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2023 Forecast

In this episode of the Top of Mind podcast, Mike Simonsen sits down with Rick Palacios Jr., Director of Research and a Managing Principal at John Burns Real Estate Consulting, to talk about what to expect in the real estate market in 2023.

Rick discusses the company’s latest research on homebuilder sentiment, shares their latest forecast for home prices and the economy, and talks about some secret signals to watch for changes in the market.

About Rick Palacios Jr.

Rick Palacios Jr.

Rick Palacios Jr. is the Director of Research and a Managing Principal at John Burns Real Estate Consulting, where he oversees all research pertaining to the US economy, for-sale housing, and rental markets.

Rick has 15 years of experience in residential real estate and economic research, originally joining John Burns Real Estate Consulting in 2006 and then rejoining the company in 2014 after working as a home builder Equity Research Associate at Morgan Stanley in New York. He has also worked as an Analyst at the Milken Institute, an economic think tank.

Rick holds a BA from the University of California, Irvine, and an MS in real estate economics and finance from the London School of Economics.

Here’s a glimpse of what you’ll learn:

  • Why new home construction might accelerate the housing market slump
  • How much home prices are likely to decline in the next two years
  • The leading indicators (and secret signals!) to watch for changes in the market
  • What’s happening with the second home market now
  • The surprising impact of ARMs in this cycle

NSDCC, Last Six Months

Yesterday a guy said he wasn’t interested in anecdotal evidence and just wanted to see the data.  But we were talking about the buyer demand in 2023, of which we have no data yet.

In addition, the data we do have doesn’t have to repeat itself or be a trend, because every month we have different houses selling.  It’s not like the stock indices that measure the exact same stock every day – in real estate, it’s a new set of variables every month.  It’s a miracle that each month looks as similar as it does!

But for those who want the numbers, here you go!

NSDCC (La Jolla to Carlsbad) Monthly Sales Stats

Date
# of Sales
Median Sales Price
Median SF
Avg DOM
Avg. $/sf
Med. $/sf
Jun
190
$2,350,000
2,710sf
23
$947/sf
$837/sf
Jul
155
$2,300,000
2,798sf
28
$925/sf
$830/sf
Aug
165
$2,150,000
2,642sf
36
$973/sf
$804/sf
Sep
135
$2,040,000
2,600sf
38
$910/sf
$793/sf
Oct
124
$2,212,500
2,909sf
43
$922/sf
$784/sf
Nov
109
$1,860,000
2,581sf
42
$821/sf
$739/sf

For the record, here’s the summary from June to November:

Sales: –43%

Median Sales Price: –21%

Average Days-on-Market: +83%

Average $/sf: –13%

Median $/sf: –12%

The stats are straight off the SD MLS, and I’m not sure how they calculate their Median $/sf because it’s not the median sales price divided by the median sf – but their numbers are close to that.

There has been a steady downdraft in pricing, led by sellers who stay on the market for 30+ days and then take a lowball offer.  As long as listings aren’t fully prepared, aren’t priced attractively, and are hard to show, the downward-pricing trend will continue.

Ideally, you want to sell your home in the first week or two that it is on the market.

Can sellers and agents adapt? Will they?

Feels Like Fed Easing

This isn’t exactly new news – most prognosticators figured the Fed would only raise their rate by 0.5% in December, instead of the 3/4% hikes recently – but the stock market liked it (up 628) and the 10-year yield dropped a tenth.  All we need is mortgage rates to be in the 5s for selling season!

Monetary policy affects the economy and inflation with uncertain lags, and the full effects of our rapid tightening so far are yet to be felt. Thus, it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting. Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level. It is likely that restoring price stability will require holding policy at a restrictive level for some time. History cautions strongly against prematurely loosening policy. We will stay the course until the job is done.

https://www.cnbc.com/2022/11/30/fed-chair-jerome-powell-says-smaller-rate-hikes-could-come-in-december.html

He never had a clue about the real estate market, and was just winging it – and nobody has helped him with it since. “…..hopefully come out in a better place between supply and demand”???  The guy who has our economy in his hands is living on hope?

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Seller Hesitancy Will Persist

Every once in a while, a sliver of truth slips into the mainstream media articles.

After the usual negativity spewed throughout the front-page UT article about the local Case-Shiller Index declining at one of the worst rates of any town in America, this quote appears at the bottom:

Zillow senior economist Nicole Bachaud wrote in an analysis of the report that sellers’ hesitancy to put homes up for sale might mean prices won’t change that much.

“Would-be sellers are sticking their ground and holding tight to the inventory they currently own,” she wrote. “As a result, prices might not continue to plunge down as much as some projections anticipate.”

Nicole has been with Zillow since 2019 and a senior economist since August.  Kudos to her for stating what all other economists are ignoring, like Mark Zandi and the other clowns who have decades of experience and keep telling people that real estate will be crushed any minute now.

I have a real problem with the common belief that we can’t predict the future.

I guarantee you that our local inventory in 2023 will be the lowest on record, and will be the major driver of market activity.  How do I know? In all other previous downturns, the banks drove the market by dumping foreclosures for whatever the market would bear. But today, all we have is forever-home owners who are locked into a low-rate mortgage.

I will present evidence too. To demonstrate how potential home sellers are reacting to higher rates, consider the number of NSDCC listings that hit the market between September 1st and November 30th, which was when mortgage rates rose into the 6-plus range.  Once homeowners think it’s a bad market, they DON’T PANIC, and instead, they wait it out.

NSDCC New Listings Between September 1st and November 30th:

2007: 1,140

2008: 1,146

2009: 1,064

2010: 1,112

2011: 1,094

2012: 921

2013: 998

2014: 1,004

2015: 1,072

2016: 1,052

2017: 939

2018: 1,099

2019: 990

2020: 1,072

2021: 644

2022: 523

The last time everyone thought it was a terrible time to sell was in the 2008-2009 era – and even then we had 1,000+ listings.

We have NEVER been in this environment before with so few choices.  The ultra-low inventory is going to continue into 2023 and even if the Fed eases up and mortgage rates end up in the 5s, potential sellers are going to wait until the coast is clear, and everyone is talking about bidding wars again. GUARANTEED!

As a result, home prices will remain elevated.

San Diego Case-Shiller Index, Sept.

These must be the seasonally-adjusted numbers.

How the mainstream media is reporting today’s Case-Shiller numbers:

  • U.S. single-family home prices slowed further in September as higher mortgage rates eroded demand.
  • Monthly house prices fell in July for the first time since late 2018.
  • The housing market has been hammered by aggressive Federal Reserve interest rate hikes that are aimed at curbing high inflation by dampening demand in the economy.

How it could/should be reported:

  • Higher rates are causing buyers AND sellers to wait-and-see.
  • Inventory is expected to be lower than ever in 2023.
  • Realtors aren’t offering viable solutions.

A guy on twitter said that the real story is that YoY appreciation is still positive, which should make the vast majority of American homeowners happy.  But I commented on how the NAR is publishing articles now that ignore/omit the downturn. I think that those of us who are in the business of assisting consumers with their real estate decisions should give accurate advice on how to cope with the current market conditions.

San Diego Non-Seasonally-Adjusted CSI changes

Observation Month
SD CSI
M-o-M chg
Y-o-Y chg
Jan ’21
301.72
+1.4%
+14.3%
Feb
310.62
+2.9%
+17.1%
Mar
320.81
+3.3%
+19.1%
Apr
331.47
+3.3%
+21.6%
May
341.05
+2.9%
+24.7%
Jun
349.78
+2.6%
+27.2%
Jul
355.33
+1.6%
+27.8%
Aug
357.11
+0.5%
+26.2%
Sep
359.88
+0.8%
+24.9%
Oct
363.80
+1.1%
+24.2%
Nov
367.62
+1.1%
+24.3%
Dec
374.48
+1.8%
+25.9%
Jan ’22
383.92
+2.5%
+27.2%
Feb
401.45
+4.6%
+29.2%
Mar
416.64
+3.8%
+29.9%
Apr
426.08
+2.3%
+28.5%
May
428.32
+0.5%
+25.6%
Jun
425.26
-0.7%
+21.6%
Jul
414.03
-2.6%
+16.5%
Aug
402.62
-2.8%
+12.7%
Sep
394.18
-2.1%
+9.5%

While current homeowners might be relieved to see the big pop in appreciation over time, if they are thinking of moving, they should recalibrate everything they think they know about selling homes.

Kate’s New Listing

Impeccable and chic, this incredible gated custom Encinitas estate offers modern living in a central location and a life of leisure. An entertainers paradise bursting with a luxurious and smart design, the home comes complete with its own detached guest house retreat. Across its 1.24-acre lot, discover winding pathways lined by manicured grounds, lush landscaping, and palm trees outlining the perimeter. Admire the tasteful fusion of massive windows, stone, stucco, and IPE wood design elements characterizing its exterior, inviting you to explore inside. Upon passing through the captivating, covered entry, step into an immaculately crafted interior defined by soaring ceilings accentuated by thick wood beams, beautifully matching the exceptional millwork on show. Appreciate the gorgeous, engineered wide-plank white oak flooring and crisp white tones. Multiple windows with custom treatments allow radiant sunlight across the casual and formal gathering areas, creating fabulous spots for entertaining. From the sunlit great room with a sophisticated fireplace to the dining room that basks in stylish lighting’s glow, plenty of extravagances await your lucky guests. Newly remodeled to please the most discerning of cooks, the chef’s kitchen highlights Gaggenau and Miele appliances with a steam oven, quartz countertops, matte black cabinetry, and an oversized island.

Relax in the well-sized bedrooms, topped by a grand primary suite graced by its own fireplace and double walk-in closets. Escape the day’s stresses in its renovated, spa-like ensuite with heated floors, a soaking tub, and a large shower. Whether you’re hosting get-togethers or spending your weekends leisurely, you’ll have an array of bonus rooms, including a game room, sports areas, and a gym. Among the best places to relish the breathtaking ocean panoramas are the balconies, each overlooking a unique angle of spectacular scenery. For a resort-style outdoor experience, the fully fenced backyard treats you to a 13′ saltwater pool!

Rates Are Steady

Will the 30-yr jumbo rate stay in the 5s? Here’s what MND says:

Excitement, volatility, non-stop action… concepts that have absolutely nothing to do with mortgage rate movement over the course of the past two weeks.  In fact, since rates plummeted in response to the November 10th CPI data, they’ve been as flat as we’ve seen in 2022.

This is the goal for financial markets and mortgage rates as they traverse a time frame like the Thanksgiving holiday, but it’s also a byproduct of relevant events.  Specifically, inflation data dominates the landscape.  It was no surprised to see a big reaction to the CPI data 2.5 weeks ago, and markets may largely be waiting for the next installment before the next substantial shift in rates.

This doesn’t mean rates will remain as flat as they have been–only that they may resist moving too far in either direction until they have more guidance from economic data and the Fed.  This week will bring some of that economic data, but the next CPI report arrives on December 13th followed a day later by the next Fed announcement.

Fed speakers were making the rounds today reminding markets that there are more rate hikes to come.  The Fed sees the strength of the jobs market as providing a cushion to be aggressive in its fight against inflation.

While the Fed will almost certainly continue to hike rates on the 14th (probably by 0.50%), financial markets have long since baked that assumption into current trading levels.  That means today’s mortgage rates already account for the current Fed Funds Rate forecasts.

Even then, the Fed Funds Rate doesn’t dictate mortgage rates and is an imperfect indicator for rate momentum. Longer term rates like mortgages and 10yr Treasury yields typically begin falling sooner and by larger amounts in any given rate cycle. The past few weeks could be the first phase of that typical pattern (10yr Treasuries have dropped 0.30% versus 2yr Treasuries since then), but again, the continuation of that pattern depends on confirmation from upcoming inflation data.

https://www.mortgagenewsdaily.com/markets/mortgage-rates-11282022

Inventory Watch

After staying around 400 since the middle of September, the number of active listings finally plunged by 6% as the holiday season finally set in.  Yet, the number of pendings rose by 9%!

There were also more new pendings than new listings this past week.

The list prices are probably as low as they will be for the next six months. It would take a very sluggish spring selling season for pricing to collapse in the second half of 2023.  Until then, sellers will be confident that they will beat the odds and sell for at least as much as they can get today.

(more…)

More Than 10% Off

I said on the Frenzy Cruise that I’d also recognize the NSDCC sales that closed well under their list price.  It’s good for potential sellers to see how buyers will lowball homes that have been on the market for a while – and encouraging for buyers to know that they might be able to get a deal if they play the game wisely.

These are sales from November, with percentages off their original list price:

-17%

-14%

-23%

-19%

-15%

-10%

-23%

-10%

-16%

-32%

-16%

-20%

-11%

-15%

-15%

-13%

-26%

-17%

-23%

-12%

-20%

-14%

-13%

-29%

-19%

-16%

-22%

-12%

-14%

-14%

-18%

-28%

There have been 94 NSDCC closings in November (so far), and 34% have been discounted by a double-digit percentage off the original list price – which isn’t too bad, given the negativity everywhere.  It happens at all price points too.

Two conclusions from the clusters in graph below:

  1. Once a home has been on the market for 30-40 days, sellers are ready to deal.
  2. Sellers who go beyond 100 days on the market are really taking a chance.

 

There were 13 of the 32 sales who ‘refreshed’ their listing, or had it on the market this year with a different agent – those DOM are not reflected here. There were quite a few at the -8% and -9% too.

Five of the 32 were round-tripped.

Because it is unethical to deliberately list a home for sale at an unrealistic price, it means that in a third of the cases, the listing agents just flat-out got the price wrong by a double-digit percentage.  Can you imagine if doctors, lawyers, stockbrokers, plumbers, or burger-flippers were wrong a third of the time?

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