June 2021 - San Diego Real Estate Market Update
SAN DIEGO REAL ESTATE MARKET UPDATE: JUNE 2021
If you’ve heard it once, you’ve heard it a hundred times by now. The Southern California real estate market - and the national real estate market alike - is on fire. It’s a seller’s market the likes of which we have never seen with supply of homes for sale at less than one-third of what they would need to be to have a “balanced” market. Home prices in all six Southern California counties are up on average 24.7% with San Diego weighing in at a 22.9% increase year-over-year in median sales price which is now up to $725,000 - the fastest increase in nearly 8 years since the market was rapidly recovering from recession, according to data firm DQNews.
For homebuyers - it’s an absolute feeding frenzy. Homebuyers are getting outbid over and over again, feeling battered and being forced to get creative to get their offer accepted on a home - and pay substantially over asking price to the tune of tens-of-thousands of dollars. Nearly every home sold in Southern California and most major cities across the US is receiving multiple offers - sometimes as many as 20+ - and most buyers are waiving contingencies such as inspections and appraisals in order to secure the deal, eager to use their low interest rate fixed mortgage in fear that rates will rise and prices will not come down.
All of this frenetic energy has the world at large wondering when this real estate market is going to implode. Search the internet or open a newspaper and the terms “crash” and “bubble burst” will jump out at you immediately. And the concerns are not without merit. We are seeing inflation that is impacting consumers noticeably. The labor market is in turmoil as hiring is at a standstill while millions are still out-of-work but unwilling to return to the available jobs. Before too long, we will see eviction moratoriums, forbearance periods and unemployment benefits come to an end. Forebodingly, in many parts of the country pending home sales are down, presumably as buyers withdraw from the market due to affordability and competition concerns. These factors have many concerned that we are facing an upcoming recession similar to the Great Recession 2008.
Yet, for each of those markers of a potential downturn, there is a counter-argument that indicates that we will continue to see strong real estate values and a recovery from the economic damage brought on by the pandemic.
While inflation is on the rise, the Fed expects this rise to be transitory while consumers re-adjust to an open economy and demand returns to normal levels. The Fed has committed to keep interest rates low, likely for at least the next 2 years. Mortgage interest rates closely follow Fed rate fluctuations and so long as interest rates remain low we can expect homebuyer demand to remain strong.
There is a substantial shift afoot in the labor market as workers collect unemployment benefits and refuse to return to jobs with meager wages and unfavorable workloads. Many workers are taking the opportunity to look for new careers, start businesses and side-hustles and invest in retraining to switch industries. Unemployment will come to an end for all of these people and they will return to the labor market in one form or another.
Eviction moratoriums will come to an end and the presumption has been that when they do, property owners would rush to sell, increasing inventory to a level that would not be absorbed by buyer demand which would cause the pace of housing price gains to level-off or even decline. That being said, the rental market is experiencing substantial increases in rent values and is primed for a boom akin to the home purchase market. At a time when investors have been buying up swaths of single-family homes to be used as rentals, that anticipated sell-off may not be in the cards with ample profits to be made for landlords.
When forbearance options were created early during the pandemic, immediately fears began to circulate that when they eventually ended, we would see a potentially devastating uptick in short sales and foreclosures as distressed homeowners came to terms with their inability to return to making their payments. What has happened instead is that we have seen ever-decreasing numbers of homeowners in forbearance as time has gone on and at the same time, home-equity has risen unanimously across the country. While we may see some homeowners unable to recover and begin making payments again, they will have plenty of equity to list their home as a traditional (non-distressed) sale. We may see an uptick in inventory as a result of this phenomenon but with buyer demand as explosive as it is, housing supply will likely remain unbalanced in favor of home sellers.
While it is true that there is a trend in many places across the nation of pending home sales falling and fewer mortgage applications, Southern California markets are not following that trend even as active home listings decline, which means in our market even the least desirable listings are selling. We enjoy markets full of skilled workers, an economy supported by tourism which is finally rebounding and a massive military industrial complex. Some experts are comparing our market to a new Silicon Valley, where home values rose to astronomical values and never stopped rising.
In 2008, the Great Recession was caused by subprime loans on overvalued assets - basically anyone with a pulse could get a loan without proving their income or bringing substantial money down to the table. Many of these loans were adjustable rate mortgages and when the rates were hiked and mortgages were impacted, these under-qualified borrowers were scrambling to pay monthly mortgage payments that had skyrocketed overnight. Millions of people lost their homes as a result and the available supply of homes drowned out the demand at a time when unemployment was at a high and banks were going under and being bailed out. As a result of that catastrophe, new lending regulations were put into place and today, mortgage borrowers are more well-qualified than ever before with high credit scores, low debt and strong savings and investment portfolios. In addition to the favorable borrower standards, the vast majority of mortgages held today are fixed-rate mortgages with low interest rates meaning beyond property tax increases as a result of climbing home values, homeowners’ mortgage payments will not rise throughout the duration of their ownership.
You can see that the combination of these factors paints the picture of a housing market that, despite astronomical growth, is in fact fairly stable. The true crisis we face is a crisis of inventory and affordability which impacts low-income families disproportionately. Between building restrictions, lack of availability of buildable land and rising construction costs, the traditional relief for low housing inventory of new home construction is restricted in its ability to provide relief. Until supply constraints ease and interest rates rise, the likelihood of a leveling-off or decline of housing prices is slim-to-none.
And even with all of that being said - eventually - what comes up, must come down. At some point in the future we will see a combination of factors that will impact housing prices in a downward trajectory. It is important for real estate professionals to impress upon their clients that we won’t know that the market is changing until it has already changed. We receive market statistics the month after they have occurred and it often takes several months to establish a trend. By that point, home sellers and home buyers who have waited on the sidelines for market factors to change in their favor will have already missed the mark by the time we know what has happened. If you’re thinking of making a move there are huge advantages for both home sellers and home buyers in this current market.
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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