Looking at 2023: A SoCal Real Estate Forecast

As you all know, I pride myself on having something of an “insider view” as to what’s going on in Southern California’s real estate markets. 

Economic headwinds are putting the brakes on our region’s rapid growth—from LA to Riverside, San Diego to Santa Barbara, things are slowing down.

It’s a reality that sucks for everyone, including buyers who—although they might be seeing prices come down—are seeing their buying power get hammered by the highest interest rates in over a decade.

With 50(ish) weeks remaining in this year, there’s a lot of reason for the local real estate community to be concerned about what happens next:

—Will prices start falling faster?

—Will people get upside down in their mortgages?

—Will interest rates continue to inch up in the face of a tight labor market and persistent inflation?

Take all the news with a grain of salt

In addressing what happens next, let me begin by saying this:

You know the expression “don’t buy into all the hype”?—It’s a good one, meant to keep expectations in check when the times are good. 

Right now, we need the opposite of that expression…we need “don’t dwell on the depressing.”

If you believe everything you read in the Times or see on KTLA, you’re likely to think the Southern California economy (including the real estate market) is about to crash and burn like it did in 2008.

—Orange County home sales tumble 28% as loan payments soar 42%

—House prices drop in one-third of U.S. — and LA County, Realtor stats say

—Southern California’s housing collapse: Sales plunge after 47% payment jump

These are just some of the foreboding headlines I’ve seen in the last few months.

But the truth is, there are positive trends that no one is talking about—trends that give me and my clients (from investors, to sellers, to first-time buyers) a lot of hope when it comes to the next 12 months. 

Prices remain high compared to the rest of the nation

Yes, prices are falling, but the rate at which they’re falling is modest compared to other regions of the country. Moreover, Southern California enjoyed some of the most prolific price gains in the nation over the last decade. 

(Recent data suggests the median home value across Southern California is 23% higher than the national median ($455K), and even higher within some cities such as LA ($788K) and San Diego ($649K). Similarly, an LA Times article found that average home values in Los Angeles County—$843K—and Orange County—$1MM—are well-above the national average of $350K.)

This is all good news for current owners and prospective sellers—it means they should still be sitting on plenty of equity in their homes, despite a cooling market. 

Whether you’re selling your property to relocate, downsize, upsize, or something else, that surplus in equity can be used to offset a higher mortgage rate on your new property (you can make a larger down payment, you can engage in rate buy-downs, etc.).

Interest rate hikes are continuing, but at a more tolerable pace

Interest rates—everyone is worried about them. 

When interest rates rise, it becomes more expensive for buyers to borrow money, so fewer can afford to purchase a home. Lower demand leads to lower prices, so when interest rates increase, the value of homes drops as well…or so the theory goes.

In actuality, it doesn’t seem to be happening (at least not in a crippling way), despite what the media might lead you to believe.

Yes, the Federal Reserve is making it clear that they don’t intend to press “pause” on interest rate hikes until such time as inflation drops to 2% (currently, inflation is somewhere around 7%). 

Yes, throughout 2022, the board hiked the interest rate by 0.75%,

And, yes, we can expect Chairman Jay Powell to announce more rate hikes at each of the next several board meetings (the next four will be on January 31st, March 21st, May 2nd, and June 13th). 

But if you look at the VERY last meeting of the Federal Reserve in December, the board only hiked the rate by 0.50%—an indication that 2023’s hikes will be of a smaller nature than 2022’s.

Softening federal fund rate hikes are great news for the real estate industry—it means a plateau is on the horizon. The sooner the rate flatlines, the sooner it will start to decline, making it easier for buyers priced-out by high mortgage rates to re-enter the market.

The market is unbalanced…but it’s also strong

Even with the current slow down, this is a pretty healthy real estate environment from a historical standpoint. Yes, demand for housing still outstrips supply by a hefty margin, but that imbalance is about the only serious red flag I can see—and it’s a flag that only hurts buyers.

For example, consider how few homes are underwater on their mortgages today (less than half a million), compared to 2008 when more than 15 million homes were worth less than their outstanding loan balance.  

For those who were in the market between 2008 and 2012, short sales and foreclosure auctions were everywhere leading to a surplus of inventory and crashing home prices. Right now, demand for homes still outstrips supply by a country mile, protecting earned equity in the face of peak interest rates. 

Even with a mild recession on the horizon, leading economists are only predicting a 12% overall decline in home prices across the United States, with the trough arriving towards the end of 2023 (compared to about a 36% decline in 2008)—that’s incredible.

So…what should you do?

To be frank, the answer depends on whether you’re a buyer or a seller.

Buyers

If you’re a buyer, think about what type of property you want to invest in versus what type of property you can afford in this market of higher interest rates. You might want a stand-alone single-family home in Redondo Beach, but if you can only afford to put 15% or 20% down, are you prepared to pay $7,000 a month to your lender?

Have an honest conversation with yourself, your loved ones, and your real estate broker about what’s in the realm of possibility versus what’s in the realm of comfort.

Yes, prices are going to come down this year, but they’re not going to come down in a meaningful enough way to offset borrowing costs, so—if you’re mentally prepared to buy—there’s no point in waiting for the proverbial floor. 

Not only is it impossible to time the market with perfection, but the floor won’t be low enough in 2023 to make it worth your while. The best thing you can do if you’re really ready to own is act ASAP while other prospective buyers are too scared or intimidated to beat you out with a better offer. 

Sellers

If you’re a seller, consider what you want from the next five, ten, or fifteen years of your life…Are you trying to downsize and have more cash for travel?…Are you looking to relocate to a state with lower taxes and less traffic? 

Whatever you’re after there are only two reasons to not list in this market:

—You want to maximize your gains in equity, in which case, hold off on listing until interest rates get back down below 4%.

—You are one of the unlucky few who bought during the peak of the market in Q1 2022, and your home is now worth a few percentage points less than what you paid for it. If this is you, just slog through 2023 and wait for 2024, as your home should regain any equity lost by then. 

Let’s make 2023 a winner, shall we?

Rather than being down in the dumps about the overall economic forecast for 2023, let’s take a glass-half-full perspective, shall we?

Real estate prices?—They really aren’t down that much.

Interest rates?—They’re poised to start coming down by the end of the year.

A recession?—It’s projected to be a minor one which means minimal layoffs, a modest reduction in spending, and a pretty soft landing for the real estate industry.

All in all, these negatives don’t sound too bad, especially in comparison to 2008 or 2001. So, keep your head up boys and girls. As I said at the end of December’s newsletter, let’s set ambitious goals for 2023 because the market will be ripping again in no time. Always At Your Service, 

-Shannon