February 2023 - San Diego Real Estate Market Update

The word I’d use to describe the outlook for the 2023 local real estate market? Mercurial (adj.) - subject to sudden or unpredictable changes. The market we are experiencing is extremely sensitive to even the slightest shifts - mortgage interest rates, seasonal trends, policy changes, homebuyer incentives - you name it, if a shift occurs, it will impact home sales in a measurable way. This creates a fickle market landscape that is highly individualistic. Each home, each home seller, each homebuyer, will have a different experience of a real estate transaction in our current market conditions. Essentially, the reason for this volatility comes down to extremely low inventory of homes for sale. When statistics are being extracted from small sample sets, small changes can impact outcomes substantially.

Here is one thing we know about this market at this point in time: There are plenty of would-be homebuyers waiting in the wings with plenty of savings, high-paying jobs, great credit history, low debt and an eagerness to own their own property. People with this profile were buying up homes like crazy between 2020 and mid-2022 when record-low mortgage interest rates were available. Armed with a 3% 30-year fixed interest rate mortgage, even the astronomically high prices that real estate had risen to were affordable for these homebuyers. When rates more than doubled, affordability took a huge hit increasing monthly payments as much as 40% or more. Can these potential homebuyers still afford to buy homes at higher rates? For households earning more than $200,000 combined and looking to purchase a median-priced home, the answer is technically yes. But, in a market like Southern California where the median home value is so high, these high income, would-be homebuyers are accustomed to the privilege of choice. Do they want to settle for a home that doesn’t check all their boxes? Is there a place with lower cost of living and higher quality of life for them? Are they happy enough renting and choosing to invest their income elsewhere? Are they willing to wait for home prices or interest rates to come down? How long does it take to ponder and answer those questions? What gets them off the fence? This line of questioning is representative of the market we’re living in.

New listings crashed to an all-time low in December. In January, as expected, we saw an upturn in new listings for the first time since last June.

Despite the increase in new listings coming on the market last month, active listings were down in January meaning that there were fewer homes available for sale in January than there were in December, the result of increased buyer activity absorbing both the new listings and the homes that had been lingering on the market.

The spike in pending sales seen in January shows the increase in buyer activity, returning to the same levels as October of last year and turning upward for the first time since August of last year.

Where are homeowners in all of this? They’re living their lives in the house they’ve made their home, enjoying the luxury of low mortgage payments secured before interest rates hit 15-year highs, and substantial equity wealth, both of which serve as golden handcuffs. So when are homeowners selling? When they have to. When their jobs force a move, when they can no longer manage the upkeep or the stairs in their home, when their family outgrows their square footage, when they can no longer resist the call to move out of the state. Would many other homeowners like to move to a bigger home, or a smaller home, or a home in a different area? Sure, maybe, someday… But they are facing all of the same issues that would-be homebuyers are without the urgency of paying rent instead of building their own equity with each monthly payment.

Even with an upward trajectory of new inventory hitting the market, we're seeing a downward trajectory of months supply of inventory forecasted, meaning that there is still not enough supply to satisfy demand for home purchases.

Back in April before interest rates increased, homes were receiving many multiple offers and buyers were bidding homes up to an all time high of nearly 107% of their list price. Once interest rates spiked, homes began receiving fewer offers closer to or even below the list price. January homebuyers paid 96% of the list price on average.

While purchase demand is still outpacing supply, we have seen a correction in the median home price, a result of buyers reclaiming their power as their affordability is chipped away at due to increasing mortgage rates. They are still making offers, but they are demanding seller concessions and refusing to overbid home prices by large margins.

Average sales price is more volatile in a market like ours because of the prevalence of luxury homes - the sale of a low number of very high priced homes can skew the average substantially. Median home price is a less volatile statistic, representing the number at which half of homes sell for less and half of homes sell for more, however it can be skewed by shifts in the marketplace such as disparities in access to housing between entry-level and luxury buyers, the prevalence of all-cash and investor purchases and stock market fluctuations.

Housing statistics are released monthly for the previous month and a slew of headlines inevitably come out - “The Market is Hot!” “The Market is Cooling!” “Expect 20% Home Price Decreases by 2024!” “Homes on Track to Appreciate 5% This Year!” This cycle is dizzying as everyone has a different opinion and few deserve attention. The statistics reflect what has already happened, but only the psychological and emotional reactions of the general public to future unknown events will determine where the market is headed. There is no crystal ball. We can, however, bank on a few things… 1; Continued low inventory of homes for sale in Southern California due to a lack of buildable land, 2; the unliklihood of seeing sub-4% mortgage rates anytime in the foreseeable future, if ever, and 3; the cyclical nature of real estate prices.

The key to success in your homeownership journey is not trying to time when you buy or sell to minimize purchase price and maximize sales price - these factors are relative. The key to your success is making wise decisions for yourself and your family based on your needs and the stability of your resources.

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. 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 the market out for a while last year, we should talk sooner rather than later. Buyers have a great deal 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. 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 still a great time to sell. It’s true that you may have missed your peak price last Spring, but your home has still earned you substantial wealth over the last three years. 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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