August 2021 - San Diego Real Estate Market Update
SAN DIEGO REAL ESTATE MARKET UPDATE: AUGUST 2021
The real estate market has been in turmoil for the past 18 months. We went from a standstill in demand and inventory that began at the advent of Covid lockdowns in March of 2020 to a market on fire with an explosion in buyer demand. This was caused by the US economic stimulus strategy that resulted in all-time-low mortgage interest rates at a time when consumer housing needs were shifting and consumer savings was ballooning while spending habits changed drastically. Simultaneously, housing inventory continued to plummet in part due to would-be home sellers’ safety concerns as well as their ability to refinance for incredibly low interest rates. Many homeowners used their equity to remodel and modify their living space to suit their needs - a trend that many homeowners preferred to the hassle and expense of selling their home and buying another one.
As of late there have been headlines and talk of the potential for a slowdown or a “crash” coming to the real estate market - some metrics do show a slight increase in inventory and some mild cooling in buyer demand. These trends seem to hold some water; however, they are localized to specific markets and likely transitory. Additionally, they may be the result of homebuyer fatigue and an increase in entry-level homes being listed. Another factor could be a “return to normalcy” with summer travel resuming, preparations for children returning to school underway and an economic rebound giving consumers more options as to how to spend their money than they had during the previous months. With a new surge of Covid cases underway, and uncertainty around how policy, economics and society will be impacted, the need for housing to adapt to changing lifestyles is as strong as ever.
The Fed has come under pressure for holding interest rates low while inflation is rising above target levels, a fact which can be seen in consumers' pocketbooks as the price of goods such as gas, groceries and household goods rise. Many assume that this inflationary trend applies to housing, however when the data is dissected it appears that housing prices are actually a stabilizing factor.
According to Forbes: “The reality is the booming housing market at the moment is not necessarily translating to inflationary pressures. The Consumer Price Index (CPI), an oft cited metric for inflation that is supposed to represent the average change over time in the prices consumers pay for goods and services, including housing, has increased 5.4% over the past 12 months. However, when you look specifically at the Consumer Price Index for shelter (which includes rental payments, mortgages, etc.), you see that number increased only 2.6% in the past year. This means housing is actually acting as a deflationary pressure on the overall CPI at the current moment. In other words, the rapid increase in housing prices is not driving headline inflation.”
In Southern California, buyer demand is still far outpacing housing supply causing prices to continue to rise at rates that may put median home prices in areas like San Diego and Orange County at near or over $1 million a year from now. The housing price growth of late 2020 and early 2021 may slow somewhat, but we are nowhere near losing steam in equity gains. “It is just moving from super hot to normal hot,” said Lawrence Yun, the chief economist for the National Association of Realtors, which has not yet released its July data. “It is still a seller’s market.”
These trends are causing frustration for both potential homebuyers and would-be home sellers. Fortunately, we have devised a number of strategies to help people accomplish their real estate goals in the current state of affairs.
If you’re a homeowner and would like to sell your home in the near future:
If you’re a homeowner and have considered selling your home in the near future - you are likely in one of two boats, either you are (1) motivated by the opportunity to make a move to a home that better suits your wants and needs but need the cash from selling your current home in order to make another home purchase, or (2); you’re motivated to cash in on your equity while it’s at an all-time high - to “take the money and run,” but are unsure where you’d move.
If you are in the first scenario, the sticking point is liquidating your home’s equity to make it available for the purchase of your next home. Because we are in a strong seller’s market, the likelihood of getting an offer on a home you’d like to purchase accepted contingent on the sale of your property is slim-to-none. In this market, we advise that homeowners take advantage of the fact that it’s a hot sellers market and start by selling their home before searching for a property to purchase. We often help our sellers negotiate a leaseback from the buyers of their home as a condition of the sale. This way, once homeowners close on their home sale, they continue to live in the property for a period of time while they search, secure and close on their next property. Many lenders can close a home loan in as little as two weeks so the rent-back period doesn’t need to extend beyond what is comfortable for all parties.
Another lesser-known strategy is to secure a loan that leverages your current property’s equity to allow you to purchase your next home as an all-cash buyer. In this scenario, your current home is used to secure a cash loan. You then purchase your next property and move in before listing and selling your existing home.
If you identify with the second of the two scenarios and are primarily interested in cashing in on your equity but are not sure where you’d move, you have several options:
Take advantage of moving to a less-expensive area. For remote workers, retirees and those who are separated from their friends and family in other locations, this can be a great option that allows you to secure housing and a lower cost of living while padding their bank account from the equity of their home sale. Many sellers in this situation are also choosing to downsize.
A more risky approach is that those who are choosing to sell their home can choose to rent while they wait for lower real estate prices on the horizon. Our warning to you if this sounds like a promising prospect: Don’t spend your equity on rent rather than increasing your equity on a new home while you wait for economic conditions that may not improve for quite some time.
If you’re a homeowner who does not want to sell:
If you own a home and you’re happy where you are, congratulations! You are surely enjoying explosive growth in your equity. If you purchased your home prior to the last year-and-a-half and currently have a mortgage, now is the time to look into the possibility of refinancing to take advantage of record-low interest rates.You may also want to take advantage the equity you’ve built to remodel, add-on or take on projects around the house that would further increase your home’s value. Many homeowners are also leveraging their equity through cash-out refi to eliminate their higher-interest debt such as car loans or student loans - a move that could save you thousands in the long run. If you are paying PMI on your mortgage loan and it has been more than a year since you purchased your home - check to see if you have reached more than 20% equity in your home - if so, you may be able to refinance your loan to eliminate your PMI payment.
Additionally, there have been legislative changes regarding the transfer of property to heirs so now may be a great time to talk with an attorney, tax advisor and/or financial planner to refine your plans for the future.
If you’re a homebuyer:
If you have dipped your toe in the home buying waters over the last year and a half then you already know that it can be challenging to be a homebuyer in today’s market, to say the least. Identifying a home that fits your needs and falls within your budget is challenge #1. Competing with multiple offers on both price and terms to have your offer to purchase that home accepted is the next hurdle, and the origin of the homebuyer fatigue that is being reported across the country. There are other potential issues from there - appraisals, issues with homes that have been purchased as-is and the concern of overspending on a home that may not hold its value.
Many homebuyers are simply opting out of the process for the time being while they wait out home prices. We caution you against this, as the Southern California market is showing no signs of prices falling. Consider that every month you pay rent, you are paying the opportunity cost of gaining equity in your own property. You are missing out on the future appreciation of a property purchased today as well as the opportunity to have your monthly housing payment reducing the debt you owe on that property.
Our best advice is to create a strict home buying budget and stick to it, but don’t forget to factor in hidden benefits of home owning such as: tax incentives, long-term equity growth, greater control over your housing expenses and more. Your rent payment and mortgage payment are not a one-to-one exchange. Once you’ve done that, there are strategies to get you into the home of your dreams which include:
Creative offer writing and negotiation of terms
Seeking out homes yet to hit the market (an expertise of our firm)
Considering a renovation project in order to buy low and customize your home to your specifications
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.
HOMEOWNER RESOURCES:
FUTURE HOME BUYER RESOURCES: