The rapidly-increasing home prices are exacerbating the problem too – especially for existing homeowners who had hoped to move up. If you paid $500,000 for your house and now it’s worth $1,000,000, you need to spend $1,500,000 on the upgrade just to make it worth it. But the gap isn’t between $1.0 and $1.5, it’s the whopping million dollars between the previously-comfortable $500,000 and the new price of $1,500,000. Even if you are over 55 and can take your old property taxes with you, the new mortgage amount will be double the previous amount AND last for another 30 years. It’s why more and more of the current homeowners are staying put, which is limiting the inventory now, and in the future.
It’s why I said on the TV show that the current market insanity is likely to continue.
With a finite number of homes and 1,700 new millionaires being created every day in America (we are now up to 18,000,000 millionaires!), the affluent have commandeered the local market. Apparently, they don’t mind paying these prices, and will throw in another $100,000 or so to win the home, if needed.
We hear regular calls for government to ease up on zoning requirements, but more action is needed because we are out of land. Bill Davidson, the most prolific home builder in the history of San Diego County, talked about the shortage back in 2012:
On the TV show, I suggested redeveloping the MCAS Miramar or getting the City of Carlsbad to free up some of the dedicated open space to create larger opportunities for builders, because we need thousands of more homes, not dozens, to balance the market and slow down the pricing.
But those ideas have no chance of happening.
It would take a monumental shift in priorities for our society to consider those. If the government were to propose redevelopment on a grand scale, it would take dozens of years to come to fruition. The Kearny Mesa project is a good example, but it will only add 26,000 homes over the next 30 years which probably won’t be enough to slow down pricing – and no single-family residences are planned there.
Any other new projects will face intense opposition.
The NAVWAR site off the I-5 freeway would seem like an ideal redevelopment project, and it could provide housing right where it’s needed. But the opposition is fierce – consider this attorney’s opinion:
Unless we have a game-changing shift in our community’s mindset about redeveloping the infill sites, the hordes of affluent people will dominate the home-buying – and keep pricing at these levels or higher.
Oh but wait Jim, how about those boomers – half of which haven’t retired yet? Will the boomers who are still working be more likely to need the dough, AND be young enough to endure a move out-of-state?
Maybe, but their kids and grandkids will be lined up to inherit the house, and with that being the only feasible way for them to stay in San Diego, the boomers will find a way to age-in-place instead.
Home buyers deserve to have their own representation.
The broker cooperation system which allows every agent to share their inventory with all other buyers via the MLS has worked well for 100+ years. But it has been under attack for years, and it may not survive the tight-inventory era where sellers and listing agents want to minimize or eliminate buyer-agents altogether.
An agent sent this in today:
Do you know that Lennar is no longer paying agents a commission or referral fee?
I have been working with a client for almost a year. She wouldn’t have known about the Lennar at Treviso community without me bringing her there. I registered her as my client and when her name got called on the list, they told her they’re no longer cooperating with agents and if she tried to include me she’d lose the house. Thank you Lennar for putting my client is a horrible position. Hey builders. Don’t ostracize the brokerage community! The market may be busy now but when the tides turn, you’re going to need us again. This is bad business.
I know for a fact that Lennar isn’t paying commissions on any of their SD communities currently.
I agree that it’s bad business to have an agent sign in their buyer as required to receive the commission, but then rescind their offer of compensation when the buyer steps up to purchase. But nobody cares about buyer-agents, and the abuse will continue. Lower or no commission being offered, no clarity on how multiple offers get handled (other than the usual “I just let the sellers decide”, which is a lie), and no easy path to show and sell.
What is the result of buyer-agents being snuffed out?
Buyers don’t recognize the need for getting good help.
An apprentice from a realtor team will suck them in with the promise of getting them an ‘off-market deal’, but then get sold a 1,200sf two-story house in a gang-infested area for 10% to 20% over value (true story).
We should probably just drop the seller-paid commissions – though they should have the right to offer a bounty – and have buyers pay their own agents. Those who value good help will seek out the best agents, and those who don’t will get what they get and wind up with regrets.
For months the talking heads have cited the ultra-low rates, the shortage of new homes being built, stock market, millennials, covid, etc. as reasons why the real estate market has exploded.
Let’s add a few no-so-obvious reasons.
Did we fully recover from the last downturn? We know that because Bernanke and the banks unilaterally changed the rules to rescue the MBS investors, we never hit the true bottom. The short-sales muddied the water further because there were so many that were never exposed to the open market and sold instead at artificially-low prices by unscrupulous realtors. In 2010-2014, we saw it here on the blog where many commenters expected the downturn to last for at least a few more years, and even the Frenzy of 2013 didn’t convince everyone we were out of the woods. Low (but not ultra-low) rates made it interesting, but there wasn’t enough confidence for buyers to flood the streets desperating seeking a home to buy – though in hindsight, they probably wish they did.
The lower-end inventory has been decimated by rental conversions and aging-in-place. Because the rents have exploded, any of those homeowners who didn’t have to sell their existing home had to consider hoarding their prized possession that was probably the best investment they ever made and turn it into a rental instead. The high costs of senior care is causing many if not most to age-in-place, and besides, one of the kids or grandkids can take over and assume the low tax basis. While pricing is flying on the lower-end today, it’s a recent occurrence that the appreciation has been 2% to 3% per month. If there had been more listings in recent years, we would have had prices rising faster, sooner. In the chart above, the rest of the categories look fairly uniform – it’s the lower-end that has changed drastically and having the most impact on the frenzy upstream.
The builders never got the memo about open bidding. Still to this day, it is first-come, first serve. Pardee is down to their last 20-30 houses ever in Carmel Valley, they were taken over by Tri-Pointe, and they have nothing left to lose. You know there has to be 50-100 people waiting on their buyers’ list yet they only release 2-4 homes per phase. Toll Brothers sold two of their models for $4,000,000+, yet Pardee is keeping their production homes attractive priced in the mid-$2,000,000s. If they just opened up the bidding at each release to ALL the buyers on the list, they would pick up an extra $500,000 easily – just because if you are number 50+ on the list, you’re not going to get another chance. But they don’t do it, which is keeping a lid on pricing. Because most everyone is buying their forever home, there won’t be enough turnover in the next few years to generate the momentum needed to find the real top-dollar value.
There are three examples of what has been undercutting the trajectory of home pricing.
When we have BOTH sales and pricing on the rise exponentially like we do now, it demonstrates what is possible when you take off the inhibitors. We are probably running a little hot today – can we be so undervalued that this frenzy could keep going for months or years?
Perhaps – especially if there are new market factors we haven’t considered before!
Rick is the Director of Research at JBREC and a great guy:
Some interesting housing color from mid-April around the country home builder channel check. Bunch of market commentary to follow…will try to hit most top markets.
The intensity of the CV frenzy is hard to determine because it’s sold out. Lines are forming but who knows how long?
Because the builder has so few left, you know they would wait it out if necessary. But so far, they aren’t having trouble finding buyers willing to pay $2M to $3M here:
Brett Farrow is a local architect, builder, and developer – and has been a long-time reader of the blog (you’ve seen him comment here as ‘Mozart’). Yesterday, we got together at his latest project, Laguna Row, and talked about his experiences in the village of Carlsbad:
I also did another tour around the village for an update on the booming redevelopment:
My friend Ken Perlman at JBREC consults with new-home builders primarily, but these thoughts apply to the resale market too – notably, the 65+ generation growing by 17 million people in the next ten years!
With the national housing market surging, active adults have decided it is time to participate again. As discretionary buyers, they’ve had time to “restart” their purchasing process, and many of our developer and builder clients report that with proper health precautions in place, they’ve been willing to do so. In many age-qualified communities across the nation, home sales were particularly strong in August and September.
The pandemic hasn’t changed the size of the active adult population or its motivations. The active adult buyers are a key component of housing demand, as the 65+ population will grow by a net 17 million people over the next ten years. We know one of the highest priorities for this buyer set is being close to children and grandchildren. This means that as the Great American Move takes place in hot markets from Phoenix to Southern California’s Inland Empire to Sarasota, Florida, active adult buyers are following.
They are wealthy with large homes they can sell. Our active adult developer and builder clients told us one of the biggest fears their buyers had heading into the pandemic was the negative impact on their stock portfolios and on the homes they had to sell. Those fears have largely subsided with a rising stock market where the S&P 500 is up 10% year over year (YOY) and existing home Google searches up 30% YOY, as well as the Burns Home Value Index (BHVI) up 5.5% YOY.
4 Keys to Success
Active adult buyers are ready to buy now, so make sure you have inventory. Builders we spoke with in the active adult space told us standing inventory numbers are low, and some are tripling the number of standing inventory homes they produce to satisfy demand. Some are also simplifying what they offer in their homes, a process that streamlines housing production and keeps new home prices more attainable. Despite their wealth, these buyers are still prudent about how they spend their money.
Design elements that appeal to primary buyers also appeal to active adults. Per JBREC’s Consumer Products and Insights survey, more than 70% of new home shoppers between the ages of 55 and 69 included a member who worked at least part time. Work-from-home spaces were always critical to this buyer and are even more so today. Indoor/outdoor spaces are top of mind for active adult buyers, particularly those who live in warmer climates. Opportunities to live in the “healthy” outside while still maintaining cover is a big reason why open corner sliders and outdoor living rooms are immensely popular among this buyer set.
A strong virtual presence is essential. Active adult buyers are not afraid to use technology to search for a home; they rely on it. Active adult developers and builders around the country reinforce that their buyers are doing extensive research online before ever coming to the sales office, and we’ve heard reports of conversion rates among prospects in this space tripling post-pandemic. With travel more restricted and the market expanding rapidly, some active adult buyers are tying up their lots and homes efficiently via builder websites before ever visiting the neighborhood. Empire Communities in Atlanta told us, “We leveraged our virtual platforms, created new virtual platforms, optimized our online campaigns and online sales consultant initiatives, coached the sales teams to get out of their comfort zones, and shifted into a ‘we got this’ attitude.”
Active adult buyers still want to visit sales offices before they buy. While technology is helping buyers become educated, developers were universal in their opinion that this buyer cohort still want to make its final purchase in person. This means that an on-site sales office, decorated models, and well-organized system for coordinating appointments are still critical for selling homes to this buyer profile. Our clients across the country told us that with proper safety precautions in place, active adult buyers prefer visiting sales offices or models in person.
While the first-time and move-up buyers have clearly been the headlines of the housing market resurgence, the active adult buyer is starting to reemerge. We are assessing active adult housing across the country and watching product trends and buyer preferences. Let us know how we can be a resource for you. kperlman@realestateconsulting.com
Catherine asked what I thought about the next 1-2 years of real estate.
First let’s discuss why real estate in the future won’t be like it’s been in the past – we’re out of dirt. Here’s my conversation with Bill Davidson in 2012 about the future of home-building in San Diego:
This is from 2015:
“We’ll be the Bay Area in no time,” said Borre Winckel, president and CEO of the Building Industry Association of San Diego. “We can offer very few product lines for the middle-class buyer.”
San Francisco was once a quirky, counter-cultural city that was home to a bevy of activists, artists and writers. But that city is vanishing because of sky-high housing costs. Now, only the elite can afford to live in the city and, like in Manhattan, low- and middle-income workers are forced to live further afield and make long commutes to their jobs.
San Diego is not far behind. It is already the nation’s fifth most expensive housing market, according to the National Association of Realtors. Only an estimated 25 percent of households can afford the median home price.
Even more troubling, most of the apartment units under construction are higher end, catering to wealthier millennials.
“My lament is that we’re royally screwing the housing opportunity for the middle class and young people,” Winckel said.
San Diego’s population grew by 159,000 people from 2010 to 2014, but the region added only 22,000 housing units in that time, according to the U.S. Census Bureau.
With today’s supply and demand being so out of whack, the outcome is being determined by money. Our home prices have risen steadily over the last ten years (which has never happened, at least since I’ve been around), and it looks like it will continue.
It’s the basis for any forecast, and with that said, let’s explore what could happen, shall we?
