May 2024 - San Diego Real Estate Market Update

The housing market is caught in a holding pattern driven by high mortgage rates that perpetuate a “lock-in effect,” that keeps homeowners from listing their homes for sale, holding inventory of homes for sale artificially low. Demand for homes to purchase, especially highly desirable homes, remains high and out of balance with supply, causing home prices to surge continuously. Housing affordability is at an all-time low, and yet that just creates incredible pent-up demand such that any solution, such as lower mortgage rates, will likely be erased by the return of bidding wars and higher home prices. 

This sounds bleak, and for some (especially first-time homebuyers), it is, but it also represents an imperative to square-off with your values and priorities and make decisions about housing that make sense holistically, which often comes with sacrifices. For buyers, that often looks like examining your list of requirements and preferred areas, or making adjustments to your budget until you can refinance at a lower rate. For homeowners, this typically looks like staying in your home for longer making it work for your changing needs, or moving to a new area. 

Ultimately, in this market, those who need to sell, do, and they make out handsomely from their equity. Those who need to buy, do, and they are securing favorable prices compared to future prices, and have the opportunity to refinance when rates come down. This is a testament to the gospel real estate professionals have always preached - don’t try to time the market, simply make the best decision for you and your family when the time comes.

Mortgage Interest Rates

We are seeing mostly flat demand for new mortgages as rates hover between 6.75% and 7.25%. When rates fall below that level, we see spikes in demand, when they rise outside of that range, we see dips in demand. It seems that this range is what has been accepted as normal in the current market.

Mortgage rates continue to fluctuate, and while we did see some improvement in rates last week, they did tick up again slightly this week. Such will continue to be the case until the Fed issues more definitive statements about the state of the economy and when they intend to decrease the Federal Funds Rate. Americans are still well-employed and spending readily, especially on services, which is holding the consumer price index (CPI) higher than the Fed needs to see to issue a formal decision on dropping rates. That being said, the CPI and unemployment rates have both moderated in the most recent reports, and while that indicates pain for some US individuals, it does put us closer to reaching the Fed’s target of 2% inflation which will allow them to ease rates and trigger a more normalized market. Analysts are currently projecting a marginal decrease in rates in September if economic data continues to trend in the same direction we’ve seen over the last couple of months.

Inventory of Homes for Sale and Homebuyer Demand

On the inventory front, we are finally seeing some improvement, with new listings in April hitting higher levels than we’ve seen since August of 2022, and total inventory of homes for sale surpassing 2023 highs. There has been a slight increase in the total inventory of homes available for purchase in San Diego month-over-month since January of this year, indicating that there is slightly more supply of homes available vs. demand for those homes - but we are still seeing prices rise. This is because demand for the best homes is higher than for homes with less desirable qualities, so while the most desirable homes sell quickly, the rest linger or get pulled off the market altogether. While we have yet to see prices ease as a result, this uptick in the number of homes available for purchase should provide buyers with some relief in the form of increased options and decreased competition. Pending home sales dropped slightly in April over March, likely due to mortgage rate fluctuations.

Home Prices

Home prices hit a new all-time high in April, with single-family detached homes in San Diego hitting a median price of $1.1 Million, while the median price for all home types hit $899,000. While multiple offer scenarios are still very common, homebuyers are paying on average just above 100% of the list price of properties, evidence that intense bidding wars have waned. While home prices have risen 11% year-over-year, price appreciation is expected to slow in the coming months moving into the fall and closer to the election. Rates will likely moderate around the same time and after the holidays, as we move into 2025, prices will continue to rise as lower rates and normal seasonality bring more buyers out of the woodwork. That trajectory will modulate upward or downward depending on how inventory behaves - if more homeowners are incentivized to sell in the new year, that could keep price appreciation in check. If inventory remains low but demand explodes, we will see prices skyrocket.

Economic Outlook

San Diego is the frontrunner on the list of U.S. cities’ home price appreciation as April marks the first time in 2 years that no major US city saw a decrease in the median price of homes. The five-year outlook for our area is extremely strong as our weather, culture, and business environment attract and retain population, even as the state of California as a whole sees population decreases.
 

From the data produced by official agencies to the stock market to investor activity and beyond, all signs point to the U.S. enjoying a very strong economy, despite our bout of high inflation and the high interest rates we are experiencing to counter it that have impacted consumer confidence.

As for the housing market, while we should expect to see price and activity fluctuations, if you’re looking for a “crash,” we probably already saw it. In April of 2022 when the Fed began hiking rates, prices and activity plummeted faster than they had since the Great Recession. As the market adjusted, prices began to rebound and now our median home sales price has hit a new high. Demand for homes is extremely strong and supply is likely to remain low compared to demand for the long term, especially in San Diego where there is so little space available to build on. Between that and strong lending standards protecting us from a major foreclosure wave, there is no reason to believe that our local market will be anything but strong and resilient for the foreseeable future.

In Conclusion

The truth is that the data suggests that prices are so high precisely because our society can support higher prices. Were that not the case, the Fed policy of the last two years would have caused a recession. Consumer preferences have changed in recent years, and that is contributing to high prices and affordability challenges. First-time homebuyers are often seeking the whole package in a home, rather than a foot on the first rung of the property ladder. They could afford a condo, but they want a detached home with a yard. When renters can’t afford to buy the house of their dreams, they often sacrifice savings for experiences - more vacations, nicer cars, more conveniences, etc… Homeowners who have yet to find a benefit to selling their current home when replacement properties with current rates are so costly, have also engaged in this lifestyle creep. There is a huge amount of wealth locked in non-liquid home equity and spent on discretionary spending right now. What do you suppose will happen when and if that changes?

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.

HOMEOWNER RESOURCES:

FUTURE HOME BUYER RESOURCES:

Say Hello

Get in Touch With Us

301 Santa Fe Drive Ste B, Encinitas, CA, 92024