May 19 Snapshot

may19mkt > May 19 Snapshot - California Real Estate Expert Robert Wolf - California Real Estate Expert Robert Wolf >

When pundits start talking about a potential recession, everyone’s collective brains immediately recall the Great Recession and expect the economy and housing to behave just like it did in 2007. They forget about the other recessions where housing values continued to rise. Today’s housing has an extremely strong foundation with years of tight lending qualifications, large down payments, fixed rate mortgages, plenty of nested equity, and limited cash-out refinances.

In housing, during a slowdown, demand falls, the active inventory rises, and it takes longer to sell a home. During the Great Recession there was a glut of homes available to purchase and it was matched up with muted demand. Consequently, home values plunged. In Southern California there were nearly 120,000 homes available in 2007 compared to the 19,000 homes available today, over six times more. Today’s missing ingredient that would lead to falling home values is supply. The number of homes on the market today is far below averages prior the start of the pandemic when values were still rising, but at a much more methodical pace.

Demand is muted compared to its elevated levels of the last couple of years, and lower than the normal levels prior to the pandemic, yet it is matched up against an abnormal muted supply of homes available today. This has resulted in the San Diego County housing market remaining at an insanely, Hot Seller’s Market level. The Expected Market Time, the time it would take between hammering in the FOR-SALE sign to opening escrow, has risen from 18 days on March 17th to 30 days today, an 12-day increase. However, at 30-days, the housing market is still at an insanely hot level. Anything below 60-days is considered a Hot Seller’s Market. From 60 to 90, it is considered a Slight Seller’s Market. The market is balanced between 90 and 120 days. It does not become a Slight Buyer’s Market until the Expected Market Time eclipses 120 days. And values do not fall swiftly until it is a Deep Buyer’s Market above 150 days. Today’s 30-day mark is nowhere close to a Balanced or Slight Buyer’s Market.

As the inventory rises and demand remains stable, the Expected Market Time will continue to slowly rise. It will remain a Seller’s Market this year, but it will take longer for sellers to find success, especially as the year progresses. Sellers will no longer get away with overpricing their homes. To find success, sellers will have to carefully arrive at their asking prices, taking into consideration the most recent comparable pending and closed sales.

The sky is not falling. Instead, housing is in the midst of transitioning from an insane, unhealthy velocity to a much more normal, methodical, “steady as she goes” pace.

The active listing inventory surged higher, adding 313 homes in the past couple of weeks, up 13%, and now sits at 2,648 homes, its highest level since last September. For the first time since July 2019, there are more homes on the market than the prior year. It is the middle of the Spring Market when more homes come on the market than any other time of the year. As more homes come on market, they are being matched up against muted demand due to 5% plus mortgage rates, allowing the inventory to rise. Homes that are overpriced, in poor condition, or an inferior location are going to be harder to sell and will accumulate on the market. Sellers should no longer expect instantaneous success, which will become less likely as the year progresses and market times continue to rise.

A new trend has emerged this year, fewer homeowners placing their homes on the market compared to the 3-year average prior to COVID (2017 to 2019). The inventory would rise much more swiftly if a normal number of homeowners came on the market. In 2020, there were 2,611 missing FOR-SALE signs. In 2021, it was 7,324. So far this year, from January through April, there are 22% fewer homes compared to that average, 3,958 missing signs, more than half of 2021. Many homeowners quite simply are opting to not participate in the current housing market.

Last year, the inventory was at 2,453, 8% lower, or 195 fewer. The 3-year average prior to COVID (2017 through 2019) is 6,412, an extra 3,764 homes, or 142% more, more than double today. There were plenty of choices back then, though this is slowly changing.

Demand, a snapshot of the number of new escrows over the prior month, decreased from 2,654 to 2,651 in the past couple of weeks, down 3 pending sales, nearly unchanged. Demand peaked early this year on March 17th due to experiencing the largest climb in rates since 1994. Typically, demand peaks between the end of April to the end of May, but rising rates and affordability took a giant bite out demand. Unchanged demand indicates that it has found its footing and will bounce along these levels as long as mortgage rates remain elevated above 4.5% with duration and they don’t spike further from here. This is still the lowest level for demand at this time of year since tracking began in 2012, intentionally omitting the COVID lockdowns of 2020.

Last year, demand was at 3,432, 29% more than today, or an extra 781. The 3-year average prior to COVID (2017 to 2019) was at 3,628 pending sales, 37% more than today, or an extra 977.

With the supply surging higher and demand nearly unchanged, the Expected Market Time (the number of days to sell all San Diego County listings at the current buying pace) increased from 26 to 30 days in the past couple of weeks, its highest level since January of last year. At 30 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; BUT, the number of multiple offers is dropping and it is taking a little longer to sell for many. Last year the Expected Market Time was at 21 days, faster than today. The 3-year average prior to COVID was at 54 days, substantially slower than today and a Hot Seller’s Market (between 40 and 60 days).

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