June 2022 - San Diego Real Estate Market Update
The real estate market and indeed the economy as a whole, has shifted in just the last couple of months, with many talking about the rising inflation and a looming recession. After over two years of low supply and high demand for just about all goods and services and especially housing, inflation has risen to 40-year highs and the Fed has raised interest rates to tamper demand a.k.a. spending - a measure that seems to be working.
In the real estate market, we are seeing a slight decrease in buyer demand with interest rates currently at 6%. The number of pending and sold homes has seen a slight decrease of 3% to the prior month and the number of new listings is up 3.4% to the prior month, thereby creating a 16.7% increase in the number of active listings. At 3,600 listings, we are still down 72% to pre-pandemic levels of 13,000 this time of year and we now have 1.1 months of supply, which is still an extreme sellers market.
There is much speculation about the impact rising rates will have on pricing and many people are waiting for a shift in affordability in their favor. While we are seeing some price drops on overpriced homes - the reality is that buyers waiting for prices to come down may be disappointed. It is likely that prices will begin to stabilize and back off from the 20%+ increases year-over-year that we have seen since the onset of the pandemic, but prices will likely continue to rise at a more stable 5%, plus or minus a few percentage points in the upcoming years.
Some consumers are speculating that because interest rates are rising, home prices will fall. However, the data does not support that claim. The last time rates exceeded 5% was in 2018 and 2019, when home prices still appreciated 4% per year on average. In fact from 2007 to 2022, home prices have appreciated on average 4% per year (even accounting for the enormous loss of 40% in 2008-2009), although it took 8 years for home prices to recover from their floor in 2009, averaging out, there has been consistent appreciation. Since the market corrected itself in 2017 to today, home prices have risen on average 9% per year.
Because we are still seeing historic low levels of homes available for sale, until that number changes, the demand for housing in San Diego will continue to offset the impacts of rising rates on pricing. There will be no huge influx of inventory as there will be no foreclosure crisis or other mass exodus of homeowners as we saw in 2008.
As for interest rates we can expect to see continued increases as the central bank recently raised rates by 75 basis points. How long these rate increases will continue is unknown and whether low-interest rates will return is anyone’s guess. Ted Pick, CEO of Morgan Stanley has indicated that he believes we are at the dawn of a new financial era - one without suppressed interest rates.
Here is a snapshot of how the rising rates will impact buyers' purchasing power on a purchase of $750,000 on a 30-year fixed mortgage and compares it to renting.
To purchase a modest home in San Diego at $750,000, it will cost $240,120 in mortgage payments over a course of 5 years at a 6% interest rate. If you wait a few months and that rate goes up to 6.75%, it will cost an extra $19,643 over that same 5-year period to buy the exact same home. Remember that, while it is a small percentage during the first five years of a 30-year fixed rate mortgage, a percentage of those payments is going towards your principal. On the other hand, if you chose to rent for 5 years and assume your rent is similar to the monthly mortgage payment at 6% of $4000 a month, assuming rental rates increase 5% annually (which is very conservative) you can expect to pay $265,000 to someone else's mortgage. Based on the recent rent increases of over 10% this number could be as high as $293,000.
So if you have been wanting to make a move and are thinking about purchasing before interest rates and prices increase further, now is the time. Homes are selling for much closer to the list price with a substantial reduction in the number of multiple offers. Lenders are also starting to offer alternative financing options in order to make the monthly mortgage payments affordable. Let's get you in before the rates go up and take advantage of this opportunity in a less competitive real estate market.
Most potential homeowners or home sellers we talk to want to move but there is always a “but,” something they’re waiting for. Check out the video above and stay tuned for future newsletters where we will discuss various home purchase and sale scenarios, the cost of waiting to execute those plans, and tips and suggestions for leveraging the current economic climate to create the best possible financial outcomes for your situation.
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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