April 2024 - San Diego Real Estate Market Update

Is now a good time to buy or sell a home? It really depends on how you look at it. True, prices are as high as they’ve ever been and mortgage rates are hard to swallow at 7-8% after over a decade of rates that never topped 5%. If you own a home and want to move up or down and stay local to your current home, it can be hard to justify the payment you’re looking at compared to your payment on your current home, and yet, you can’t sacrifice meeting your changing needs forever. The truth for would-be buyers and sellers alike is, that if prices are higher but rates are lower in a year, today will have looked like a great time to move in retrospect. So what are the chances that will be the case?

Mortgage Interest Rates

Mortgage interest rates have been the primary driver (or breaker, as the case may be) of the real estate market since they spiked in the Spring of 2022. Mortgage rates are indirectly tied to the Federal Funds Rate, which has been held high in the face of inflation persistently hovering above the Fed’s 2% target. The problem, ironically, is that the economy is too strong. Too many people have stable, high-paying jobs, demand for goods and services is too high and consumer spending is immutable. The intent of higher rates, simply put, is to restrict consumer spending, a measure that has not been adequately realized for these reasons. Inflation has come down substantially from its 8% high, the rate cuts have not been without impact, but prices rose so substantially from 2020 to 2022 that reigning in that spiral has been tough to do without overcorrecting and causing a recession.

Until the Fed is confident that inflation is steady at its 2% target, they have committed to holding interest rates at their current level, and even raising them further if necessary. At this point, when rates will come down is anyone’s guess. In December, we expected to see the first rate cuts by March. That timeline has come and gone and now many industry insiders are predicting rate cuts by the end of the Summer.

Homebuyer Demand

Demand for homes for sale has weakened lately as mortgage rates have surged higher than the rates we saw this winter. With that said, demand in San Diego often outpaces demand in the rest of the country, and the local demand for the most desirable homes is still strong compared to supply. We’re seeing homes in the best condition and in the most desirable neighborhoods consistently sell quickly for listing price or above. Homes that need work or have less in-demand locations are lingering on the market a bit longer and seeing less activity.

Home Prices

In March, San Diego area home prices hit their highest-ever median price at $863,750 for all home types, with single-family homes hitting $1,050,000 which is $35,000 higher than their previous record. The data clearly shows that demand for single-family homes outpaces demand for attached properties and far exceeds demand for modular or manufactured homes. Single-family homes are priced higher than other types of properties and more are sold each month. The rising median home values reflect that there is still more demand than there is supply, but it is also a reflection of demographics and the attitudes of homebuyers. Higher earners are less impacted by high interest rates and purchase more expensive homes. Those who are willing to buy in the current market are trending away from “starter homes” such as attached dwellings, homes in less desirable neighborhoods, or homes that need more work. All of these factors are impacting home values which have trended upward despite temporary and seasonal blips, since the beginning of 2023.

Inventory of Homes for Sale

The San Diego region has seen a very slight uptick in inventory of homes for sale but remains roughly at the same level as last year, which was the slowest year for home sales on record since 1995. We have seen improvement over the same time period last year in new listings coming on the market, providing buyers with slightly more options. Interestingly, however, we are not seeing an increase in homes going pending (under contract) or selling vs. last year at this same time, likely because of persistently high interest rates. Because inventory of homes for sale isn’t rising substantially but there is a gap between the number of new listings hitting the market and the number of homes selling, we are left to deduce that many homes are being pulled off the market unsold. This is unsurprising as most sellers are seeking a replacement home and are faced with high prices and limited inventory and may choose to pause their search and stay in their current home.

Economic Outlook

Depending on who you listen to, the U.S. economy is either indestructible or headed for a cliff. Of course, the truth is very likely somewhere in between. So, are we going to experience a recession in the near future? Our guess is yes, we will experience a mild recession. Our economy is strong, so strong in fact, that it’s unhealthy. The Fed needs to reign the economy in, and while they’ve been aiming for a “soft landing” that allowed for inflation to tamper without triggering a recession or causing harm to the job market, inflation has been persistent. It seems that consumer spending will need to stay restricted for at least a couple of financial quarters and it’s likely that in order to do so, the unemployment rate will need to rise - these are the markers of recession. A mild recession, in this case, would not be a terrible thing on a macro scale, although it would cause pain for some individuals. That being said, it should cause prices to stabilize and interest rates to come down, helping consumers with affordability across the board.

In Conclusion

Our prediction is that rates will come down slightly before the year’s end, but they will come down slowly. Unless some unpredictable event occurs (never say never!) there will be no defining moment when affordability returns to the housing market, it will happen over time. In fact, as rates come down, prices are very likely to rise, erasing any affordability gains made by lower mortgage rates in the short term. The upside is for those who have purchased homes using 6+% rates – when rates do come down, they will have an opportunity to refinance and bring their payments down – they’ll be glad they bought when prices were lower despite higher rates. Those who wait to buy until rates come down will pay higher prices and have no opportunity to lower their payments. But, real estate, especially in San Diego, is an incredible investment - as long as you can hold onto your home for at least 5-10 years, you’re all but guaranteed to enjoy solid price appreciation. So, our advice is to worry less about timing the market and focus more on timing your real estate decisions based on your own needs.

Most importantly, if you have questions or concerns about your specific situation… CALL ME to help sort through them. That’s why we get up in the morning - not just to sell homes, but to serve our clients.

As always, we will be here to continue to provide you with updates about the housing market and answer any and all of your questions. Feel free to reach out to us anytime.

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