May 5 Snapshot

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Over the past month, demand dropped by 4% when it normally rises by 4%.

In 2002, the Los Angeles Angels won the World Series for the first time in franchise history. The next year they missed the playoffs completely with a losing record. After hoisting the Commissioner’s Trophy the year before as champions of the world, they missed post season play due to a slump in wins to close out the year from July through September. The San Diego County housing market is amid a similar slump in the middle of the Spring Market following the best year for local real estate since 2005.

According to Mortgage News Daily, 30-year mortgage rates have risen from 3.27% on December 31st to 5.55% today, a climb of more than 2.25%. Rapidly rising rates eat into affordability significantly. For example, the monthly mortgage payment for a $1.1 million purchase with 10% down has risen from $4,319 on December 31st, when rates were at 3.27%, to $5,652 per month today at 5.55%. That is a $1,333 per month rise, or nearly $16,000 per year. The significant change occurred in just four short months.

 California Association of REALTORS® reported that the median detached home in San Diego County rose to $950,000 in March, up 19% in contrast to last year’s $800,000 median. At these levels, rising mortgage rates significantly impact payments.

In response rising rates, demand has slowed considerably. Demand, the prior 30-days of pending sale activity, has been on the decline after peaking on March 17th, shedding 5%, or 131 pending sales, since. Usually demand peaks from the end of April to the end of May. This year, with rapidly rising rates, many buyers backed off purchasing, the peak occurred early, and not everything is selling instantly.

Today’s demand readings are muted compared to last year, 2,654 versus 3,413. That is down 22%, or 759 pending sales. Keep in mind that last year was the best year for San Diego County housing since 2005. Yet, the 3-year average for demand prior to COVID (2017 to 2019) was 3,546. Today’s demand is down 25%, or 892 pending sales, compared to the average.

During the Spring Market, demand normally is on the rise along with the active listing inventory. More homes come on the market during the spring than any other time of the year. There is cyclically more escrow activity because that is when families desire to open escrow in hopes of closing and moving at the end of spring or during the summer when the kids are out of school. The housing market cyclically revolves around families and the school year. Spring is when there is the most activity, followed by summer. Then housing decelerates during the autumn after the kids go back to school. It then downshifts further during the holidays, the slowest time of the year.

This year is a bit different. Housing is experiencing substantially less activity. Low mortgage rates fueled the explosion in demand in 2020 and 2021. Today’s considerably higher mortgage rate environment has cooled demand. As a result, the active inventory has grown by 557 homes in the past month, up 31%, and the Expected Market Time (the time between pounding in the FOR-SALE sign to opening escrow) has risen from 19 to 26 days. The market is still an insanely Hot Seller’s Market, and the inventory is at unprecedented low levels, but the market is currently evolving fast. The market will continue to cool, demand will drop, the inventory will surge higher, and the Expected Market Time will rise.

Housing is moving away from everything selling in an instant. Instead, carefully arriving at the asking price will swiftly become the fundamental initial step in successfully selling. The housing inventory will grow on the backs of homes that will not sell. Homes in inferior locations, like backing to a busy street, need to be priced according to their inferior location. Homes that are in poor condition and need a lot of work must adjust their prices appropriately. Sellers who OVERPRICE their homes will sit on the market until they adjust to their Fair Market Value. Housing will no longer absorb overpriced homes, or homes in poor condition or a poor location.

The current active inventory is rapidly rising.

The active listing inventory surged higher, adding 368 homes in the past couple of weeks, up 19%, and now sits at 2,335 homes, climbing above the 2,000-home threshold for the first time since last November, five months ago. It was the largest two week rise since May 2018. For the first time since July 2019 there are more home available to purchase than the prior year. The inventory is still extremely low compared to the years prior to COVID, but it is heading in the right direction. With demand cooling due to higher mortgage rates, the inventory can advance higher at a more rapid rate. This will continue throughout the Spring and Summer Markets, which is when more homes are placed on the market than any other time of the year. As more homes enter the fray, they will be greeted with more cautious demand, buyers unwilling to stretch much above the asking price and unwilling to pay much more than the most recent closed or pending sale. Homeowners who stretch the asking price and overprice their homes will accumulate on the market without success and the inventory will grow. Sellers must approach pricing very carefully and will no longer get away with testing the market at a much higher price. Price reductions will become more common as the rest of this year unfolds and sellers will miss the absolute best time to take advantage of the market and all its fanfare, the initial couple of weeks in coming on the market, simply because they came out of the gates too high. The inventory will continue to grow, and the market will cool throughout the Spring, Summer, and Autumn Markets, until finding a late peak between October and Thanksgiving.

Last year, the inventory was at 2,326, 9 fewer homes, almost identical to today. The year-over-year difference has been continuously growing smaller since the end of January, and finally passed last year’s level. The 3-year average prior to COVID (2017 through 2019) is 6,190, an extra 3,855 homes, or 165% more, more than double today. There were a lot more choices back then, though this is slowly changing as well.

For the month of April, there were 3,987 new FOR-SALE signs in San Diego County, 943 fewer than the 3-year average prior to COVID (2017 to 2019), 17% less. Missing signs counter the potential rise in the inventory due to higher mortgage rates.

Demand continued to drop in the past couple of weeks.

Demand, a snapshot of the number of new escrows over the prior month, decreased from 2,744 to 2,654 in the past couple of weeks, down 90 pending sales, or 3%. Ignoring the pandemic shut down’s effect on demand at the start of the pandemic in 2020, this was the largest drop in April and the lowest demand reading since tracking began in 2012. With rates increasing well above 5%, demand will continue to erode. Affordability is becoming a real factor in the housing market in 2022. As long as rates remain elevated above 4.5% with duration, demand will be muted, and the market will methodically slow from week to week, month to month. The Expected Market Time (the number of days to sell all San Diego County listings at the current buying pace) has already climbed from 19 days four weeks ago to 26 days today. Anything below 60 days is considered a Hot Seller’s Market, and below 40-days is what is considered an insane pace where multiple offers is the norm and homes fetch above their asking prices. At this point, today’s 26-day reading is indicative of a frothy market where some buyers who had been losing out over the course of the past 6-months are stilling willing to stretch the price to finally “win.” As demand continues to cool and the inventory continues to climb, anticipate the Expected Market Time to slowly rise, surpassing the crazy 40-day threshold by the start of summer. Multiple offer situations will diminish, record high prices that push the envelope will decelerate, and the rate of appreciation will come back down to earth.

Last year, demand was at 3,413, 29% more than today, or an extra 759. The 3-year average prior to COVID (2017 to 2019) was at 3,546 pending sales, 34% more than today.

With the supply surging higher and demand dropping, the Expected Market Time (the number of days to sell all San Diego County listings at the current buying pace) increased from 22 to 26 days in the past couple of weeks. At 26 days it remains an insane, Hot Seller’s Market (less than 60 days) where there are a ton of showings, sellers get to call the shots during the negotiating process, multiple offers are the norm, and home values are still rising rapidly. Last year the Expected Market Time was at 20 days, faster than today. The 3-year average prior to COVID was at 53 days, substantially slower than today, yet was still a Hot Seller’s Market.

The luxury market cooled further in the past couple of weeks. 

In the past couple of weeks, the luxury inventory of homes priced above $1.5 million increased by 63 homes, up 12%, and now sits at 609. Luxury demand fell by 27 pending sales, down 7%, and now sits at 364. With inventory increasing and demand continuing to slip, the overall Expected Market Time for luxury homes priced above $1.5 million increased from 42 days to 50 days, still an extremely hot market for luxury. Luxury is starting to rapidly cool.

Year over year, luxury demand is down by 35 pending sales or 9%, and the active luxury listing inventory is down by 7 homes or 1%. The Expected Market Time last year was at 46 days, exceptionally hot for luxury, and slightly hotter than today.

For homes priced between $1.5 million and $2 million, the Expected Market Time increased from 29 to 33 days. For homes priced between $2 million and $4 million, the Expected Market Time increased from 37 to 47 days. For homes priced above $4 million, the Expected Market Time increased from 103 to 167 days. At 103 days, a seller would be looking at placing their home into escrow around October 2022

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