it is best to look at yearly comparisons for housing data because it removes seasonal variations. However, during the pandemic it is important to look at changes on a month-to-month basis. By this measure, Santa Cruz’s single family home and condo prices both saw healthy gains. San Mateo and Santa Clara saw dips in single family home prices, but condo prices rose.
As we reported in our April and May newsletters, the fundamentals of the housing economy remain strong. In April, despite the fact that forecasters downgraded the U.S. economic outlook due to the effects of the pandemic, mortgage-finance giant Fannie Mae said that it expects the 2020 national median existing-home prices to rise from $272,000 to $275,000. Demand and supply have not moved in lock step and demand still outpaces supply. The National Association of Realtors (NAR) reported that even though buyer demand softened and nationwide sales fell 8.5% from the prior month, the supply of homes on the market decreased even faster. Even before the pandemic, the housing market was undersupplied for years. Lawrence Yun, NAR’s chief economist, emphasized the persistent supply issue when he said in April, “You would have to see continuing job losses for a prolonged period leading to foreclosures, and even then we may not have oversupply.”
The Wall Street Journal reported that some sellers “are hanging tough because they believe their homes aren’t moving because buyers haven’t viewed them in person or are reluctant to make offers right now, not because the asking price is too high.” In other words, sellers may be waiting for stay-at-home orders to ease before deciding whether to lower prices. Additionally, The Wall Street Journal reported that both real estate agents and homebuilders confirmed that active buyers are more serious than ever before and mortgage applications are being approved and funded at a much higher rate than normal. The low interest rate environment and a need for a home during a pandemic has created a sense of urgency for homebuyers.
While home values remain intact, many homeowners are using this time to refinance their homes. In the first week of March, the Mortgage Bankers Association reported that refinance applications rose by 79% for the week and were 479% higher than a year ago. This is the highest level of refinancing since April 2009. On May 13th, the Mortgage Bankers Association reported that refinances are still up 201% compared to the previous year. The falling mortgage rates in March generated a refinance boom, and since March, rates have fallen even further.
As a general rule of thumb, homeowners benefit from refinancing if they can lower their rates by at least 1%. Refinancing also provides an opportunity to dispense with private mortgage insurance (PMI), as long as the value of the home has risen and the owner has enough equity in the home.
For owners of Q1 2020 median-priced California homes ($612,000), a 1% reduction would reduce monthly payments by $300. Refinancing, however, comes with costs, which include title insurance, attorney’s fees, the price of an appraisal, taxes, and transfer fees, among others. Expect refinancing to run anywhere between $1,500 and $5,000. While most costs are fixed, appraisals are variable and cost more for larger homes.
The second biggest determinant of whether or not to refinance, therefore, is whether or not the homeowner plans to stay in the home long enough to recoup the costs of refinancing. For instance, if refinancing costs $3,000 and the homeowner stands to save $300 each month on their mortgage payment, then their costs will be recouped after ten months of living in the home. As a result, the homeowner would benefit from refinancing if they plan to stay in the home for longer than ten months.
Due to the large cost savings and short breakeven period for refinancing, the number of refinance eligible borrowers—borrowers paying interest 0.75% or higher than current rates with credit scores above 720 and enough equity to get a new loan—rose to 11.3 million, the second-highest on record, according to Black Knight.
For homeowners looking to sell rather than refinance, technology continues to change how the real estate market operates.
Stay-at-home orders make video calling a daily activity, which has quickly increased the overall comfort level with technologies like Zoom, Skype, and FaceTime across demographics. 3D virtual tours have become commonplace over the last several years, but they are even more important now. Video call showings are becoming more normalized with each passing day. Exact data on the increase in agent-led virtual tours is difficult to gather with an MLS, but in March, CNBC provided some color using data from Zillow and Redfin. Zillow showed a 191% increase in the creation of 3D virtual home tours in the first week of March compared to February, and Redfin’s requests for agent-led video tours increased 94x from the first week of March to the last. Because of the rapid adoption and comfort with video technology, we expect the market to normalize relatively quickly, bringing sales volumes and inventory back to more typical seasonal trends and helping restore a more balanced market.
June Housing Market Update for the Peninsula/South Bay
While the pandemic’s impact on the housing market progressed rapidly in March, the April housing market data illustrates a stable market, albeit at a new normal. The graph below illustrates the available housing inventory by week rather than by month (as is typical) to illustrate how the market has changed over a shorter timeline. We can see that inventory levels declined in March, but have since climbed for seven straight weeks as more homeowners become comfortable with listing their home. Meanwhile, a significant number of sellers have remained in the market, and this so-called floor might indicate that active listings have fallen as far as they will go.
Another sign that the housing market may already be turning around is the number of listings under contract. During the week of March 25th, listings under contract hit a low. Since then, listings under contract have more than doubled and are approaching the levels we saw in early March. This indicates that people are forging ahead, aided by technology.
As mentioned earlier, the Peninsula/South Bay housing market looked stable in April. Measured on a yearly basis, both San Mateo and Santa Clara’s home prices finished higher than at this point last year. Although the pandemic and stay-at-home orders dampened buyer demand, the number of active listings also decreased, which buoyed prices. Appreciating prices typically signal a healthy demand for the available housing and encourage sellers to price their homes slightly above comparables.
The sale-to-list ratio reflects the change in the original list price of a home and the final sale price. For example, a ratio of 100% means that a home sold for the price at which it was most recently listed. In the Peninsula/South Bay, single-family homes almost always have higher sale-to-list ratios than condos. Sale-to-list price ratios remained strong in April with buyers making offers at just above list price to put a listing under contract. This is another indication that home prices are stable; sellers are not making any additional price concessions to sell.
Months supply of inventory measures how many months it would take for all current listings on the market (including listings under contract) to sell at the current rate of sales. In April, the inventory of single-family homes decreased but not nearly as much as the sales volume, which caused a large jump. Still, months supply in Santa Clara (2.5) was low even by California standards.
Sales volumes fell dramatically in the Peninsula/South Bay due to dampened demand and fewer available options on the market. Compared to last year, sales are down by over a third.
Looking ahead to June, we anticipate more growth. We expect buyer demand to pick back up as fears of a steep price decline lessen. Look for more agents to leverage the latest technology to give buyers the ability to tour homes in compliance with state and local laws.
As we discussed in previous newsletters, the fundamentals of the housing market were strong before the global economy stalled, which we believe will help us all navigate this difficult time with as little consequence to the market as possible.
As always, we remain committed to helping our clients achieve their current or future real estate goals. Our team of experienced professionals would be happy to discuss the information we’ve shared in this newsletter. We welcome you to contact us with any questions about the current market or to request an evaluation of your home or condo.