Real Estate Year in Review 2023
At the end of every year I do a recap of my sales and what’s going on in Southern CA Real Estate.
This year, I’m changing the format and instead of recapping my sales, I’m going to talk about three major themes that affected housing on a national and local basis. Two of them, you are probably familiar with - the run up in mortgage interest rates and the lack of inventory. The third major topic - the assault on the industry commission structure via class action lawsuits launched against the National Association of Realtors (NAR), local Multiple Listing Services (MLS) and some of the large national brokerages, hasn’t quite permeated the consciousness of most buyers and sellers yet although it has received national attention and those of us who sell homes for a living are very aware of it. (Please note - I am not a party to that litigation.)
If you don’t like reading, you can just watch the video. I’ll cover most (but not all) of what I’m going to be writing here. And so you don’t get totally bored looking at another agent talking into a camera, I have a lot of background video running while I’m speaking showing some of the properties I sold, leased and listed during 2023 as well as some local scenes.
MORTGAGE INTEREST RATES
Interest rates, the Federal Reserve, inflation, “soft landing” or recessions - all big, big stories in 2023. But the biggest by far for the housing market was mortgage interest rates which briefly rose to over 8% compared to the sub 3% they were at during 2021. For most of the year rates were at 20+ year highs if my calculations are correct.
At the same time, in most markets after an initial dip prices held steady or even went up. As a result of the record high rates and prices, a lot of people - both buyers and sellers, went to the sidelines.
Here’s how this impacted people in very real ways.
BUYERS
First, many buyers simply found themselves priced out of the market and the properties they were most interested in. As rates rose with all the rapid Fed hikes many buyers even found their pre-approvals quickly outdated and were no longer able to qualify for the needed loan amount even if they had the downpayment and good credit. In some instances monthly payments rose by as much as 40-50% compared to a few years earlier.
While it is common for buyers to substitute neighborhoods and other requirements in their home search, at a certain point many will remain renting or staying in their existing home.
Many of the buyers I worked with during 2023 accepted payments higher than they would have preferred because they are a) either hoping to refinance when rates inevitably come down or b) are expecting to see increases in their income in the coming years.
SELLERS
The second impact was on sellers. Not many people are willing to trade out their 3% mortgage to pay 7 or 8% on what might be a more expensive home. During 2023 we started to hear the term “golden handcuffs” applied to the over 50% of homeowners with sub 4% mortgages. Previously, the term had been used to describe employees locked into their jobs with lucrative stock options and other perks that kept them out of the job market. Now it’s the home owners locked in.
Another factor keeping sellers from listing their homes was that if they moved, they could often rent their departing residence for thousands more than their low mortgage. Many used those funds to offset their higher payments in the new home. Until they could refinance, that is.
And lastly, many sellers just didn’t think that the overall economic environment was conducive to a sales experience they wanted to participate in.
SHOULD WE HAVE SEEN THIS COMING?
My question to the banking community and lenders in general is “when you refinanced everyone you could in the sub 3% days, did you think there was another refi coming under 2?”
WHO WAS BUYING OR SELLING in 2023?
For the most part it’s been all about life events.
Buyers I worked with needed larger homes because of growing families, were moving back to or into California for the first time (yeah, that’s really a thing), or had received a job relocation and preferred to buy rather than rent. While rents generally increased, the differential was not as great as the cost of home ownership.
For the sellers I worked with, most were moving out of the state - either voluntarily to be closer to family or for work, had a need of a larger house or different living arrangement, or had an inherited property they needed to dispose of to settle an estate. Other reasons people are selling now are divorce or illness.
I think the buyers who decided to make a move in 2023 made the right decision. Once rates come down, competition will be fierce and there’s no guarantee that there will be more listings. Which leads me to the second major theme of 2023…..
LOW INVENTORY
Even with far fewer buyers in the market, there weren’t enough homes listed to meet demand. It is entirely an understatement to say that the inventory was low. It was historically low in many neighborhoods and so were sales.
Why? For the reasons I mentioned above, sellers just weren’t selling other than the “have to’s”.
To put this into perspective historically, researching back to the beginning of the modern MLS, sales have gone steadily down no matter what the rates were. There should be no surprise about that. As homes became less affordable - and affordability is not very favorable right now, sales went down. Except for the financial crisis, this has kept housing prices in most of California relatively high.
Let’s take a look at a few cities I work in and compare year over year sales. I’m going to look at Manhattan Beach, Redondo Beach and Palos Verdes Estates and compare a few years of sales going back to the “pre” times before Covid so we can also include another nominally down year in 2020.
SALES COMPARISON 2019-2023
What are we seeing here other than some bright colors?
Even factoring out the bonkers increase in sales in 2021, in every case 2022 was lower than 2019 and 2023 even lower than 2022. Sometimes by a lot.
Manhattan Beach had 252 sales in 2023 - down from 322 in 2022.
Redondo Beach had 560 sales in 2023 - down from 661 in 2022.
Palos Verdes Estates had 142 sales in 2023 - down from 162 in 2022.
While it might appear on the surface that the sales decline was due to the higher rates - which were certainly a contributing factor, even with fewer buyers in the market, there were not enough listings to go around.
Because of declining sales and other factors I’ll be talking about, we come to my third major theme…..
MAJOR CHANGES IN THE REAL ESTATE INDUSTRY ARE COMING
In the video I speak about the anti trust and class action lawsuits that are roiling the Real Estate industry right now and I’ll get to that in a second.
First though, I want to mention that for years various start ups - often backed by hedge funds, have been trying to “disrupt” the industry. What they really mean by that is how can they get a piece of what is perceived to be a huge pool of commissions earned by agents and brokerages representing residential home buyers and sellers.
One of the most common disintermediation schemes was the advent of the firms that would buy your home for cash and then resell it. What most of them learned is that - as many flippers already knew, it is easier said than done. Some rather big players in that market - like Zillow, lost so much money they got out of it entirely.
Then there are the brokerages who’ve convinced their agents that they are really tech companies. Really? That’s so dot com era. Sorry, you’re just a brokerage with some tech tools that usually aren’t even best of breed.
And lastly, in 2023 we had the new disruptor - AI as in artificial intelligence. That was going to change Real Estate. While I think there is some beneficial potential application of AI to the home buying experience, that would require a lot more standardization of data entry and management by the MLSs across the country.
And that leads me to a topic I discuss in the video, the class action lawsuits alleging that the large brokerages, the MLSs, and NAR all conspired to fix commission rates and who knows what else. If only they were that organized! Real Estate is for the most part a Mom and Pop business and most Brokerages are not run by very good business people. So for me at least, kind of a stretch to believe that these parties all got together to do anything but have a few drinks. As for the other parts of the lawsuits - there are now over a dozen copy cat suits going on, I’m not a lawyer and not going to weigh in on the ant trust aspects.
As for commission rates, what I can say is that a) I’ve always made it known to my seller clients that commissions are negotiable and have even been somewhat ostracized by other agents for accepting lower listing commissions - I even lost a very good friend by offering lower rates, and b) I’ve always been upfront with my buyer clients as to where my source of income was coming from when I represented them. Sellers have paid the commissions.
Which brings me to the part of these lawsuits I do want to comment on.
Without getting into the history of agency and representation in Real Estate, I believe that buyers need representation. In the brave new world that may emerge, the lawyers and courts may decide that that representation should be paid for directly by the buyer. For the last 100+ years the sellers have borne the brunt of paying the commissions (for the most part).
Here’s the challenge with having buyers directly foot the bill for commissions. Unless it can be financed as part of the sale - which currently it can not, buyers won’t be able to afford representation or at least not from the agents who can really help them. And, anyone who thinks that sellers will lower their prices by the 2.5% to 3% that they are currently paying for the buyer’s agent is extremely naive. I’ve sat at the table with hundreds of sellers and they all want every penny they can get - as well they should.
Some people think this issue will take years to work its way through the appeals process. Others think an injunction can come at any time.
Here’s what I can tell you if you will be a buyer in the next few years. Don’t be surprised when your agent ask you to open your checkbook (or Zelle) money for their services. It is coming.
THE LAWYERS GET THE LAST LAUGH
So for all those disruptors out there who wanted to grab a piece of the commission pie - jokes on you. The lawyers will get whatever they get - which who knows could be 30% of the judgements and the commission pool will shrink.
OTHER THOUGHTS ON 2023
For the most part, it was a good year to be a builder - particularly those large enough to offer rate buy downs for buyers.
There is a segment of the market that isn’t mortgage rate sensitive - those with cash. For example in Palm Springs there were often more sales than in the Beach Cities combined. And by Palm Springs I’m just referring to the city of PS not the entire Coachella Valley.
In the South Bay, it often seemed to me that the more expensive properties were less affected by rates than some of the lower priced ones. Often wealthier people had sweetheart deals with banks or were cash buyers.
During 2023 it was also apparent that most buyers wanted homes that are “done” whether new or a resale. A large percentage of my business was new construction and for other homes I listed, the ones that were move in ready definitely were better received by buyers. I see that trend continuing into 2024. Speaking of which…..
WHAT ABOUT 2024?
No one has a crystal ball which is why I stopped doing forecasts. But there’s a few things we can most likely count on.
MORTGAGE RATES WILL COME DOWN
Actually as of this posting, mortgage interest rates are about a point or more lower than the highs earlier this year for many products and programs. That’s of course if you have good credit, down payment and reserves.
Other than any actions the Fed takes, there’s other reasons why I think mortgage rates will come down. While it is not often spoken about, it seems to me that many lenders increased their margins when rates were near zero and did not make changes as rates went up. Here’s what I’m talking about.
When mortgage rates were in the 2-3% range, the true cost of money was around zero. So lenders were making more than the usual 1.5-1.75% they would make on loans. Similar to the prices at the gas station, they go up quicker than they come down and lenders got used to higher margins.
But rates will come down in 2024 if the Fed does as is predicted and cuts rates 2-3 times which will most likely happen in the second half of the year. That may or may not be in time for the traditional Spring selling season but we’ll have to see.
Most economists predict more activity when rates get to the 5-5.5% range which historically would be considered good. Just not as good at 3%.
What is unknown right now is if the lower rates will propel prices even higher and what effect if any that will have on some home owners deciding to list. The market could quickly get over its skies if there are more listings than buyers.
THERE MAY BE NEW LENDING PROGRAMS
Whether to accommodate buyers financing the cost of paying their agents or to make homes more affordable, expect to see something new from the banking industry, although it may not initially come from the largest banks. I’m talking about 40 year amortizations, balloon payments, shared appreciation and other offerings that are today considered non traditional lendng.
DON’T EXPECT MORE INVENTORY
Although as mentioned about, there is a possibility higher sales prices pull more sellers into the market but it’s just not something I expect to see happening. It may take decades for the 4% and lower homeowner inventory to work its way through the normal life cycles.
One unknown that can can this is if the hedge funds that bought a lot of properties to rent out decide to dump that inventory. Another variable is repurposing unused office and retail into residential - although that comes with its own set of issues.
Lastly is changing in zoning to enable more density where housing is needed. But most home owners are NIMBY on that topic.
CONSOLIDATION IN THE REAL ESTATE RANKS
This will happen on the agent and brokerage level. There simply won’t be enough deals to feed enough mouths and the offshoot of the class action lawsuits may force many players out of the industry.
But not me…..
HAVE CAR WILL TRAVEL
I’m continuing to do my balancing act between the Beach and the Desert. Most times the drive is about 2 hours and so far I’ve been able to serve mu clients in each market. With all the traffic in LA these days it could take me close to 2 hours to get from Santa Monica to Redondo Beach.
Thanks for reading, watching the video or both. I’ll see you out there.
