Real Estate Market Update September 2022

You’ve probably already heard that there has been a profound shift in the housing market both locally and nationally. It’s all over the news. I prefer to refer to this as a “reset” rather than a shift. All the stakeholders - buyers, sellers and agents, will have to make adjustments as to expectations as we look at the new market realities.

No more lines around the block at Open Houses. Multiple offers are now few and far between. Buyers don’t have to waive all their contingencies. Welcome to price reductions, seller concessions, more inventory, and properties being on the market for longer before they attract a buyer. In other words a more balanced market and basically what I predicted in a blog post in late May has come to pass. Simply put, we are in a profoundly different environment now than at the beginning of the year. The extremely favorable Seller’s market has faded into the past.

So what happened? Higher mortgage interest rates. And they aren’t going down anytime soon. In fact they’ll most likely trend higher which will put more pricing pressure on listings. While some economists predict rates may decline in 2024, that’s a ways out. I personally don’t think we’ll ever see sub 3% rates again even though I’m hoping we do. I also don’t think we’re looking at another 2008 style foreclosure crisis. At least not yet, anyway.

While sales are definitely down across the board, prices have not necessarily followed suit - although I do see some price erosion from the high point in May. I’ll be discussing all that later in this post and looking specifically at sales in the Beach Cities of Redondo Beach, Manhattan Beach and Hermosa Beach CA but before I do, I want to touch on how Buyers, Sellers and Agents are playing this market incorrectly and offer some tips on what might work better.

BUYER & SELLER TIPS | FALL 2022

Many buyers have simply withdrawn from the market which might be exactly the opposite of what they should be doing. There’s a lot of reasons that buyers have pulled back but the primary concern is the economy. The persistent drumbeat in the news about recession and yes the higher rates make qualifying more difficult - until prices reset. The economy has been a drag on activity.

Even with all that, this Fall may be the best buying opportunity in the last 3 years. There’s far less competition and sellers are more negotiable. As a buyer what you don’t want to risk is inventory shrinking again and rates going up. The price on the house you buy now is set forever, rates aren’t. If rates do decline a few years out, you can always refinance. Even if they don’t, chances are pretty good that the same house will cost more - either measured by price or payments or both the longer you wait.

BUYER TIPS

• Consider an adjustable rate mortgage (ARM). Yes I know they got a bad rap during the foreclosure era but they are useful products because you will pay less for a set period of time - either 5, 7 or 10 years. And even if rates don’t go down, you can always refinance to another ARM before the reset.

• Have the seller pay some points to buy down your rate. Your agent can write it right into the offer. From a seller bottom line perspective, the net effect is the same - they are getting less money. Make sure to check with your lender so you know what will be allowed. Not every loan program or situation allows for seller concessions (although most do).

• Don’t offer $150K less than the asking price - unless that’s really the right price for the property. Yes, there are some properties that are selling for way below the list price, but in general low ball offers go nowhere. Ask your agent for comps from sales that close in July-August and onward and, at least for now, start your offer 5% below that.

SELLER TIPS

• That huge jump you saw in your home’s value since the beginning of the pandemic, maybe 30-40%, sorry you’ll be giving some of that back. Probably not all of it, but I’ve seen a fair number of homes trade at 3-5% less than they were at the high point in May. Prices potentially may soften more before the market stabilizes. My analysis based on affordability is that we could decline 15% (It’s looking like May was the high point in the current market.) Let’s reframe some of that last few sentences. If I had told you in March of 2020 when we were locking down because of the pandemic, that your home would be worth 25% more in September of 2022 you most likely would have been pretty happy.

• Condition, curb appeal and marketing count more than ever. It’s not the Summer of 2021 anymore when anything would sell no matter the condition and presentation. To sell in this market your home has to look great, be in good condition and show well. And your agent must have a marketing strategy that is more robust than just putting the listing in the MLS and doing an Open House.

• Pricing right is more crucial than ever. The few properties that are getting multiple offers are priced aggressively, show well, and have robust marketing. You may cringe when a knowledgeable agent tells you the number you should list at. If you don’t price right you’ll wind up chasing the market down and I’m sure you don’t want to do that.

• The good news is just like a lot of buyers have withdrawn from the market, many sellers have pulled back also. Lower inventory won’t result in the feeding frenzy we’ve previously seen but it may help your sale.

AGENT TIPS

Have you figured out yet that your Broker is feeding you the wrong info? No it wasn’t slow because it was Summer and people were traveling or any of the other BS you’ve been hearing. Buyers are turned off on housing right now. It happens from time to time. Get over it.

Instead of telling your buyer clients that “rates are still historically low” (which they don’t want to hear), and pushing your sellers for $100K price reductions, spend your time studying the data, finding solutions and looking for ways to add real value no matter which side of the transaction you are on.

HERE’S HOW THIS PLAYS OUT

A lot of people simply will not be selling because they are in homes with 3% or lower mortgages and it simply doesn’t make any sense to sell unless they have some major life event or are moving out of the state.

At the same time, builders have pulled back from building because of concern about the market.

Inventory will decline throughout the balance of the year and further increases in mortgage rates take even more buyers out of the market. A possible recession adds to that pain.

At that point, the sellers who are really committed to selling lower their prices to meet the affordability challenge of buyers. This brings more buyers back into the market.

Bottom line: until real wages catch up with home prices, the real estate and mortgage market will continue to shrink.

BEACH CITIES SALES | JANUARY THRU AUGUST 2022

WHAT ARE WE SEEING HERE?

A lot of counterintuitive data and in 2 out of 3 cities, something much different than the national numbers.

MANHATTAN BEACH

Manhattan Beach started out the year slowly - in part because of lack of inventory. But by the time we entered the traditionally stronger selling season, sales had picked up and stayed there except for the drop off in August which was around 23% less than the highest months in 22. That’s most likely because the Manhattan Beach buyer is typically very strong financially and often have financially options not available to lesser qualified buyers.

HERMOSA BEACH

Similar comments to Manhattan Beach with a drop off of 25% from the highest months in 2022 but still better the national numbers.

REDONDO BEACH

The most dramatic decline in sales has been in Redondo Beach, particularly North Redondo which during July and August saw a 50% drop off from the prior year. For 2022, there was just about a 30% drop off from the strongest month to the lowest. Redondo Beach, typically lower priced than the other Beach Cities, would be the most affected by affordability and rates.

Let’s next look at a multi year comparison for the first 8 months of the year.

FIVE YEAR BEACH CITIES SALES JANUARY - AUGUST

WHERE DO WE GO FROM HERE?

I’m not one for “happy talk” and you might not like the following comments.

With additional FED rate hikes in the pipeline for the immediate future, expect to see affordability continue to erode. In the normal course of events that would lead to lower prices. My analysis indicates that prices will have to fall 15-20% from the highs in May of this year to close that gap.

That means that sellers would be giving back a lot of the pandemic era price appreciation but in most instances not all of it.

Alternately, sellers could just say no to selling and we can see a soft landing. By that I mean that enough buyers and sellers withdraw from the market to create an equilibrium. If that happens concurrently with a reset of expectations, we would see a price erosion of no more than 10% from the absolute high.

The smart money is on rates being lowered at some point in 2023-2024 to further stimulate the economy which very well may be hurting by then. At that point, even for those who bought at the early 2022 highs, they should be in the money.

I don’t think this is 2008 again and will write about that elsewhere.