Home buyers can’t catch a break. Not only is it becoming harder to get a mortgage, but real estate prices have risen so much this year that buyers—much like during the housing bubble—can no longer afford the home in the first place.
Median-income households can afford a median-priced home in just eight of the 25 largest metropolitan areas in the U.S., according to data released today by Interest.com, which tracks consumer credit. That’s down from 14 of 25 a year ago. On a larger scale, the study found that it is harder to afford a home in all 25 metro areas. The findings support those of a similar study released earlier this month by Trulia, an online real estate marketplace, which found that home prices were increasingly falling out of reach for many middle-class buyers. In 14 of the top 100 metro areas, more than half of for-sale listings in early October were too expensive for these buyers.
The study underscores the impact the recent spike in home sales is having on regular home buyers. For much of this year, buyers have been re-entering the housing market, eager to purchase a home before mortgage rates rise further. But for-sale listings have been limited as investors who have been snatching up homes are turning them into rentals (rather than selling them to would-be owners), and by homeowners who are holding off listing their properties in the hope that prices rise even further in the next few months.
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In addition, buyer frenzy to get in before mortgage rates spike has backfired on, well, the buyers. Many “have been so desperate to buy something that they are bidding each other out,” says Eric Tan, a Los Angeles-based listing agent with Redfin, a national brokerage. Tan says buyers he has worked with have gone to extremes telling him they will match any offers he gets—effectively bidding against themselves—and waiving clauses in contracts that are supposed to protect them.
Still, the hype may not last. Fed up with rising prices, buyers have started retreating in recent weeks, agents say. And sellers in some markets have gotten the timing wrong and are listing now in anticipation that buyer demand has not abated.
For buyers, the main issue is that the math just doesn’t add up. Home price gains are outpacing the rate at which income is rising. While that was often the case during the housing bubble, it was a lot easier to get a mortgage with little or no cash down. In addition, as mortgage rates rise, the buyers can no longer get approved for as large loans.
Here are the metro areas where affordability has declined the most over the past year.
28% less affordable than last year
Even though Detroit filed for bankruptcy in July, real estate prices are picking up—and falling out of range for a growing number of buyers. Home prices rose nearly 17% in the Detroit metro area in July compared with the same time a year ago, according to the latest data from the S&P/Case-Shiller home price index. This also marks 25 consecutive months of positive year-over-year returns.
Much of the increase stems from the resurgence of American car manufacturers, who are employing more locals and helping to boost consumer confidence in the area, which is bringing more buyers into the market, says Jeff Glover, a real-estate agent at Keller Williams in Detroit. Beyond the auto industry, several large companies, including lender Quicken Loans and Blue Cross Blue Shield of Michigan, have been moving their offices from the suburbs to downtown Detroit. That’s helped boost demand for real estate in the area and resulted in limited supply—the occupancy rate in downtown Detroit is roughly 98%--that’s pushing prices upward, says Glover.
To be sure, despite price increases Detroit remains one of the more affordable cities in the country and the city’s center still has plenty of homes selling for close to nothing.
19% less affordable than last year
A spillover effect is pushing up prices in Sacramento: As prices in the San Francisco Bay area continue to rise, more buyers are having a difficult time affording real estate there and are instead heading east to the Central Valley where prices have been within reach, says Stuart Gabriel, director of the Ziman Center for Real Estate at the University of California, Los Angeles. Luxury real estate in particular is taking off: There were 66 sales of homes fetched more than $1 million in the Sacramento metro area during the third quarter, up from 23 a year before, according to a report released by the regional office of Coldwell Banker Residential Brokerage.
But increased demand for real estate is resulting in price hikes and limited inventory—similar headaches that buyers in Sacramento where encountering by the bay. For-sale listings were difficult to come by during the first half of this year and most homes that hit the market were sold within the same week, says TaLisa Bealum, real-estate broker for ZipRealty’s Sacramento district office. While a healthy market would have about six months of inventory to sell, Sacramento had just under one month of listings, she says. That created competition among buyers who were bidding each other up in an effort to snatch what remained of listings, which in turn pushed prices up.
But this momentum has come to a standstill in the last two months and conditions are changing from a seller’s to a buyer’s market: Prices rose too high to a level where buyers became exasperated and pulled back, she says. At the same time, home buyers who had become aware that listings just a few months ago were selling at high prices decided to put their homes up for sale—many of which are now sitting on the market. Bealum says many of these homeowners were previously underwater (meaning that they owed more on their mortgage than their home was worth) but no longer are because of price spikes. They’re eager to sell while they’re still above water so they’re offering concessions like closing cost credits and offering to pay for repairs buyers want.
17% less affordable than last year
The median sales price for a single family home in Los Angeles County was $430,000 in May—up $100,000 from a year before, according to Redfin. By September, that price jumped to $470,000. The spike is partly due to investors who’ve been purchasing homes in large numbers and an expanding tech industry by the coast that has brought more young adults into the region who have also pushed up demand for homes, says Gabriel of UCLA.
Bidding wars are now the norm among buyers. More than 70% of offers written by Redfin agents in the Los Angeles metro area in September went up against multiple bids, according to Redfin. Eric Tan, a real-estate agent with Redfin, says some buyers are taking desperate measures and removing contingencies from their offers to beat out other offers. Contingencies allow buyers to cancel a sales contract without penalty if something goes wrong, for example if financing falls through or an appraisal comes in lower than expected.
Here as well, the run-up in prices may be slowing down. Investor purchases have slowed and competing bids—while still very common—are actually fewer in number than they were earlier this year.
16% less affordable than last year
The epicenter of the housing meltdown is heating up once again. Many buyers here are investors who are buying homes to rent out, which in turn is limiting inventory and pushing up prices in the market, says John Mulville, vice president at Real Estate Economics, which tracks housing. These buyers—most of whom are institutional investors like hedge funds and private-equity firms—are pushing prices up in two ways: by purchasing large numbers of properties and not reselling them to would-be homeowners.
The trend has had a trickle-down effect on homeowners whose homes have increased in value. Also, helping to boost home values is the decline in foreclosures, which were 64% lower in September compared with a year earlier, according to RealtyTrac, which tracks real estate. Still, many homeowners remain on the sidelines, experts say, waiting to see if home values have more room to rise before they decide whether to put their home up for sale.
16% less affordable than last year
Baltimore’s appeal to buyers has been twofold: it’s close to Washington, D.C. and home prices have been coming off a low. The median sales price of existing single-family homes in the Baltimore metro area fell from $246,100 to $206,000 last year, according to the National Association of Realtors.
Since then, demand has taken off, says Erin Phelps, sales manager at Weichert Realtors-New Colony in Columbia, Md., a suburb of Baltimore. Buyers have flooded the market, lowering the number of days homes are on sale to 46 on average this past September, down from 83 on average a year ago, she says. By the second quarter of 2013, prices in the metro area had spiked to $262,700, according to the latest data from the NAR.
In some cases, she says, buyers do not mind paying extra because they are planning on staying put in the home for decades. Meanwhile, extreme behavior is fueling more price increases: Phelps says buyers are making offers and saying that in many cases they are prepared to beat out higher offers that may come in.
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