Real Estate 2022 Half Year Market Update
With half the year now in the books, let’s take a look at where the Real Estate market is and may be going. I’ll also discuss the Beach Cities YTD and review my activity so far this year. But now this…..
It is probably an understatement to say that no one saw this market coming last January.
If you are not familiar with what I am referring to, the sharp increase in mortgage interest rates has pushed many buyers to the sidelines which has increased inventory as properties have gone unsold. Sellers who maybe were undecided about selling have started to list their homes because they don’t want to miss out on the market high (too late) and that has pushed inventory even higher which has caused other sellers to lower their prices. I’ve actually seen more price reductions the last five weeks than the last five years and that’s not an exaggeration. We’re also seeing more inventory in most neighborhoods to the point that buyers actually have choices. Imagine that.
This isn’t just the LA area. Pretty much the same is happening throughout the entire country from what I am hearing and reading.
Here’s what that all means.
The Seller’s Market of 2019 through 2021 is over. Now instead of buyers asking how much over the list price they have to be, a lot of buyers are asking how much less than the asking price the sellers would accept. Really.
A few thoughts:
As I have long said, all we ever know about the real estate market is what we know today. Things change.
No one rings a bell when we hit market highs or lows. Market turns are often quite abrupt.
Conditions favorable to your situation won’t continue indefinitely. Your home can’t go up 20% or more a year indefinitely. A word to Buyers, this too shall pass.
HOW DID WE GET HERE?
As we entered 2022, inventory was historically low as were mortgage interest rates. Buyers were conditioned to offer $50K-$100K over the asking price for every new listing and waive multiple contingencies. Sellers expected homes listed on Thursday to be in escrow on Tuesday and receive multiple offers with extremely favorable terms such as free leasebacks after the close of escrow.
And then the Federal Reserve started indicating that rate hikes were coming, a war erupted in Ukraine and gas prices and inflation spiked. As a result the stock market indexes broadly declined as did crypto. That was all on the back of the lingering supply chain issues and the persistent pandemic.
Amidst all the recession talks, it is very likely that some buyers would have withdrawn from the market because no one likes uncertainty. But the doubling of mortgage rates from sub 3% to close to and over 6% was not the straw, but the brick that broke the back of the multi year Seller’s Market. And broke it is as of this writing.
Here’s the effect of the higher rates. Let’s say a buyer is buying a property for $1,250,000 and putting down the classic 20% thereby getting a $1M mortgage.
$1,000,000 mortgage at 3% is a PI payment of $4216.
$1,000,000 mortgage at 4% is a PI payment of $4774.
$1,000,000 mortgage at 5% is a PI payment of $5368.
$1,000,000 mortgage at 6% is a PI payment of $5996.
I don’t need my calculator to conclude that $5996 is a lot higher than $4216.
This is real and at higher loan amounts even more so. It is way beyond what I call the Starbucks trade. That’s when the Buyer says they will stop going to Starbucks to free up some money for the mortgage. Also knows as the gym, new car lease, vacation etc trade. In the past typically the buyers did not give up the vacation or going to Starbucks but it was good happy talk. These days the delta is too high for that kind of rationalizing.
Over the past few weeks, I’ve gotten dozens of calls from other agents asking what’s going on and why instead of seeing dozens of parties come through their Open Houses, maybe 2 or 3 show up and often those are just neighbors who were out walking their dog. Add to that little or no activity during the week and many agents are at a total and complete loss as to what to do next. (But not yours truly.)
That’s how slow the market is right now.
Or as I’ve been saying, Sellers still think we’re in the summer of 2021 and Buyers think we’re in the throes of the financial crisis foreclosure era of 2008-2010.
While neither are quite correct, that’s a perception gap that you can drive a freight train through.
WHERE DO WE GO FROM HERE?
Well your guess is probably as good as mine, but here’s my take on things.
The market will have to go through a natural reset. Does that mean prices go down? Possibly for some properties and neighborhoods but no one is saying this is 2008 redux and that we will see 30% drops. In fact, recession does not necessarily mean decline in housing prices.
But the next few months may be painful for Sellers, Lenders, and Agents. The way to avoid the pain is to accept the changes and move forward. Hint for Sellers - your list price should be about where you reasonably think your home will sell for.
BEACH CITIES YTD SALE UNIT COMPARISON
5 YEAR SALES JAN - JUNE
There’s a lot to unpack here. What are we seeing?
REDONDO BEACH
2022 sales are way off the pace of 2021. 364 in ‘22 compared to 509 in ‘21. That’s a decline of 28.5% and does not reflect the current slowdown over the past 6 weeks. As would be expected, 2020 came in lower at only 275 sales over the first six month that that shouldn’t be surprising because in March everything ground to a halt during the early weeks of the pandemic lockdown.
Looking at 2018-2019 we saw six month sales for January through June in the 400s, 447 in 2019 and 412 in 2018. What fueled the major increase in 2021? You know, the same thing causing the decline today, rates.
HERMOSA BEACH
As with Redondo, current year sales in Hermosa are running behind last year, 99 compared to 140. Thats a decline of 29% on par with Redondo. But after that the data diverges. 2020 was about on par with 2019 and 2018 slightly lower than this year.
MANHATTAN BEACH
We see the same approximately 30% fall off year to date in 90266 as in the other two Beach Cities, 248 down to 173. 2020 was lower due to the pandemic and 2018 and 2019 were remarkably consistent with just under 200 sales during the first six months. The trend lines inManhattan Beach looked fairly similar to Redondo Beach.
“The numbers we are seeing for the first 6 months do not fully reflect the impact of higher rates yet.
It will take a few more quarters of data to determine the full impact on prices and sales.”
BEACH CITIES MEDIAN PRICES 5 YEAR TRENDS
JAN - JUN MEDIAN PRICES
So what are we seeing here?
Median sales prices are up significantly in the past 5 years with the biggest jump coming in the last 2, basically post pandemic. During that time period prices increased over 20%.
A recent article in Forbes made the case that the run up in prices has been almost entirely fueled by the lower interest rates and that now that rates are on the rise you can expect appreciation to stall. They then go on to state:
“What happens in the future if mortgage interest rates have bottomed out and we don’t have generally falling mortgage interest rates pushing up real house prices and home-owner family wealth over the next 30 years?
House prices will still go up with inflation but, nationally, real, inflation-adjusted prices wouldn’t go up much, or at all, for the foreseeable future in this scenario.
Significantly less real house price appreciation would mean significantly less real family wealth creation via home ownership and, possibly, slower family wealth creation, overall. A much larger percentage of family wealth would come from simply paying off their mortgages and far less, or none, would come from real home price appreciation.”
BUBBLE TERRITORY?
Writing for “The Street”, Brian O’Connell notes: It’s not a matter of “if” but a matter of “when” the housing will lose its luster, and residential real estate prices will decline.
Well sure if as reported “In the US, mortgage applications have fallen by 28% from their peak, new home sales are down by 17% and housing starts have dropped by 13%,” said Neil Shearing, chief economist at Capital Economics in a new research note.”
Those number track fairly close to what I am anecdotally hearing from lenders I work with. The first leading indicator of the strength of the house market is really mortgage purchase money applications.
Shearing goes on to say, “The underlying drivers of the latest rise in prices are very different to those behind the surge in the mid-2000s. Back then, a bubble in house prices was inflated by a rapid expansion in mortgage debt that was facilitated by lax regulation and loose lending standards. When the bubble burst, homeowners found themselves in negative equity, and forced selling created a self-reinforcing downward spiral.”
That’s just not the situation we are in now. In fact, my prediction is that once the current listings sell through we might go back to the very low inventory of just a few months ago. That’s because Sellers may wait for a better market and with builders pulling back, that will help suppress inventory as well.
MY 2022 SALES YTD
Here’s what I have in the books so far through 6 full months. Seven sales totaling just about $10M. One more closing in July and a lease to be signed will put me at around $12M. Everything has been in Redondo Beach except for one in Lawndale just across the street from RB and one in Long Beach on Redondo Ave. Yeah really. So on my historical usual pace. Let’s take a look.
IF YOU WILL BE BUYING OR SELLING - HERE’S WHAT YOU NEED TO KNOW RIGHT NOW
BUYERS
Yes, rates are up BUT you have more inventory to choose from and less competition. What that means is that you may not be involved in endless bidding wars, have to waive all kinds of contingencies and offer free leasebacks. You might even get a better price than would have been achieved otherwise.
I’m seeing a lot of buyers move to adjustable rate mortgages (ARMs) which is not a bad idea depending on your timeframe for ownership. I also see Buyers paying points. Short version is that, at least at the time of this posting, Buyers are getting rates in the 4s on jumbo mortgages. On loans that fall within the Fannie Mae conforming range (below $970,800 in LA County), the rate will most likely be higher than for jumbos and those will be more in line with what you see on the national news - rates as of this writing in the 5’s.
Some economists think that rates may come down in 2023. If so, there could be an opportunity to refinance.
SELLERS
If you are going to be listing you home anytime soon, price and presentation count more than ever because you have more competition and fewer Buyers out looking. Since you can’t reliably count on every new listing getting bid up, its best to price your home closer to what it may sell for. And it has to look great online and in person.
Don’t expect to get a lot of the very favorable terms such as free leasebacks and no contingencies. And don’t get nervous if your home doesn’t sell the first week on the market.
And everyone, just remember…….
“All we ever know for sure about Real Estate is what is true today.”