October 2023 - San Diego Real Estate Market Update

Mortgage interest rates hit 8% recently, and there’s no denying that the real estate market has all but ground to a halt. Prices are hovering near their all-time highs and with rates this high, homeowners can’t afford to move. Mortgage applications are at a nearly 30-year low. As expected, as we move into the slower season, we are seeing fewer new listings hit the market. However, active inventory of homes for sale has risen to its highest level since May of 2020, meaning homes that have previously hit the market are lingering. We are seeing almost 30% of homes on the market receive price reductions. But despite all of this, when a desirable home hits the market, it still typically sells fast and for near or above list price.

It's not that buyer demand isn't on the decline - it is, we can see that in the data - declining sales, longer market times, lower percentages of list price to sale price... So, why would a buyer eagerly make an over-asking price offer on a home that just hit the market in this environment when prices and rates are both so high, even if that home is desirable? Simply put, because prices are likely going to continue rising, while rates are likely to come down in the long term. The purchase price is fixed and amortized over 30 years while the mortgage can always be refinanced at a lower rate to bring down monthly payments and total interest paid over the life of the loan.

There is reason to believe that rates are peaking right now. The Fed has been increasing rates in order to reduce inflation, and in order to do so, must negatively impact consumer spending. With higher rates we see increased consumer debt, decreased consumer savings and as inflation and world events have increased the cost of goods such as fuel and food, consumers are more restricted in discretionary spending categories. Now, tens of millions of Americans are back on the hook to make monthly student loan payments. It will be interesting to see how holiday consumer spending plays out, and how unemployment numbers look in the new year once seasonal hires are let go, but assuming the metrics perform as expected, it is likely the Fed will either hold rates steady or slightly decrease them, which will have a positive impact on mortgage rates. That being said, lower rates will be a slow process.  "Unless the interest rates drop to around 5.5%, we will continue to see a slow market with historically low inventory," said SDAR President Frank Powell recently. Fannie Mae expects mortgage rates to stay in the 7% range through most of 2024, before ending next year at 6.7%, according to its latest forecast.

Of course, it’s important to remember that any number of unforetold events can impact rates and the real estate market is susceptible to the domino effect - one metric changes and impacts many metrics down the line, including inventory and buyer demand. A safe assumption, however, is that there is incredible pent-up demand of would-be homebuyers waiting in the wings for home buying to become affordable for them. In August, 82% of consumers reported putting home-buying plans on hold, according to the latest Fannie Mae Home Purchase Sentiment Index (HPSI). At the same time, home affordability sank to its lowest level in more than three decades, according to the latest Real House Price Index (RHPI) released by First American Financial Corporation. It’s hard to imagine a scenario in which affordability improves substantially via housing prices with that much pent-up demand and so little inventory as a reduction in rates would drive buyers into the market and force prices up due to competition.

Low inventory is a problem that pre-dates the pandemic which served to amplify the problem due to supply chain issues, migration trends and shifts in consumer behavior. In places like Southern California with so little space to build additional housing and such high demand for housing due to favorable weather conditions and ample high paying job opportunities, the creation of new housing units is lean, so there is little hope for a substantial improvement in the low inventory environment over the long term. As rates improve and more homeowners list their homes for sale - it’s important to note that most sellers are also buyers, they are looking for replacement homes, which prevents a net-improvement in overall supply and demand. In the absence of a housing crash, these dynamics persist. The systemic vulnerabilities that led to the 2008 housing crash have been addressed and there are no signs pointing to the likelihood that another housing crash is in the cards. Homeowners have low, fixed-rate loans for which they are well-qualified and high equity to hedge against issues such as job loss leading to extremely low mortgage default rates.

WHAT DOES THIS MEAN FOR YOU?

If you’re a homeowner:

If you own a home and you’re not looking to move, ride the wave. You likely have substantial equity and a low interest mortgage that is manageable. The great news is that your home value is hovering near all-time highs. Any losses you see over the Winter will probably rebound in the Spring. If you’re considering moving in the next few years, let’s talk about your ideas. If you’re considering remodeling or tapping into your equity, give me a call for lender referrals that can help you access the lowest rates available right now.   

If you’re a hopeful homebuyer:

If you’re newly in the market or revisiting buying a home after choosing to wait out the market, we should talk sooner rather than later. Buyers have more power in the real estate market right now than they have in the last few years with sellers more willing to make concessions including rate buydowns, repairs and price reductions. Keep in mind, though, inventory is still low so there is still more limited selection and the best homes still sell at breakneck speeds. When you lock your rate for a home loan is very important right now as rates can change quickly and changes of even .5% can save you thousands of dollars per year in interest costs. Remember, you can always refinance a high interest rates, but your purchase price is forever. If you love a home, you need to take steps to secure it quickly.

If you’re a potential home seller:

If you’re interested in selling your home, it’s a great time to sell. Depending on the location and condition of your home, you may be able to sell at record value quickly. This is a tough market for buyers so it's important to keep that in mind when listing your home. The key to selling in this market is to price your home intelligently, make it as appealing to buyers as possible, market it strategically and come to the table ready to create a win-win scenario for both you and your buyer. This is my expertise and I’m never too busy for you or your referrals whether you’re considering selling or you just have questions about the market.

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.

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