June 2020 - San Diego Real Estate Market Update

Our currently strong market is underscored with questions for the longer term...

Let me start by saying that San Diego is positioned to be one of the most resilient real estate markets in the country. San Diego is home to millions of essential and high-paying jobs that aren't going anywhere - with a presence of the military, manufacturing, biotech and science, professional, technical, government and healthcare sectors - demand for housing in San Diego tends to remain high throughout market cycles. There are also factors that keep housing inventory chronically low in San Diego, primarily low housing starts which have been lagging for years and are at a 5-year low in San Diego currently - too few homes are built to meet demand and many of the housing projects we see locally are focused on the luxury market. High demand and low supply results in ever-rising home prices. As of May 2020, over 40% of San Diego Homeowners are "equity rich" meaning they have over 50% equity in their homes. The total number of seriously underwater mortgages is just 7%. In total, over 90% of San Diego Homeowners have equity - equity which is up 5% in San Diego from this time last year - a good proposition for both home sellers and home buyers alike. 

Speaking of Homebuyers, they have long enjoyed very low fixed-interest mortgage rates for over a decade and at present, interest rates are lower than they have ever been - some days even falling below 2.5%. There was a time in the not-so-distant past that we sung the praises of a 6% fixed interest rate. Our low interest rates are not likely to raise substantially in the near future, as the Fed is likely to need to use low interest rates as a tool to help the economy rebound from sectors that aren't fairing so well, such as tourism and restaurants. We may find that housing is the sector of the economy that drives market improvement this time around.

So the news, at present, is good for buyers and sellers alike. Mortgage applications are up 54% over April and 9% over May 2019 with buyer purchasing power at an all time high due to the low rates. Amidst unemployment and stricter lending guidelines deeming fewer mortgage applicants creditworthy, the buyer demand is still there, even with fewer homes to choose from as would-be home sellers choose to press pause on listing their homes until they feel safe allowing people in their homes again. This low inventory is driving home prices higher and increasing equity for homeowners as buyers duke it out for the few homes available which are selling quickly - within 5-15 days - for within 1% of their listing price. This trend is likely to continue as it is likely that once rates eventually raise, homeowners will likely stay put in their homes longer, not wanting to trade up to a more expensive home with a higher interest rate, perpetuating low inventory that cannot meet buyer demand.

What Potential Factors Could Change The Tides?

There is, of course, a possibility of recession conditions in the real estate market if certain factors begin shifting. If the following hypotheticals were to occur, we could start to see a negative impact on home prices locally and nationwide.

#1 The Shift Away from High-Density Areas into the Suburbs

The anecdotes about city-dwellers fleeing high-density areas in search of more space and less congestion in the suburbs appears to be backed up by the data. This is particularly true in areas like New York City and San Francisco where demand for city homes has dropped by as much as 65%. Demand in suburbs on the other hand, has risen in the same areas by 20-50% or more, resulting in higher prices in those neighborhoods. We are certainly seeing a version of this play out in San Diego as home sales across the county remain strong and prices continue to rise in our mostly suburban community.

#2 Increased Foreclosure Activity & Vacation Rental Sell-Offs

There is speculation that as mortgage forbearance relief options expire, some homeowners may not be able to catch up on their payments, and that could trigger more foreclosure activity which would increase inventory of homes for sale. In most cases, forbearance payments will simply be added to the end of the loan, a smart move by strategists to keep homeowners from defaulting. 

There is also a concern that with the travel and tourism industry suffering the hardest hit from Coronavirus, that vacation rental owners will begin liquidating properties, many of which are in the luxury market, increasing inventory of homes for sale. If more homes are listed than demand can devour, we reach hyper-supply and start to see home prices fall.

#3 Chronically Low Interest Rates & Increased Inventory

The problem with extremely low interest rates is that they are intended to be used to bolster the economy - but we've had very low interest rates for over a decade - and they're rapidly approaching 0%. If market factors begin to spell trouble for real estate, we will not have decreasing interest rates as a tool in our arsenal to help keep demand high. If demand falls, we will need to resort to other measures - namely lower home prices - in order to move the increased inventory that becomes available.

#4 Buyer Confidence Dipping, Increased Consumer Debt & Tighter Lending Standards

There is some data that does seem to suggest a trend of buyers expecting discounts during the Coronavirus pandemic. According to the National Association of Realtors (NAR) 63% of people polled expected lower prices in the months to come. However that has been met with sellers being unwilling to reduce their asking price - and according to this data, with good reason. Demand is strong and prices are on the rise. Inventory being low is a relative indicator of housing predictions, because it depends on the demand. If demand dries up due to stricter lending standards and high unemployment numbers continue as the ripple effects of coronavirus play out over the next months and years, that could temper the predicted rise in prices.

Despite last weeks better-than-expected unemployment numbers, we know that still many people have lost jobs and seen household budgets reduced - and not just low income households. Prior to April 2020, the debt ratio as a percentage of disposable income in the US was at its lowest in 20 years. These budget shortages may have Americans taking on more debt, making it harder to save for a downpayment, qualify for a mortgage or move up to a higher priced home. 

Data about current mortgage holders is that only 30% of homebuyers have a 20%+ downpayment, and over 30% of loans require mortgage insurance. If unemployment continues into 2021 and ripples to higher paying sectors, we may start to see signs of trouble like increased inventory, falling prices and demand decrease.

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