March 2022 - San Diego Real Estate Market Update

In the last couple of weeks, there have been headlines emerging about how current US and Global events may begin to impact and shape financial markets now and in the near future. The subject of this newsletter is Southern California real estate and the question we seek to answer is “what is the current state of real estate, and how might that change in the near future?” The answer to that question is, currently, inventory of available homes for sale is still incredibly low and the demand for those homes is still unbelievably high. Rates are still low - although they have come up from the historic lows of pandemic uncertainty and wages and savings are high. The low inventory has continuously been driving prices up and there is no indication that inventory is going to increase. The real estate market is still hot and the signs look promising that it will continue to stay that way.

Homeowners have locked in low rates and are extremely creditworthy. Most homeowners, especially in SoCal, have substantial equity, so in the event of illness, job loss or other circumstances that might impact their ability to pay their mortgage, there are programs that can help them stay in their homes and in the worst case scenario, they are still able to sell for a profit. The experts agree that there is no foreclosure crisis on the horizon and in the absence of such an event, it is hard to imagine that any substantial increase in housing inventory will come to fruition. With such low inventory, demand could afford to fall substantially without prices decreasing, although that would likely signal the end of astronomical year-over-year increases.

With all of that said, what appeared as a bright Covid recovery ahead in January is now morphing into the possibility of what some economists are dubbing a “Russession” - and whether this recession has already arrived is unknown as of yet. Amidst the existing inflation and supply chain disruptions, a new economic abnormality has emerged.

The warning signs of recession are numerous, but that doesn’t mean a recession is by any means inevitable - nor does it necessarily mean a grave threat to real estate. "The recession drumbeat is gaining in volume," Nancy Tengler, CEO and CIO of Laffer Tengler Investments, said in a report. "Of course there are many reasons to be concerned. Soaring inflation, rising energy costs, an almost sure recession in the Euro Zone and a dangerously flat yield curve." The US is experiencing inflation not seen since 1981, a time which has since been known for the ravages on the economy that inflation waged. When too many dollars are chasing too few goods, a very apt description of current financial markets including US real estate, the Fed must raise interest rates in order to slow demand. Several rate hikes were already planned for 2022, but the Fed now has a new factor to consider as the US Treasury yield curve is flattening. If the Fed doesn’t raise rates enough, there won’t be a substantial impact on rising inflation and it can (and likely will) run rampant. If they raise rates too much, they risk inverting the yield curve. An inverted yield curve has often been a potential recession signal. The yield curve inverted in 2019 before the 2020 Covid-induced recession. It also did so in 2007 before the 2008 Global Financial Crisis/Great Recession. And it inverted in early 2000 right before the dot-com/tech stock meltdown. “Over time, the three biggest factors that tend to drive the U.S. economy into a recession are an inverted yield curve, some kind of commodity price shock or Fed tightening,” said Ed Clissold, chief U.S. strategist at Ned Davis Research. “Right now, there appears to be potential for all three to happen at the same time.”

So should we anticipate housing demand plummeting as a result of a recession? With such low inventory, would a drop in demand even impact prices substantially? First time homebuyers who represent the largest sector of the home buying market - over 30% - and they are certainly feeling the heat of ever-rising prices. Even modest increases in mortgage interest rates can negatively impact their purchasing power. As rates rise, first time homebuyers could be sidelined as affordability gets away from them and they choose to wait for prices to come down or their incomes to increase. Investor purchases have been driving another large sector of the market with over 20% of real estate purchases in Southern California going to investors. With the potential of a recession, investors may pull back on their investments and switch to a cash-holding strategy. Not to mention that the state of CA may be trying to come for investors - a new bill proposed in CA would impose a 25% gain tax on investors that sell in fewer than 3 years and would not be eligible for write-offs, a move that could certainly slow down investor activity. These two segments of homebuyers represent upwards of 50% of all housing demand and yet, with inventory below a 1 month of supply (a balanced market is closer to 6 months of supply) even if all of both first time homebuyers and investors exited the game, we would be looking at only 2 months of inventory - not enough to drive prices down or come close to satisfying the demand of the remaining homebuyers.

San Diego is a unique market - we’re in a bit of a safety bubble given the desirability of our locale. For now, real estate is following the same trajectory as we have been on since the Summer of 2020 - low inventory, high demand, rising prices and quick sales for way over asking price. It is a great time to sell and take advantage of the extremely hot market. With rates and uncertainty on the rise, it’s also the time to buy if you’re in the market - you want to lock in the lowest rate and take advantage of the inflation shelter of real estate. As soon as we see any signs that the market is changing, you will be the first to know.

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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