Hi Everyone,
We’ve spent months and months talking about the impact of inflation and the economy on the broader real estate market.
Naturally, most of the conversation has trended into negative territory as high interest rates and a slumping economy tend to hammer real estate.
Yet for all our talk since the start of 2023, something very interesting is happening. It appears that despite some well placed fears about neutered demand, the market remains pretty strong.
In fact, it doesn’t feel like buyers are discouraged at all—they’re just as interested in buying a home as they were pre-pandemic when the economy was ripping.
So, today, we’re going to explore why buyers are still interested in acquiring anything they can get their hands on, and what it means for the months ahead.
-Shannon
310-853-0335 | ShannonShue@KW.com
*** Next investing workshop is a property comparison. Join us on September 21st at 12pm via zoom. Don’t miss this opportunity to learn about all-things SoCal real estate***
The Short Story...
**At the start of the year, there was a lot of fear that the real estate industry might experience something of a collapse.***
***This fear was driven by the belief that higher interest rates would quash buyer demand and force sellers to make massive concessions or price cuts.***
***Yet as we look back on the first six months of 2023, it seems demand hasn’t gone anywhere—at least in relation to supply.***
***Low inventory has allowed sellers to keep their prices fairly high, and there’s still a large pool of buyers who remain undeterred by interest rates sitting above 6%.***
***With interest rates set to cool over the next several months, it will be very interesting to see how the stars align between sustained buyer demand and more affordable capital (i.e., lower mortgage rates).***
The Full Story...
Let’s wind back the clock a few months to my newsletter from January 2023:
“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 50ish 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?
Fast forward to today
Well, prices didn’t start falling faster.
In fact, they didn’t really fall much at all—especially in California’s most desirable markets like Greater LA, San Diego, and San Francisco.
Unlike the real estate collapse of 2008, no one’s really falling behind on their mortgage payments either.
Sure, foreclosures are happening, but they’re always happening—and they’re not really happening at volumes much outside the norm.
Yes, interest rates did keep climbing for the first six months of the year—and the labor market remains strong. However, inflation appears to be cooling (which is amazing!). The most recent report from the Bureau of Labor Statistics states that year-over-year inflation is now only at 3%—just a notch above the Federal Reserve’s 2% target rate. While that’s still higher than our nation’s leading economists would like to see, it’s well below the record-high inflation rate of 9.1% we saw 12 months ago.
In sum, the last six months were far rosier for the real estate industry (and the overall economy) than anyone could have predicted.
Jobs aren’t being lost
Despite all the headlines about layoffs at buzz-worthy companies such as Meta, Amazon, and Microsoft, the reality is the American job market remains stupidly strong despite inflation, supply-chain issues, and interest rate hikes from the Federal Reserve.
While no one likes inflation or higher mortgage rates, the fact is if people aren’t losing their source of income they’re still going to think about buying a home.
The supply of homes is tight
When mortgage rates go up, home prices fall because it raises the cost of homeownership, thereby reducing demand—at least that’s what conventional wisdom tells us. Yet, we’re not seeing prices drop precipitously and that’s because the supply of available homes is so low.
Part of this supply constraint is due to lingering caution within the home building industry due to the calamity experienced in 2008. Builders like D.R. Horton and Lennar Homes are ramping up production, but they’re not maxing out their production capacity for fear they could over-build and be forced to sell homes at a loss.
Another part of the constraint is due to current homeowners feeling “locked-in” to their current mortgage. Anyone who bought a home between July 2010 and July 2018 likely secured a mortgage rate at or below 4.5%, while anyone who bought between February 2020 and February 2022 likely secured a rate below 3.5%. (Some buyers even secured rates below 3% which from a historical perspective is insane, and 85% of current homeowners own a mortgage rate below 5%.)
Considering today’s mortgage rate is effectively double what it was for the 12 years between 2010 and 2022, selling feels scary for a lot of people. In effect, these crazy-low mortgage rates have become a form of “golden handcuffs” for many prospective sellers. Yes, they may want to upgrade to a bigger place, or move to a warmer climate, but they’re not willing to sacrifice their 3% rate for a 6% rate in order to turn their desires into realities.
These golden handcuffs are limiting the number of existing homes entering the listing market, further crunching supply.
Just how bad is the crunch? Well, check this out…
- Inventory in Q1 2023 averaged 1.63 million listings—down 40% from Q1 2019.
- Inventory in May 2023 May was 1.08 million listings—down 6% from May 2022.
What’s next?
What’s next is this:
More of the same.
Most people aren’t jumping back into the market to sell, because they feel trapped by their favorable mortgage rates.
That’s really good news for those owners who don’t feel trapped and decide they want to sell is that constrained supply protects home values. Put plainly, as long as inventory remains lower than buyer demand (which it currently is) their homes can still command exceptional prices with little to no depreciation.
Jumping in to snap up those few available listings will be a swarm of hungry buyers who remain undeterred by the higher cost of financing—they just want their house and they’ll pay (almost) whatever it takes to get it.
To be clear, this isn’t to say the total volume of prospective buyers hasn’t decreased since the Fed started hiking rates—it most certainly has. The underlying issue is that the pool of buyers hasn’t shrank by a great enough volume to match (or undercut) the painfully small supply of homes.
In sum…
I’m sorry to say it if you’re a buyer, but things aren’t going to get better:
- Supply isn’t going to catch up with demand any time soon.
- Rates might come down, but if they do it will only bring more buyers back into the market.
- Rates might go up, but if they do it will only constrain the supply of existing homes further while making it more expensive to buy.
So, basically, if you want to buy, you might as well take your medicine and just dive into the market right now, because it won’t get any easier or more affordable than it is today. This is especially true if you’re someone looking to buy in Southern California’s most resilient markets such as greater LA.
For my sellers, whatever buyer’s market that might have existed at the end of 2022 start of 2023 is dead and gone. The world is, once again, your oyster. People want what you have, and if you’re willing to list, you’re going to get an exceptional price. Granted, you might not see the rabid bidding wars of 2021 when interest rates were around 2.7%, but there will still be plenty of qualified buyers lining up to throw good money at you.
With all of that said, please remember that I’m here to serve you. Whether you’re thinking about buying, selling, investing, or starting a career in real estate, my door is always open. No question or request is too silly—if you’ve got something burning in your mind, I want to hear it.
Shoot me an email at ShannonShue@KW.com or give me a call at 310-853-0335. Tell me a little bit about your situation and what you’re really looking for—from there, I can make a recommendation that best suits your needs.
-Shannon