Pickup In Price Cuts Suggest U.S. Housing Costs Could Be Nearing Peak

Forbes - Samantha Sharf - 07 November 2016

U.S. housing supply is down and prices are up, but there is at least one sign of softening. Landlords and sellers are increasingly cutting prices in order to find takers.

According to a new Trulia analysis, in the 12-months through September, advertised prices were reduced on 9.32% of rental listings around the country, up from 7.97% in the prior year. The share of rentals with price reductions increased in 80 of the 100 largest metropolitan areas. Meanwhile, 10.66% of for-sale listings took price reductions. That’s up from 10.14% last year. Of the 100 largest metro areas, 70 experienced an increase in price reductions on for-sale listings year-over-year.

To come up with these numbers Trulia used price history for every listing on its site. (Note the analysis tracks cuts to advertised price, not the final price negotiated by a buyer or renter. According to online broker Redfin, across the country people paid 93.6% of sale-list price in September.)

In the past five years home sale prices across the country are up more than 20% and rentals more than 12%, leaving many to wonder if a peak could be near. In most markets the climb continues, but the price reduction trend Trulia has charted suggests fault lines at the fringes.

“We are not arguing that home prices have been declining,” writes Trulia data scientist Mark Uh, pointing out that for-sale prices have increased 6.8% this year alone. “It could be that landlords and sellers listed their properties too high the first time around. Perhaps it’s taking property owners a bit longer to sell or rent than you thought. One solution may be to list the property a smidge lower (albeit still at a higher price than what you would have listed your house for the same time around last year) in order to attract more potential buyers or potential tenants.” In other words, sellers and landlords may be testing just how high they can go and adjusting from there.

Every month this year the share of listings taking prices cuts was higher than that same month a year earlier and the year-over-year difference have expanded as 2016 has progressed. In a separate analysis Trulia found that price cuts are more common in the luxury market (which Trulia defines as the top third of the market). This year 11.99% of luxury sale-listing saw price reductions, up from 11.01% a year ago.

Geographically the cuts were highly concentrated. Four of the ten cities with the biggest pickup in rental reductions are in Texas and most of the rest are West Coast tech hubs that have seen a surge in popularity in recent years. The sale side is only slightly more diverse with three East Coast towns making the top ten.

As with so many things in real estate today, San Francisco offers a striking case study. Sale prices in the city are up more than 70% over the past five years. Nevertheless, a whopping 21.31% of rental listings in the city experienced a price reduction this year, that’s more than any other metro area. With 8.1% of for-sale listings taking a reduction, San Francisco is far from top there, but the 3.1% increase from 5% last year is the largest jump.

“Some of the most expensive markets are showing noticeable sings of slow down,” said Trulia Chief Economist Ralph McLaughlin in a conversation earlier this year. “We think affordability is reaching a tipping point. Working class households, especially, cannot afford to buy a home in San Francisco anymore. This will keep a large section of home buyers out of the market. If they are not replaced by other buyers, some demand pressure will be taken out, leading to a scenario where prices increase at more normal levels.”