January 2022 - San Diego Real Estate Market Update

If you are making housing-related decisions in 2022, forecasting the real estate market is likely a high priority. A quick Google search will reveal conflicting opinions and dozens of unpredictable factors impacting the market that can make it confusing to plan your next steps. That being said, when you clear out all the noise and focus on what we know to be true, it seems clear that the real estate market will likely remain steady this year.

Here are 5 signs that the SoCal real estate market will remain steady and hot in 2022:

Supply

Inventory of homes for sale locally and nationwide is at an all-time low and there’s little reason to believe that will change anytime soon. Homeowners have little incentive to move as home prices skyrocket, while they are locked into low interest mortgages and sitting on huge home equity gains. There is some speculation that as more and more people gain immunity against Covid, those who have held off listing their homes due to concerns of exposure may finally decide to sell - but that is only one factor that has caused stagnant home inventory and if it comes to fruition, will likely not come anywhere near satiating buyer demand.

Demand

While inventory is at an all-time low, demand for homes is extremely high. This demand is fueled by many factors including newfound location independence thanks to the trend of remote work and the explosion in the number of retirees in the last two years, as well as a shift in perception of how people live in their homes and more tangible factors such as low mortgage rates, enormous rent increases and a spike in American consumer savings. The demand we’ve seen over the past two years has caused real estate prices to balloon - most Southern California homeowners have at least 50% more equity today than they did at this time in 2020.

Interest Rates

The Fed has announced that they plan to raise interest rates at least three times this year, and there is cause to believe that those increases may be larger and more frequent than many have anticipated due to the current inflation situation. Closely tied to the Fed rate, mortgage interest rates today are hovering around 3.52% up from their record low of 2.68% in December 2020. The expectation amongst market economists is that mortgage interest rates will end 2022 around 4.0% - still a great interest rate historically speaking. As interest rates rise over the course of the year, consumers will likely feel the pressure to secure a mortgage and buy a home before rates and prices go up even further, impacting their purchasing power negatively. This will drive even more demand as renters and would-be homebuyers who have chosen to sit on the sidelines re-enter the race to purchase a home.

Homeowner Assistance

One sector of the housing industry that experts have been watching closely for a potential stream of inventory is foreclosure properties. At one point in the pandemic there were over 8 Million homeowners in forbearance and it seemed like a possibility that those homeowners may be unable to recover from financial hardship and their homes could wind up in foreclosure, eventually creating a glut of supply that could cause home prices to plummet. Today, fewer than 800,000 homeowners in the US remain in forbearance. In California, the California Mortgage Relief Program has recently been enacted, offering homeowners in financial hardship up to $80,000 each to catch up on mortgage payments and remain in their homes. The one-time grants are part of a new $1 billion federally-funded program to aid homeowners facing the threat of foreclosure because they lost income during the pandemic. "The COVID-19 foreclosure tsunami that some people had anticipated is clearly not happening," said Rick Sharga, executive vice president at RealtyTrac. "Government and mortgage industry efforts have prevented millions of unnecessary foreclosures, and while it's likely that we'll see a slight increase in the first quarter, we probably won't see foreclosure activity back to normal levels before the end of 2022."

Inflation

The US inflation rate is at the highest level since June of 1982 at approximately 7%. Consumers and investors alike are feeling the impact on their wallets and their portfolios. While originally, Federal Reserve Chair Jerome Powell labeled the factors causing inflation “transitory,” Powell has since retired the "transitory" definition of inflation from the Fed's vocabulary. What feels like good news to consumers is potential for trouble for the economy ahead - 99% of US employers are raising wages for their employees as the cost of living increases and they fight to retain talent at a time when record numbers of workers are quitting their jobs. The fear is that the rise in wages allows consumers to afford rising prices which, as they continue to rise, put more pressure on wages creating what is known as a “price/wage spiral” that causes inflation to run rampant. The Fed is acting to hedge inflation by raising interest rates and scaling back on the stimulus efforts of 2020 and 2021 that were intended to help Americans and keep the US from falling into a recession as a result of Covid-19. When inflation is high, investors tend to see real estate as a safe haven for their funds as real estate historically yields strong returns on a long enough timeline. We are seeing signs that this trend is already impacting demand for real estate as Southern California investor purchases in 2021 ran 32% above the previous year to equal 1-in-7 of all sales.

With such volatility driving the current economic situation, it’s hard to say what changes might occur in 2022 and beyond that will have the potential to make a major impact on the real estate market. Equity growth of 20%+ per year is certainly not sustainable and with prices and interest rates on the rise, it is unlikely that demand can continue at its current rate. For now, it seems the hot seller’s market will remain steady through 2022 while the US economic situation continues to develop and consumers seek to make decisions about their housing and finances before the potential for unfavorable conditions come to fruition.

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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