California, which is often a leading indicator for the nation, saw a sharp drop in sales in October. Southern California home sales fell 5.5 percent from September and were up barely 1 percent from a year ago, according to CoreLogic. Sales were over 14 percent below the October average since 1998.
“After a relatively strong summer, Southern California home sales lost steam in October, dipping more than usual from September and rising only slightly from a year earlier,” said Andrew LePage, research analyst with CoreLogic. “Sales remain constrained by a tight inventory of homes for sale and lower affordability.”
Sales leading up to October had been very strong, LePage added, which makes the October dip more troubling.
Home prices are still rising, with the median up 6 percent in October, according to Redfin. Prices are bolstered by the lack of supply and resulting competition for homes, but there is an affordability breaking point for every buyer. The price growth has been moderating as interest rates rise and cut into consumers’ purchasing power.
The average contract interest rate on the popular 30-year fixed mortgage rose well above 4 percent last week to the highest level since July, according to the Mortgage Bankers Association. That may be getting some buyers off the fence in November, fearing even higher rates coming soon. The Federal Reserve has been giving strong signs that it could raise its lending rate in December, the first time since 2006.
“An increase in rates on the part of the Fed, causing mortgage rates to rise, can actually be good for the housing market in the long run. Continued low mortgage rates are a contributing factor to the pace of price appreciation that we have seen in the housing market over the past three years,” said Mark Fleming chief economist at First American.
Low rates have allowed for strong home price appreciation — outpacing income growth and reducing affordability, especially for first-time homebuyers. A monthly gauge of housing heath by First American confirms a drop in demand in October. First-time buyers are traditionally most active in the fall and winter, while move-up buyers, often families, are more active in spring and summer.
“We should be buying more homes, but we’re not. All the fundamental things that go into buying a home are there,” said Fleming.
The fundamentals like employment and income growth, an aging millennial generation and an overall improved economy are there. What is not there? Enough affordable homes for sale.