A bright spot in a four-year sales slump in August, but with storm clouds on the horizon

Prices inch higher despite a glut of homes on the market and fewer buyers

Homebuyers shrugged off fast-rising mortgage rates in August, leading to better-than-expected sales during the final month of the always important summer homebuying season. 

But as housing experts cheered the boost in sales, they are also concerned about higher mortgage rates, which climbed to 7.24% on Sept. 16 and are up more than half a point during the past month, according to Mortgage News Daily. 

Add a teetering economy and stubbornly high inflation – largely because of food and gas prices – coupled with the Federal Reserve’s interest-rate hike Wednesday, and the hard-hit housing market could soon land back on the mat.

“The recent rise in mortgage rates and continued economic uncertainty could create some headwinds as we move in the fall,” said Tamara Suminski, president of the California Association of Realtors. “At the same time, year-over-year gains show that demand is still there, especially among buyers who are prepared to move when the right home and opportunity come together.”

Four-year sales slump

For some buyers who have been anxiously waiting on the sidelines, a market with a lot more sellers than shoppers provides just-the-right opportunity, even with the highest mortgage rates in more than a year. 

The California Association of Realtors reported a seasonally adjusted annualized rate of 269,620 homes sold in August, a 2.4% increase compared to July – and up 1.4% from a year ago. (The annualized rate is how many homes would sell over a 12-month period based on the pace of sales in August or think about 22,468 homes sold during the month.)

Better but far from good. 

Home sales were below the all-important 300,000 threshold for the 47^th consecutive month. The figure is considered the minimum number of homes needed for a so-called “healthy market,” where there are enough homes listed and a good balance between buyers and sellers.

The Far North, from about Chico to Eureka, had the largest annual increase at 15%, while sales slid 8.4% in the Inland Empire (Riverside and San Bernardino counties), the largest swings in either direction in the state.

Affordability amid million-dollar homes

The state’s median-home price – meaning half the homes sold for more, the other half for less – reached $901,420 in August, a 1.6% increase from July and up 0.1% from a year ago. 

Southern California enjoyed the largest annual price increase of the seven regions at 2.9%. Home prices on the Central Coast, from Santa Barbara to Santa Cruz, endured the largest drop at 2.3%.

Million-dollar homes accounted for 35.2% of sales in August, the third straight month the percentage has slipped. Many high-end buyers are not affected by higher mortgage rates, since they often pay cash for homes, but the stock market and cryptocurrency have been on a rollercoaster-like ride the past few months.

For most buyers, affordability remains a big concern, and near-record home prices and higher mortgage rates have a huge impact. 

Fewer than one of every five households could afford to buy the median-priced home during the second quarter, according to the California Association of Realtors. The affordability rate dropped to the low- and mid-teens in several markets, including the Central Coast and Orange County.

So, higher mortgage rates, almost three times higher than five years ago, will certainly bump more would-be buyers from the market, at least temporarily. That is awful news for sellers, who desperately need more buyers. 

‘Another layer of uncertainty to California’s housing outlook’

California’s unsold inventory index – basically how long it would take to sell every home currently listed – reached 3.7 months in August, the highest level in six months. The average home enters escrow in 28 days, though the figure varies from less than two weeks in some Bay Area counties to more than three months in nearby Napa.  Some of the smaller counties have topped seven months to almost one year.

The unsold inventory index and the days on the market could increase in the coming months, as summer fades to fall and winter, when home sales typically slow.  

“The recent increase in mortgage rates adds another layer of uncertainty to California’s housing outlook, especially as the market moves beyond the peak homebuying season,” said CAR chief economist Jordan Levine. “While August showed that underlying demand remains present, pending sales softened and inventory is taking longer to clear. If the Federal Reserve decides to take a more restrictive path for the rest of the year, mortgage rates could remain elevated or move higher, further challenging affordability and weighing on market activity this fall.”