January 2023 - San Diego Real Estate Market Update

Kicking off the new year we find ourselves in an in-between period in the real estate market. 2022 was a tumultuous year for real estate with the year beginning as a hot sellers market with too few homes for sale and more homebuyer demand than could be met. Then, mortgage interest rates doubled without a substantial corresponding drop in home prices, putting a significant strain on homebuyer affordability. Home prices did begin to decline from their record-highs, but interest rates kept going up which kept affordability stunted for many. Now, home prices have leveled off a bit and interest rates are finally beginning to do the same - but as for where home prices and rates are headed for the rest of the year, only time will tell. Inventory is likely to stay low so if homebuyer demand increases with lower rates, it may be another hot home seller Summer.

Home Prices

The median home price has declined for seven straight months, coming off highs of the Spring of last year. These price drops have been the direct result of decreasing homebuyer demand as mortgage rates more than doubled from their lows of sub-3% at the end of 2021 and early 2022. Overall, the median home price locally ended 2022 in the same place it ended 2021, despite peaking much higher last Spring. Situationally, desirable homes in desirable areas are still selling for higher prices now than they were at this time last year by about 10%. While there has been homeowner equity loss since Spring’s median price peak, a time when home prices were higher than they’ve ever been, today’s home prices are still reflective of astronomical equity growth over the past 3 years. 

Percent of Original List Price

At the peak of the market last Spring, homes were selling for 106.7% of their asking price, the highest on record. This was representative of bidding wars pushing the price of homes substantially higher than list price because of demand that far outpaced supply. This sort of consumer demand was not limited to the real estate market and was causing economic inflation which needed to be reigned in. The Fed raised interest rates which caused mortgage rates to double and because home prices were at their all-time peak, homebuyer affordability plummeted as mortgage payments on the median priced home increased by 30%. Of course, this decreased homebuyer demand. Now, homes are selling for 95.4% of their original list price, the lowest since the Spring of 2012 when the real estate market was beginning its Great Recession recovery. This is reflective of home sellers pricing their properties based on comparable listings sold when demand was higher, then being forced to reduce their list price or accept offers below their list price in order to get their homes sold.

Inventory

2021 and 2022 were the lowest years for inventory of homes for sale on record, bottoming out over the holidays in 2021, a seasonal pattern to be expected - inventory is always at it’s lowest over the holidays. The inventory in 2022 was also lowest in December, and this month we are seeing very minimal inventory gains. This trend is likely to continue through February and then begin to pick up March through July. While we do expect to see more inventory during the Spring and Summer selling season, we expect inventory to remain extremely low compared to the same seasons in any year before 2020 when we would have seen at least 3 times as many listings.

Interest Rates/Buyer Demand

Because the Consumer Price Index (which measures inflation) has come down recently, we’ve begun to see mortgage rates decrease. The improvement in rates reflects a substantial improvement to buyer affordability, especially coupled with the decrease in home prices since May’s peak. In some cases mortgage lenders are offering rates below 5%, especially for jumbo loans, of which most home purchases in Southern California require. We are seeing a small uptick in demand for home purchases in the new year.  As inflation continues to decrease, it’s likely that the Fed will back off of their dramatic rate increases which should continue to positively affect mortgage rates. That should continue to increase buyer demand as inventory of homes for sale increases over the next few months heading into the Summer. Buyers who are entering the market now will be pleased to learn that there is more room for negotiation and seller concessions than we’ve seen since the beginning of the pandemic housing boom as the reality of longer market times and fewer offers convinces sellers to show more flexibility to get their homes sold.

Pending/Sold Homes

The number of pending and closed home sales last month is close to the lowest ever recorded. While the number of new listings is also very low, the pending and sold sales numbers do reflect that there are many homes sitting on the market unsold, a change from the norm of the last couple of years when nearly every home listed, sold quickly. The primary difference between the previous all-time lows in pending and sold homes vs. today is the amount of available inventory. In 2008 when the previous lows of pending and sold homes occurred, inventory of homes for sale was the highest ever on record. This is when the market crashed and the Great Recession began. At that time there was extreme supply and minimal demand. Today, the market is more balanced. We talk about low homebuyer demand, but supply of homes for sale matches that low. This dynamic is keeping home prices relatively high as the home price decreases we see primarily represent a reality check about buyer affordability. What would it take for home prices to crash? It’s impossible for forsee, but suffice it to say, if home prices were crashing, we’d likely have bigger problems to worry about.

 
Conclusion

The bottom line is that homebuyer demand is low due to high interest rates for now, but low inventory of homes for sale is a factor that’s here to stay. The low inventory problem in Southern California is a systemic one related to population, zoning laws, property tax code, building costs and a variety of other factors more complex than supply and demand. If homebuyers are incentivized with lower interest rates, financial stimulus, or other programs, demand will return with a bang. Inventory will remain limited, and that dynamic would cause home prices to begin their upward trajectory once again.

What does this mean for you?

If you’re a homeowner:

If you own a home and you’re not looking to move, you can breathe a sigh of relief. You likely have substantial equity and a low interest mortgage and there are no signs of substantial home price decreases in the near future. It is likely that your home’s value will fluctuate up and down +/- 5% over the next year. 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 home buyer:

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. Because demand is low and multiple offers have cooled off, homeowners are now 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 considering listing:

If you’re interested in selling your home, all of this may sound like bad news, but in reality, 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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