November 2022 - San Diego Real Estate Market Update

The real estate market during the Pandemic Era beginning in March of 2020 has been anomalous, but as with so many things in our current world, people have adjusted to the “new normal,” and now, as things change yet again, it feels jarring. What was the real estate “new normal” that has shifted in recent months? 2020, 2021 and the first few months of 2022 were characterized by skyrocketing home prices, low interest rates, record-low inventory levels, frothy buyer demand and a white-hot seller’s market. By the Spring of 2022 due to forces such as Covid-related supply shortages, the war in Ukraine, low unemployment and fiscal policy, skyrocketing inflation became a problem that the Fed needed to act on, and they’ve been using increases in the Fed rate to attempt to bring inflation down.

As of the end of October, San Diego median home values have dropped by 10.5% to $765,000 since May 2022 when they peaked at $855,000. This most recent drop has effectively erased the majority of the equity gains that homeowners saw throughout 2022 as the median home price in January began the year at $760,000. With that said, the median home price today is still 29.7% higher than it was when the Pandemic began in March 2020 when median home prices were just $589,900, which was 14.9% higher than median home values had ever been, with the previous high being $513,500 during the housing bubble in March of 2006.

The average percentage of the sold price vs. the original list price of homes is currently the lowest we’ve seen since the Winter of 2018 and early 2019, the last time mortgage interest rates were on the rise. This represents the substantial drop in affordability that buyers are faced with due to today’s rising interest rates. Before that, we saw lower offers and price drops in the Winter of 2014 and early 2015 which coincided with unseasonably high housing inventory which created a brief buyers market scenario. Interestingly, while home sellers have become accustomed to over-asking offers and bidding wars over the last couple of years, never before in the history of recorded home sale statistics before January of 2021 have we seen the average sold price as a percentage of original list price exceed 100%.

We are now seeing market times exceed Pandemic Era housing market times for the first time since February of 2020, but historically speaking, the average market time of 33 days that we’re currently seeing is still quite low - in fact, the market times we’re seeing now are on par with the Spring/Summer market in 2019 at which time we were discussing a hot seller’s market with low inventory - laughable by today’s standard of low inventory. Before the Spring of 2017, we hadn’t seen average market times below 40 days since the Spring/Summer of 2004 over 12 years ago, when what we now refer to as the housing bubble was heating up.

Low housing inventory is the blessing and the curse of our time as it pertains to the real estate market. Societally speaking, low inventory is a restrictive factor - it keeps renters stuck renting and paying increasing rent costs, it keeps homeowners from moving into homes that better suit their changing needs, and it keeps home buyers in limbo without enough inventory to choose from. Because of low inventory, demand often outpaces supply and prices continue to rise as a result. However, as a homeowner, especially at this particular point in time when demand is dwindling due to high interest rates, incredibly low inventory is the saving grace keeping home prices from dropping drastically. The inventory trend downward that we’re seeing coming out of the Summer of this year is likely due to a typical seasonal downturn coupled with newly high mortgage interest rates keeping homeowners from choosing to move out of their current home where they likely enjoy high equity and a low mortgage rate.

Pending and Sold home figures are where it becomes crystal clear how much buyer behavior has changed since early 2022. We are currently seeing homes selling at the lowest rate since the housing market crashed in 2008, although for very different reasons. In 2008, inventory was spiking as homeowners were trying to offload homes they could no longer afford, while demand was plummeting due high unemployment, high mortgage rates, high (for the time) home prices and fear about a recession beginning. Today, the leading cause of low pending and sold home figures is low inventory - even for those who are looking to buy, there are limited options. The secondary cause for low pending and sold home figures is a drop-off in demand due to affordability - home prices are only 10.5% below their all-time highs and mortgage interest rates are higher than they have been in 20 years.

WHAT DOES THIS MEAN?

Mortgage rates are not directly tied to the Fed rate but the Fed rate does indirectly influence mortgage rates which have tripled since December of 2021. This has caused a shift in the real estate market which is characterized primarily by decreased demand which has caused inventory to remain restricted and home prices to begin to decrease as bidding wars dry up and homes for sale sit on the market for longer. But in any market there is opportunity, you just have to know where to find it, for instance, now is a great time to be a home buyer with a lot of cash or a favorable interest rate. It’s also a great time to be a seller with a trophy property.

Whatever price decreases we see in the near future are likely to be countered by rate increases. By the time we see substantially lower rates, buyer demand will likely rebound, resulting in higher home prices - unless we have fallen into a recession. According to Realtor.com “The bright spot of a recession is that, during a downturn, the Fed is more likely to lower rates to stimulate the economy. That would likely lead to falling mortgage rates. Combined with lower home prices, first-time and other buyers could jump back into the housing market. “This is still a pretty strong economy,” says Padhraic Garvey. He is the regional head of research, Americas, at the multination financial services and banking company ING. “There is a recession risk, but we don’t have the ingredients there for the housing market to crash. Prices won’t collapse off a cliff.””

IF YOU'RE A HOMEOWNER:

If you’re in a home and happy there, all is well. You likely have a great deal of equity which is fairly stable and a great fixed-interest rate mortgage. You can expect your home to surpass its record-high price from April/May of this year within 5-10 years if not earlier, according to traditional real estate market cycle models.  

IF YOU'RE A HOPEFUL HOMEBUYER:

If you have substantial cash to put down, mortgage rates impact affordability less for you and therefore, now is a great time to take advantage of having the upper hand in negotiations with sellers who are seeing long market times. That being said, for those shopping for a mortgage, mortgage demand is low right now, banks and lenders are competing for your business. This competition is great for you - there are tons of programs offering rates that are lower than industry averages including fixed-rate and adjustable-rate options. If you have been sidelined by bidding wars over the last couple of years, now is a great time to take advantage of lower homebuyer competition. If you’re open to putting in some work, you need to shop around for the best rates as there are deals to be found for the first time in a few years.
 

IF YOU'RE THINKING ABOUT SELLING:

It’s true that prices have come down since they peaked in May 2022, but they are still a great deal higher than they were last year.  It is also true that buyer competition is lower, but all that means is that it’s more important than ever to market and price your home properly in order to sell quickly and for the most money possible. There are still very few homes for sale so it’s important that your home stands out among them to be buyers’ first choice, but the fact that there is not a lot of competition in homes for sale is great for you. That being said, market times are longer than they have been since the pandemic housing boom and you should expect fewer offers than you would have before things began to slow down. You need an outstanding real estate pro in your corner to help you price, market, and negotiate on your behalf.

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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