August 2023 - San Diego Real Estate Market Update

Home prices have remained nearly level month-over-month from June to July. While prices saw a substantial but short-lived correction in the wake of the Fed’s campaign to reduce inflation by raising interest rates beginning in the Spring of last year, today prices are hovering near their all-time highs from April and May of 2022. In mid-July, the average mortgage rate spiked to 6.96% and has since increased to 7.09%, the highest average mortgage rate on record in the last 20 years. As a result, the number of pending and sold homes have dropped and active inventory has increased while new listings coming to the market have decreased. Unless mortgage interest rates shift downward, we are likely to see these similar statistics on a seasonally adjusted basis throughout the rest of the year.

This graph shows the average rate on a 30-year fixed mortgage from January 2002 through today.

Home values saw a drop-off from their all time highs when the Federal Reserve began to raise rates last Spring, however prices have recovered and are now hovering near their all time highs once again.

Sold listings represent homes that went under contract and closed escrow.

Pending sales represent homes that accepted a home purchase offer and went under contract but had not yet closed escrow when this data was released.

New listings hitting the market in 2023 have been the lowest of all time. The height of the summer selling season this year saw a number of new listings ordinarily comparable to the slowing Autumn in recent previous years. A new trend we’re seeing develop however, is that more homes are staying on the market for longer, compared to the last few years when every home that was listed, sold. Months-of-supply (a metric that compares the number of active home listings to homebuyer demand to determine how long it would take for all of the supply available to sell) is now up to pre-pandemic levels, but the reality for homebuyers is that once you account for the homes that are not viable options for various reasons, homes that have been listed for longer than a couple of weeks tend not to be options, leaving them to duke it out with the competition on the limited number of new listings that hit the market. As a result, we are still seeing multiple offers and bidding wars on homes in high demand, especially homes needing little work in great areas across all price ranges. The homes we see lingering on the market tend to have more niche demand, such as those needing remodeling or those at very low or extremely high price points. Homes like this are still selling, but may take a little longer to find their ideal buyer. The average active time on market for a home listing is still between two and four weeks, which is historically very low.

New listings represent homes that are newly listed for sale.

Months of supply of inventory is a calculation that compares the current inventory of homes listed for sale with demand to calculate how long (in months) it would take for all of the listings currently available to sell if no new listings came to market.

Active listings represent homes that are listed for sale and are inclusive of new listings as well as listings that have been on the market but not yet sold.

Active market time is the average amount of time it takes for a home listed for sale to accept a purchase offer.

This dynamic of very few new listings hitting the market and all desirable homes selling quickly is the reason we are seeing prices continuing to rise despite the decrease in affordability. Before Covid, new listings hit the market every month in seasonally appropriate numbers, but not all homes sold right away. As a result, home buyers who were in the market had a lot more inventory to choose from - hot homes still sold fast and for over asking at that time, but for your typical home buyer, they would spend a month or two looking and considering many options. They had the luxury of weighing neighborhoods or lots against finishes or layouts, deciding whether they could manage a remodel or preferred a smaller but “done,” home. If they didn’t like the options available to them, they could wait a month or two and likely see several options come to market that suited their preferences. Today, the mood is completely different. Because so few new homes hit the market, if something comes up that suits a homebuyer's needs, they need to move fast and do whatever is necessary to secure the property. At today’s prices and interest rates, it is rare that someone purchasing a home to live in wants to take on substantial renovations. Homebuyers’ purchasing power has been diminished as interest rates and prices have trended up and since they need to be prepared to over-bid and use extra cash on hand to lower their mortgage payments, they are searching at the bottom of their price-point and not looking to borrow additional money to complete upgrades. 

Low inventory is a problem that has been brewing since the beginning of the Great Recession. Home building ground to a stop when the recession hit and existing homes flooded the market, prices plummeting to rock bottom. As the U.S. recovered from the recession, construction of new homes never quite rebounded. At the same time, the millennial generation began to come of age and armed with low mortgage interest rates, an economic stimulus measure used to spark buyer demand and kickstart the economy, they began buying their first homes. During these same years, it became more commonplace for homeowners to choose to “age-in-place,” or in other words, stay in their homes as they entered old age rather than moving to retirement homes. The final nail in the coffin of housing inventory was the growing prevalence of institutional homebuyers a.k.a. landlords, competing with homebuyers and buying up homes that became rentals and never hit the market again. Today, first time homebuyers account for about ⅓ of home purchases but in 2012, that number was closer to ⅔. Institutional home buyers account for another ⅓ of home purchases today. 

These trends continued into the age of Covid when many Americans experienced major lifestyle changes, either forced or chosen. Millions of people relocated for various reasons. Homebuyer demand spiked off the charts due to unprecedentedly low interest rates, another stimulus measure meant to buoy the economy during the pandemic, and virtually every home that was listed for sale was purchased at above-list-price, causing home prices to grow immensely month-over-month. This buying frenzy was not limited to the real estate market and before long, inflation had risen to a level not seen in 40 years. As a result, the Fed began to raise interest rates rapidly in order to gain a handle on inflation and decrease demand. The challenge in real estate is that the increase in mortgage interest rates has had the effect of locking homeowners into their current homes that they secured with low rates, decreasing inventory even further. With inventory so low, even the stymied demand has still been substantial enough to keep home prices rising. This cycle restricts inventory more - the higher home prices go, the lower inventory levels fall as moving becomes less and less affordable for people.

As for the remainder of 2023, little is expected to change. New listings always decline from August to September and bottom out for the year in December, jumping again in the new year and peaking in the Spring/Summer. After this month, inventory and home sales will almost definitely decline from their already slow pace and there will likely be very little home sale activity taking place. The one thing that could make this year different from all the others is if we see a decrease in mortgage interest rates. Current rates are not only impacting would-be homebuyers but also homeowners who would like to move but are locked in place by their low current mortgage rate. Of course, for the 80% of US homeowners who have rates below 4%, it’s unlikely that they will get anywhere near matching or beating that rate. But, as they’ve been facing rates at or above 7%, if rates came back down to sub-6%, that would likely bring a lot of movers off the fence, potentially even during the “slow season.” Some say this is a possibility as inflation nears the Fed’s 2% target, others say that the Fed is going to raise rates even further. Only time will tell.

WHAT DOES THIS MEAN FOR YOU?

If you’re a homeowner:

If you own a home and you’re not looking to move, ride the wave. You likely have substantial equity and a low interest mortgage that is manageable. The great news is that your equity losses from May 2022 - December 2022 have rebounded. You may see some equity loss through the Fall/Winter but it will likely rebound and even grow in the new year. If you’re considering moving in the next few years, let’s talk about your ideas. If you’re considering remodeling or tapping into your equity, give me a call for lender referrals that can help you access the lowest rates available right now.  

If you’re a hopeful homebuyer:

If you’re newly in the market or revisiting buying a home after choosing to wait out the market, we should talk sooner rather than later. Buyers have more power in the real estate market right now than they have in the last few years with sellers more willing to make concessions including rate buydowns, repairs and price reductions. Keep in mind, though, inventory is still low so there is still more limited selection and the best homes still sell at breakneck speeds. When you lock your rate for a home loan is very important right now as rates can change quickly and changes of even .5% can save you thousands of dollars per year in interest costs. If you love a home, you need to take steps to secure it quickly.

If you’re a potential home seller:

If you’re interested in selling your home, it’s a great time to sell. If you felt like you missed your peak price last Spring, you've likely recovered from that loss and depending on the location and condition of your home, may be able to sell at record value. Prices typically come down during the Fall/Winter but rebound in the new year and into the Spring. This is a tough market for buyers so it's important to keep that in mind when listing your home. The key to selling in this market is to price your home intelligently, make it as appealing to buyers as possible, market it strategically and come to the table ready to create a win-win scenario for both you and your buyer. This is my expertise and I’m never too busy for you or your referrals whether you’re considering selling or you just have questions about the market.

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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