December 2021 - San Diego Real Estate Market Update
SAN DIEGO REAL ESTATE MARKET UPDATE: DECEMBER 2021
2021 Year in Review
The economic, logistical and behavioral changes that have taken place over the course of 2020 and 2021 due to the Covid-19 pandemic have changed the real estate market in ways that will have a permanent impact. As we close in on the second year of our “new normal,” let’s examine the changes we’ve seen and what may lie ahead for us in 2022.
Housing Inventory
Available inventory of homes for purchase has been low for years, but beginning in March 2020 when Covid lockdowns first began we have had the tightest inventory markets the country has ever seen. A balanced real estate market has 3-6 months of inventory available for purchase at any given time. Throughout the last two years, we have typically had less than one month’s supply of inventory on the market, which means if no more homes were listed, in less than one month at the current pace of demand every available home for sale would be purchased. Some may say that this is in part due to trepidation of would-be home sellers to risk their safety by allowing strangers into their homes, and while that may account for a small percentage of homeowners reluctant to sell, the bigger issue at play over the last several months and likely to continue is the question of, “If I sell my home, where will I go?” With no land available for new home construction and prices continuing to rise, would-be home sellers often don’t see a value proposition in attempting to improve their current housing situation and choose to stay-put instead. This trend is likely to continue.
Housing Demand
While housing inventory is at an all time low, housing demand is extremely high. This trend is driven both by consumer behavior and economic policy. The lifestyle of the American people changed drastically when Covid lockdowns began and the change caused many people to reassess their priorities, including how they lived in their homes and used their space. At the same time, economic policy aimed at mitigating a Covid-related recession was enacted and stimulus money was pumped into the hands of consumers while interest rates were slashed to all-time lows. Consumer savings increased as people stopped eating out and traveling and moratoriums on student loan payments were put in effect. First time homebuyers entered the market, starter homes were off-loaded for larger single-family homes and vacation home purchases were off the charts. This increased demand coupled with the extreme inventory shortage spurred bidding wars that have driven home prices up month after month. So long as interest rates remain low, demand is likely to remain high and with so little available housing inventory for sale, there is room for demand to weaken without seeing prices fall.
Interest Rates
Pre-2020, interest rates were nearing 5%, higher than they’d trended since before the Great Recession began in 2008. Once lockdowns began, the Fed preemptively slashed the Fed rate to stimulate the economy, which was quickly followed by mortgage interest rates plummeting, eventually to as low as 2.66% - the lowest rates ever recorded in US history, recorded in December of 2020 as Covid languished on and continued to impact the economy. Since then, we’ve seen some volatility in mortgage rates which continue to fluctuate but haven't exceeded 3.5%. It appears that mortgage rates can be expected to stay around 3.5% or lower for the foreseeable future, however many factors can and will impact rates including and most importantly at this moment in time, inflation.
Inflation
Since 2000, U.S. inflation has averaged 2.2%, according to the Consumer Price Index. Yet in October, U.S. inflation was 6.2% - the highest inflation rate the US has seen in nearly 40 years. "With inflation rising so aggressively and the fact that people's salaries and weekly income are not rising at the same rate, we end up with less discretionary money to spend each month," said George Ratiu, manager of economic research at Realtor.com. Because consumers are spending more money elsewhere, those shopping for homes may need to lower their budgets to make ends meet. Historically, interest rates increase as inflation increases which will increase the cost of housing at a time when home prices have been ballooning. This combination of factors could put home purchases out of reach for some consumers. Conversely, real estate has historically been viewed as a hedge against inflation. If your savings or investment account does not grow at the same rate as or faster than the cost of goods, your savings is actually dwindling. The current reported rate of inflation is around 6.2%, while the average interest rate on a savings account is around 0.6%. So, the question is; what investments can generate a 5% return on investment (ROI)? Home values traditionally at least keep up with inflation, and when you have a mortgage, you lock in a fixed monthly payment for the length of the loan while rents only tend to rise over time. Investors are utilizing this investment strategy right now, and so long as a typical consumer intends to hold a property for 5 or more years, home purchases are an effective hedge against inflation for them as well.
Employment
Early on in the era of Covid, the primary employment concern was lay-offs - millions of people lost their jobs as shutdowns forced business owners to close their doors - some for good. Jobless claims skyrocketed and unemployment supplements were enacted to help people make ends meet. Eventually businesses opened back up and began hiring and requesting workers return, however the tides had changed. Many workers didn’t want to return to their old jobs and were making enough on unemployment to hold out for better opportunities. Another force at work changing the labor market was the early retirement taken by many more baby boomers than would have been expected under normal circumstances. Add to that changes to school schedules and family caretaking needs that shifted and the huge number of primarily women that were unable to return to work to meet those needs – the landscape of American employment changed completely. More recently in the era of Covid, we are experiencing what many are referring to as “The Great Resignation.” People are quitting their jobs in droves. The reasons for this may be numerous - burnout, stagnant wages failing to increase to match inflation and changing work norms and desires. Some say many of these workers are leaving for better jobs with higher pay and greater work/life balance, which is likely true for workers previously in low-wage jobs in hospitality and retail. It appears based on the latest job reports that we are reaching full employment, however those numbers are skewed. The official 4.2 percent unemployment rate only registers those who recently lost a job and are actively looking for one — about 7 million Americans. It excludes those who have given up looking or who determined that available jobs aren’t worth the effort, risk or travel. That describes a majority of the 100 million jobless adults currently considered outside the workforce. Some of them are retired, happily or not, some are unable to work. But many of them would choose to work, or work more hours, given reasonable job opportunities, which they lack.
Affordability
Something less often discussed with consumers by real estate professionals presently is the affordability index. Currently the affordability of homes in California is at the lowest it’s been since early 2008 - right as the Great Recession was beginning. As of September of 2021, only 42% of Californians could afford a median-priced home, according to the California Association of Realtors. With wages stagnating and home prices continuing to surge, that number is likely to fall even lower as we begin the new year. This stat speaks to the concept of a K-shaped recovery from the Covid-19 induced recession - one where the wealthy become wealthier and the poor become poorer. The wealthy use real estate as a haven for their cash during inflationary periods, the poor pay the ever-rising rents as their wages stagnate and the cost of goods and interest rates rise. Affordability is not likely to increase in the near future - even as home price gains are predicted to slow somewhat, there is no reason to believe they will come to a grinding halt, nor will they begin to decrease without an influx of inventory and a plummet in demand, neither of which are likely given the current market factors at play.
Foreclosure Activity
Despite the concerns about housing affordability in California and nationwide, market economists, industry experts and Realtors all agree - it is unlikely that there is a “crash” brewing. Indeed, the foreclosure activity across the US is incredibly low, even in the wake of eviction moratoriums and mortgage forbearance programs expiring. Because of the nationwide housing price increases, nearly all homes have equity. In California, homeowners have seen their equity rise by 31.1% year-over-year in the third quarter of 2021, according to the latest CoreLogic Homeowner Equity Insights report. Add that to the 20%+ that home equity grew in Southern California in 2020 and homeowners that purchased before March of 2020 have seen their home values grow by over 50%. The share of mortgage residential properties with negative equity in the state is hovering at 0.8%, significantly below the 25% plus in the fourth quarter of 2009 during the Great Recession. Even if a homeowner can’t afford their payments due to a change in their employment or expenses, they can sell their home for a profit, paying off the bank and avoiding short-sale or foreclosure while netting proceeds substantial enough to pay off debt and often purchase a replacement property. Homeowners today are more well-qualified for their mortgages than they’ve ever been as a result of lending reforms following the mortgage crisis that caused the great recession. In 2008, anyone could get approved for an unaffordable adjustable rate mortgage loan regardless of their employment status and income. Today, mortgage underwriting standards are extremely rigorous and over 90% of loans are low interest fixed-rate loans. Historically, high foreclosure rates have the tendency to increase housing inventory beyond what demand can absorb which causes home prices to fall. There is little-to-no concern of these circumstances coming to fruition in the near future given our current market conditions.
Homeowner Behavior
Homeowners that would like to move must ask themselves in this high priced market “Where will I go?” The homeowners who are selling and moving are those who would like to downsize, those who are moving to a less expensive area and those who are upwardly mobile and are able to increase their housing budget substantially in order to move-up. For the majority of homeowners, it doesn’t make sense to move right now – and that trend is reflected in the current inventory crisis. While homeowners have substantial equity, that equity will often not buy them a nicer or bigger home in the same area where they currently live without increasing their cost of living. Most homeowners have chosen instead to stay put, refinance and/or remodel. Any homeowner with an interest rate above 3.5% has likely talked to a mortgage professional about securing a lower interest loan. Many are opting simply to lower their payments or shorten their mortgage term. Many others are opting to pull out their equity to remodel to make their home suit their needs better and/or ensure that when they do sell, they will be able to sell for top dollar. For those who are preparing to sell, they can count on a short marketing period and multiple offers - however caution must still be exercised. Because of buyer expectations that they will pay well above the asking price for a home, it is not advisable to price homes according to the sales price of recently sold comparable homes. It’s a delicate balance but it is wiser to price homes near the list price of recent comparable homes instead, allowing homebuyers to compete in a bidding war to establish the highest and best price that the market is willing to bear for the home.
Home Buyer Behavior
Home buyers have found themselves in a tough spot as market conditions have evolved over the last two years. Because of the record-low inventory and high demand, nearly every home that is listed for sale has showing appointments booked up within hours and receives multiple offers within a few days. Buyers are often competing with at least five and oftentimes up to 10, 20 or even more offers. Buyer behavior has shifted over the course of time as a reaction to these conditions. At first, buyers were finding themselves making dozens of offers, one after another, and losing out on many homes before they finally locked one down. Typically they would learn they needed to offer immensely over the asking price and waive contingencies such as inspections and appraisals, and sometimes resort to even more drastic measures – like this story of a woman who offered to name her first born child after the seller of the home they were making an offer on – and still lost. In 2021, “more than half of homebuyers waived contingencies in the buying process to gain a competitive edge. Six out of 10 offers accepted by the seller were non-contingent offers, with half of buyers waiving the appraisal contingency (50 percent). A third waived the property inspection (30 percent), and over a quarter waived the contingency of securing financing” according to the CAR 2021 Annual Housing Market Survey. Through the summer of 2021, once a buyer was able to secure a home, they were typically so thrilled and afraid they wouldn’t find another option that they were willing to meet any of the sellers’ demands in order to close on the property. But many buyers felt unable to compete - either financially or emotionally, and sidelined themselves to wait for things to cool off. What we’re seeing now is buyers getting their offers secured amidst a slightly softening market, but continuing to look at and make offers on homes that come on the market. As a result we are seeing more homes fall out of escrow on the first try only to be scooped up by another buyer - often with a better offer than the original deal. This trend will likely change the average number of days on the market of homes in the Southern California region in the coming months which may paint the picture of a softer market, but rest assured that the market is still very, very hot.
The factors that impact the housing market and the economy as a whole are innumerable and if Covid has taught us anything, it’s that there is always the chance, and even a likelihood, that unpredictable factors will impact the market in unexpected ways. It is important to be aware of the current and past economic trends in order to best predict where the trends are headed and navigate financial choices that will impact your future. Based on recent history and the myriad of factors at play, it appears that 2022 will be another year of a scorching hot real estate market. Prices are expected to continue to rise although possibly at a slower pace than the last two years. Interest rates are expected to rise but to remain near 3.5% which is historically a great interest rate and is not likely to slow demand substantially. These factors will continue to spell a hot sellers market, but buyers have a few tricks up their sleeves so it’s best that home sellers take a cautious approach and play fair.
If you have even considered buying or selling a home in the coming year, please reach out to us to discuss a strategy that will ensure that your goals are put first. We have buyers who are ready to pounce on the perfect home and tried-and-true tactics to help our buyer and seller clients alike achieve their goals more quickly and easily than they ever thought possible.
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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