October 2024 - San Diego Real Estate Market Update

In early September, the Fed lowered its target rate, mortgage rates fell and we all celebrated the lowest rates we’d seen in many months… and then, rates started climbing again. Inflation is nearly in line with the Fed’s expectations, so what will they do next? Will they continue to cut rates? Will they hold? How will that impact rates? That is the million-dollar question. Now, we also await the presidential election to learn what sort of economic policies and directives we can expect in the new year. I’m going to dub this moment “The Great Breath Holding,” because we just can’t predict what will happen next. As for what’s happening now, read on to learn about the current state of the US economy and housing market.

Mortgage Interest Rates

Mortgage rates have taken an unexpected turn, rebounding to over 6.8% after a brief but blissful dip into the low-6% range after the Federal Reserve lowered its target interest rate in early September. While this might seem counterintuitive, it’s important to understand that mortgage rates, though influenced by the federal funds rate, are more closely tied to U.S. Treasury yields.

Mortgage lenders often base their rates on the yield of the 10-year Treasury note, which is considered one of the safest investments. When investors expect economic uncertainty or a more cautious stance from the Fed on future rate cuts, they tend to demand higher yields on these treasuries. This is exactly what has happened recently—while the Fed has started cutting rates, traders are predicting that the Fed will proceed cautiously with future rate cuts, and that expectation has driven Treasury yields higher.

Another factor impacting mortgage rates is the way lenders price in their profit margins. Lenders need to protect their profit margins when lending money, so they add a spread to the base interest rates to cover their costs and potential risks. This is where you’re most likely to see fluctuation in rates. For borrowers with stable income and great credit, lenders are more likely to offer lower rates as their risk of default is low.

Despite this less-than-ideal development, the good news is that mortgage rates are likely at or very near their ceiling right now. While they didn’t remain at the lower levels we saw in late September and early October, they are still a full percentage point lower than they were at this time last year and that is saving buyers tons of cash. As we move forward, the Fed’s more cautious approach will likely keep rates moving downward incrementally, but expect this process to be slow and keep expectations of how low rates might go realistic. We will likely not see rates in the sub-5% range again unless we find ourselves in a major financial crisis. My best advice is not to attempt to time the market. When rates go down in the future, you can always refinance, but when prices go up, as they tend to do, you will be stuck with a higher purchase price, which could erase the benefit of lower rates.

Home Prices

While the median home prices across Southern California are down, the price per square foot of homes sold is closer to flat. This is probably indicative of a larger share of homes that are selling being below the median price rather than an indication that home values have actually fallen much. That being said, home prices are a function of demand, and we did see signs of weakening demand in September, which is seasonally appropriate.

Real Estate Inventory, Sales Activity, and Demand for Homes

Inventory of homes for sale has remained mostly flat since July of this year, but in September, fewer new homes were listed than in previous months. At the same time, September saw fewer homes go under contract and fewer homes sold, the average percentage of list price to sale price dropped, and market time increased. These are all signs of softer buyer demand, however, we may see a reversal of some of these trends for October (stats are released mid-month for the month prior) as a result of the temporarily lower mortgage rates.

Economic Outlook

Facing many unknowns in the coming months, the US economic outlook is somewhat uncertain, but because of a very strong foundation, there is little cause for concern that we are facing any major downturn. The Fed has managed to get a handle on inflation without triggering a recession, a challenge many didn’t think could be accomplished. Now, it’s expected that the GDP will tighten and the job market will experience a slight uptick in unemployment, but both should remain healthy. That being said, with a new administration slated to be elected and take office in the coming months and rising geopolitical tensions, there are unknowns that will impact the economy, for better or worse.

In Conclusion

As far as trends are concerned, the housing market is behaving in a seasonally appropriate way, however, the total activity is operating at a reduced level because of uncertainty around interest rates and a chronic lack of supply.

For the time being, buyers have a slight upper hand in negotiations, so if you’re in the market to purchase, don’t wait for rates to fall - seize this opportunity while it exists and refinance your mortgage later when rates fall and the numbers pencil out. Speaking of penciling out, new commission laws are in play, and not all real estate professionals are navigating them in a way that is in your best interest. Reach out to me to chat about how to structure commissions to create a win-win for you and a seller to make sure you don’t lose your dream home or your wallet when you go to purchase a property.

If you’re thinking of selling, now is the time to make sure you have a trusted advisor in your corner (that’s me!) as the market has shifted and new commission laws add a layer of negotiation that you’ll want to navigate expertly to ensure you get the most money possible for your home in the least amount of time, with the fewest hassles possible.

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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