Why Home Prices Will Keep Rising

Over the history of real estate, buyers have determined the market.

They decide how much education and investigation they need to complete before making what is now the biggest decision of their life, and then they proceed when ready – or when they see an attractive house, hopefully in that order!  There isn’t much education available on how to do it, so people just trust their gut and start looking around – even those who already own a home.  HGTV makes it look easy (see three, and buy one), and the disrupters keep promoting that their agent-lite program is all you need.  In a hot market, the investigation/education phase usually gets obliterated.

You’d think it would cause people to Get Good Help, to compensate – and many do (thanks!).

But once on the playing field, the buyers are split into two categories:

  1. Those who own a home here now, and are trying to do better.
  2. Those who don’t own a home here, and want/need to get in.

Buyers from the second category are determining the market.

They see every decent home get snatched up by those who got desperate sooner.  It becomes a race for those newcomers to get desperate enough so they can compete with those ahead of them.

Buyers in Category 1 already have it good.  Even if their home doesn’t suit their current needs, it’s what got them here.  The property taxes are lower, the neighborhood is a known quantity, and they are comfortable.  Are they going to rise to the same desperation level as those who don’t own a home here yet? It’s doubtful, even if the Prop 19 passes and sellers can take their property-tax basis with them anywhere – nobody is desperate to leave coastal San Diego.

It’s what is causing the inventory to be so thin, and why I’m convinced it’s only going to get worse.

Consider these factors:

  1. Baby boomers are older now – if they haven’t moved yet, it’s probably too late.  They will make do with their current residence, and make it last for the duration.  Kids will inherit, and one of them will occupy as their primary residence – and the cycle of low inventory for sale will continue for another generation.
  2. San Diego is a mid-range market – there are a number of more expensive areas that makes us look cheap, relatively.  It’s those move-down buyers from affluent areas who are filling up Category 2, making it very tough for locals to compete, which prevents them from moving…..which means less inventory.
  3. There aren’t any new-home tracts left to build in Coastal North County.
  4. There will be massive pressure on the Fed to keep rates low for years to come.
  5. The business is being dumbed-down for easier consumption, not smarter.

These factors will keep the inventory low, and competition high for a long time.  It also means that the deliberate, informed buyers will keep getting run over by those who are just in a hurry to buy a house.

The old adage of buyers determining the market is being snuffed out.

Sellers can name their price now, and there is probably someone who will at least consider paying it.  Until unsold listings are stacking up to the rafters, sellers will ensure that prices keep creeping upward.

Rates at All-Time Low (Again!)

From MND:

Mortgage rates were unchanged today for the average lender.  That means they remain at all-time lows that are even lower than the all-time lows seen during the previous 3 business days.  Even so, today’s underlying market movement might be a bit of a wake-up call for anyone waiting to lock an interest rate.

In general, the decision to lock or float a mortgage rate has had low consequences recently.  While that will likely continue to be the case until the coronavirus situation meaningfully improves, it doesn’t mean we should fall asleep at the wheel.  We need to remain vigilant for signs that the most recent all-time low mortgage rates are the last we’ll see for months or years.

Today served as a fairly non-threatening wake-up call in that regard–at least for those following the intraday movement in the bond market.  Mortgage rates are ultimately dictated by the bond market.  When yields move higher (and specifically when mortgage-backed bond prices are moving lower), we need to be on the lookout for mortgage rates to move up.  That was exactly the sort of market movement we saw this morning, and it forces some of the risk takers out there to question how many times they will push their luck before finally resigning to lock.

There is NO WAY to know when rates have finally bottomed.  So it’s best to decide a personal set of rules as to how you’ll approach the lock/float decision.

What can we know about the future?  That’s tough because coronavirus has changed the playbook to some extent.  In general, though, mortgage lenders are hesitant to drop rates very aggressively when they’re already at all-time lows.  I can also tell you that, outside of an apocalyptic scenario, mortgage rates are highly unlikely to drop by more than half a percent (which is still significant).  Even dropping by that much would require a significant deterioration in the covid narrative.

But how about we discuss this in a slightly simpler way.  People always ask me for predictions, and I always tell them why it would be silly for me to provide and for them to put any stock in such things.  What I CAN do is give you my sense of the most and least probable rate ranges within the next 3.5 months (presidential election will likely create new volatility for better or worse).

Most probable: 0.25 lower to 0.25 higher
Somewhat probable:  0.25 to 0.50 higher
Less probable: 0.25 to 0.5 lower OR 0.50 to 0.75 higher
Improbable: >0.5 lower or greater than 0.75 higher

Please keep in mind that this is as of July 8, 2020.  Things can and do change rapidly when it comes to pandemics and financial markets.  That said, if your takeaway is that we’re slightly more likely to see a 0.5% move higher than a 0.5% move lower, that is indeed what I am saying.  Again, it would take further deterioration in the covid narrative to reverse that order.  That’s totally possible, but it’s not a given as of today.

http://www.mortgagenewsdaily.com/consumer_rates/948995.aspx

Leucadia Sheridan

I love this video’s length and quality – it makes you want to visit!

Welcome to the Sanctuary, an incredibly private architectural masterpiece with whitewater ocean, lagoon and sunset views. This extraordinary mid-century modern home and its guest house sit on nearly an acre of Batiquitos Lagoon-front land, positioned behind a gated entry and set well away from the road. The main house (3 BR) and detached guest house (1+ BR) harmonize perfectly and both feature floor to ceiling windows. Sellers will consider offers between $4.8M and $6M (closed today for $5,399,450 cash).

Home Prices to Decline?

One of the more-accurate forecasters is predicting that home prices will start dropping:

Strong home purchase demand in the first quarter of 2020, coupled with tightening supply, has helped prop up home prices through the coronavirus (COVID-19) crisis. However, the anticipated impacts of the recession are beginning to appear across the housing market. Despite new contract signings rising year over year in May, home price growth is expected to stall in June and remain that way throughout the summer. CoreLogic HPI Forecast predicts a month-over-month price decrease of 0.1% in June and a year-over-year decline of 6.6% by May 2021.

Unlike the Great Recession, the current economic downturn is not driven by the housing market, which continues to post gains in many parts of the country. While activity up until now suggests the housing market will eventually bounce back, the forecasted decline in home prices will largely be due to elevated unemployment rates. This prediction is exacerbated by the recent spike in COVID-19 cases across the country.

https://www.corelogic.com/insights-download/home-price-index.aspx

Expecting prices to fall that quickly is flawed, however.

They are ignoring that for home prices to go down, we would need a load – probably a majority – of sellers who are willing to sell for less than the last guy got.  In addition, it would take realtors who recognize what’s needed, and be able to properly advise their sellers on lower pricing.

It ain’t going to happen.

Listing agents only have one pitch – to berate the buyer agents into paying the seller’s price.  If we ever get to the point where buyers object to the constantly-rising prices, and/or we run out of buyers altogether, then there will be a long stall before sellers and agents re-calibrate.

Recognizing that a shift in pricing is needed will be hampered by all the usual excuses.

The seller retorts of “I’m In No Rush”, “I Don’t Need to Sell”, and the classic, “I’m Not Going to Give It Away”, will be doused with coronavirus blame before any sellers – even the desperate ones – would consider selling for less than what they think they deserve.

Sales will slow first, so keep an eye on them – but it would take 1-2 years of stallout before sellers and agents start believing that they might not get their price.

Statewide Showings Subside (Slightly)

I’m not alarmed here with a statewide drop-off in showings:

  1. Showings are 37.4% above those in early March.
  2. They are way ahead of last year!
  3. It was going so good that a drop-off was inevitable.
  4. Showings declined this time last year too – might be seasonal.

If you would have predicted this market bounce-back in April, nobody would have believed it!

Inventory Watch

What a week!

  • We had more new pendings than new listings (88 vs. 83), which rarely happens,
  • The total number of pendings in the $1.0M – $1.5M range jumped by 13 and we now have more pendings than actives in that category, which has never happened.
  • The number of pendings between $2.0M – $3.0M increased by twelve to 59, and
  • The number of pendings priced over $3M rose by ten to 57.

Tremendous activity during a week of troubling pandemic news.

Are buyers trying to hurry up and hunker down?  It appears so!

The takeaway is that the inventory is not growing, which means that the current pricing is working.  As long as there isn’t surge of unsold listings, buyers have little negotiating power and are forced to pay the man!

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