February 2022 - San Diego Real Estate Market Update

Expectations for the 2022 real estate market are beginning to come into focus, and it looks like this year we can expect for home price gains to begin to moderate from the 20%+ per year gains we’ve seen over the last two years, to somewhere closer to a 5-6% gain in Southern California. This shift, however, does not indicate that we will be entering an era of a buyer’s market - home sellers still very much have the upper hand. Most homes are still selling with multiple offers over asking price due to extremely low inventory of homes for sale - 60-75% fewer homes on average than in January of 2019 in all Southern California counties.

Yet, even with the plummeting number of homes listed for sale, “home sales are the best they have been in 15 years,” according to Lawrence Yun, chief economist at the National Association of Realtors. That means that despite what some are calling “catastrophically low inventory” the numbers of homes actually being sold are the strongest they’ve been since before the Great Recession. This indicates that nearly all homes that are listed actually result in a sale as well as the prevalence of off-market sales - homes that are sold to buyers without ever actually hitting the market or being listed for sale.

Extremely high demand for housing has been driving the housing market as of late. Changing norms, an influx of first-time home buyers to the market as millennials come of age, investor purchases and low interest rates have driven that demand and will continue to do so. This demand has come at a time when inventory of homes for sale has been dropping consistently, and the imbalance between supply and demand drove home prices up over 50% total since the beginning of 2020.

Given this combination of factors, what is driving predictions of a leveling-off of price gains, one might wonder? The answer - rising mortgage interest rates coupled with an expectation of increased inventory of homes for sale. Inventory has been so low for a variety of reasons, namely the favorable interest rates and growing home equity homeowners are enjoying. Homeowners have chosen to stay in place and remodel their homes if they have changing needs, or to purchase second homes to suit their needs. Another factor that has kept inventory low and kept homeowners from moving is mortgage forbearance options and foreclosure moratoriums, programs that are coming to an end.

Record low mortgage interest rates below 2.5 - 3% softened the blow of rising prices for homebuyers somewhat, but with inflation rising to an alarming level, the Fed is acting to restrict easy money policies including raising the Fed rate and slowing down the purchase of mortgage-backed securities. This will lead to a rising cost for Treasury borrowing, impacting mortgage interest rates which are expected to near 4% in 2022 - a rise that amounts to hundreds of dollars per month in interest alone for homebuyers - before rising prices are factored into their affordability. This affordability issue is causing many would-be homebuyers to consider exiting the buying pool or looking to relocate to less expensive areas. But, for homebuyers who can afford the increases, we’re seeing a rush to secure a property before rates and prices creep up even higher.

There does seem to be some possible relief in sight for homebuyers. With forbearance and foreclosure moratoriums coming to an end, the expectation is that we will begin to see more homes listed as homeowners who haven’t been able to recover from financial hardship will need to sell. They have enough equity to avoid foreclosure or even short sales and have the ability to cash in on that equity to get out of debt and salvage their credit scores to start fresh. Homebuilder sentiment is also very strong and although home building costs have risen by over 20%, home prices have also risen and those prices can be passed onto the consumer. In the most desirable areas of SoCal, there is very little new home construction, but for homebuyers who are flexible on location and able to work from home or bear a longer commute, there are new communities being built to ease some of the supply constraints.

Another factor that could work in homebuyers favor? As mortgage rates increase, refinance activity is coming to a grinding halt which is having an impact on mortgage lenders’ bottom lines. Purchase applications are expected to rise which will soften the blow of the disappearance of refinance activity, but the changing dynamics will leave mortgage lenders in a very competitive space, all competing for homebuyers business. That competition will leave room for homebuyers to negotiate their rates and many will likely be able to score rates that are below the market average.

Of course, all of these predictions hinge on predictability as it relates to the Pandemic and the economic impact of the inflation the US is currently experiencing. As we’ve learned in the last two years, the unexpected happens and can have staggering effects on the world at large. It appears that we are moving in the right direction with Covid numbers, that the Fed is proactively addressing inflation and that employment numbers have sustainably recovered from their lows in 2020. Given these assumptions, it looks like we will have another strong year for homeowners and those looking to sell their homes and that homebuyers can look forward to a year that may not offer increased affordability, but may offer increased predictability.

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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