Despite sales prices climbing +4.5% in October 2018, the number of listings that had a price cut of +1% increased +31.3%, a good +6.3% points above October 2017’s inventory increase of +25%. Overall, inventory increased +1.3% in October 2018 when compared with October 2017 to the highest level of inventory growth since September 2016.

Adding to that inventory growth, the number of home sales in 59 of the 71 largest metros declined, thus leaving many homes already on the market to simply languish longer.  When home prices did increase, as they did in 32 of the 71 largest metro areas, Redfin attributes those increases to specific areas that are more expensive, not to individual valuations of individual homes.

Back to the connection between rising interest rates, rising inventory growth and lowering home prices, “An increase in interest rates effectively makes home-buying more expensive because buyers have to pay higher monthly mortgage payments even if the sticker price of the house hasn’t changed,” said Redfin’s Chief Economist Daryl Fairweather.

Fairweather continued by saying that some buyers are adjusting their price range downward to compensate for higher monthly mortgage payments and that some buyers are simply backing out of the market completely. On the seller side of the transaction, “Sellers are now realizing that buyer demand isn’t what it used to be and are dropping their prices…”

Inventory growth has been championed by the “softening” of coastal markets in Q3 2018:

  • San Jose inventory increased +110.9%
  • Seattle inventory increased +73.7%
  • San Diego inventory increased +38.2%
  • Boston inventory increased +17.3%

The number of newly listed homes increased +5.4% y/y in October 2018 despite the number of completed home sales plummeting -5.7% compared with October 2017. Perhaps sellers are worried that things will only worsen in the near future if/when interest rates climb higher? Perhaps sellers are deciding to hedge their bets by listing now?

In conclusion, Fairweather was asked about the possible impact of fires on the California market. He said, “The fact is that rising mortgage rates and high home prices have a bigger long-term effect on California’s local housing markets than the fires’ destruction.”

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