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:
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.
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:
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:
- Once a home has been on the market for 30-40 days, sellers are ready to deal.
- 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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Yesterday I was delivering pies throughout North County, and visiting with our great supporters – who were mostly past clients. Predictably, the conversation turns to real estate, and observations about what’s going on in the market, now and in the future.
In case the subject comes up at your Thanksgiving, here are things we discussed:
- Sales are down, but they aren’t zero. There are roughly 400 houses for sale between La Jolla and Carlsbad, and the vast majority have been languishing on the market. But at least 100 of them find a way to close escrow every month – and they tend to be the spectacular homes that are priced attractively.
- Sales are being hampered by the light inventory. The number of listings are 40% lower than in 2019, and next year I expect there will be the same or fewer homes for sale as sellers decide to wait until the “market gets better”.
- Mortgage rates in the 5s are tolerable, and above that is problematic. Higher rates don’t only make homes less affordable – they also cause buyers to have a psychological expectation that sellers should come off their price. The higher rates go, the more standoff there will be between buyers and sellers.
- To get deals, the buyers have to cause them – and they are happening. We saw how two sales near my latest listing knocked off more than 10%, and here’s another one from yesterday:
- I am re-examining one of my favorite seller slogans from many years ago; I’m Not Giving It Away. Back when potential sellers had little, if any, equity, they would fight like crazy just to make sure they came out of escrow with at least enough for a steak dinner. But everyone has gobs of equity now….and those who need to move bad enough are giving up decent chunks of it. It means we could have a much faster decline in pricing than ever before.
- I am still convinced that by March/April, the spring selling season will kick in and homes will be selling briskly for all the money. It’s likely that we’ll get off to a slow start as both sellers and buyers wait for someone else to go first, but by the end of March or April we will see bidding wars again.
- Realtors are woefully ill-equipped to handle these conditions. They have no strategies for a soft market and are very reluctant to price aggressively or reduce a list price properly. Here is a discussion of typical agent comments.
The blog is picking up momentum, which hopefully means more people are looking to get better-educated about the market conditions, which is encouraging:
Thank you for being here! I appreciate all of you and Happy Thanksgiving!
Try out Grandma Klinge’s pumpkin bread (mastered by Natalie) from the Compass cookbook:
There have been 80 NSDCC closings in November, which should mean we should get to at least 100 sales for the month. But with only 108 pendings today, the monthly sales in December and January sales will probably be under 100. Even though there are 393 active listings, sellers haven’t been too interested in adjusting their pricing strategies, and most will just wait it out until some unknown date in the future.
Another lady was walking by on Wednesday when we were doing the photos of the new listing. She confirmed that we were selling the house, and replied, “It’s a TERRIBLE time to sell”.
She came back yesterday, and when she heard that I already had three offers, she said, “Well I guess it’s good to get out, because I heard that PRICES ARE GOING TO GO DOWN FOR FIVE YEARS!”
The future is somewhat unpredictable, so let’s just look at how sellers have been operating in 2022.
How do the sellers feel about getting more aggressive about their list prices? If prices were going to decline for the next five years, there should be some evidence already.
Here are the weekly averages of LP/sf by price range in 2022:
Generally speaking, at least 3/4s of the sellers would rather stick to their price and not sell.
I don’t expect that trend to change.
If it were to change, it would be in the off-season when the stragglers who didn’t sell in the spring/summer are motivated enough to accept a lowball deal. But you won’t see it much in the list prices, it will only happen for those who are willing to make low offers.
There are three types of sellers:
Sure I’m motivated….if I get my price.
- I’ll sell for what the market will bear.
Unless the home is a real trophy property, this isn’t the market that tolerates aspirational sellers. For those who will only sell if they get their price – you should wait this out….and it could take a while.
The high-priced listings might get showings, but mostly to buyers who are considering the better-priced home down the street. It will take another six months and some boost from a strong spring selling season before the listings priced at retail-plus will start selling again. And that’s probably optimistic.
I still think the 2023 Spring Selling Season will be boisterous, and the sales volume will pick up – but generally-speaking, I agree with Zillow that pricing won’t be rising. Here are Z’s latest predictions:
SE Carlsbad 92009
Del Mar – 92014
La Jolla – 92037
Rancho Santa Fe – 92067
Carmel Valley 92130
Less than 1% annual increases in prime neighborhoods? Yikes!
There is nothing wrong with being in Plateau City. Sellers just need to recalibrate and be smart about what it takes to sell a home in this environment:
- Hire a great agent.
- Spruce up the home.
- Utilize effective staging.
- Price attractively (be the best-priced active listing).
- Make it easy to show.
That’s all – and if you don’t do all five, it’s ok because there’s nothing that price won’t fix!
An example of #1 is the now-famous property for sale in Del Mar on Border. A buyer thought they could get approvals to build a high-end resort there, but it was put to a vote, and the citizens turned it down. A new buyer is now hoping to turn it into apartments.
It’s been for sale since 2007, or 5,573 days!
P.S. If there is anyone who wonders why their Over-$4,000,000 stats don’t match up with mine, it’s because I take this listing out every week so it doesn’t skew the averages.
Could we have a decent spring selling season next year?
Is there any precedent of our market settling down that quickly?
Home sales had been struggling for months, and then the Lehman Brothers collapse in September, 2008 helped to trigger the Great Recession, and millions of foreclosures and short sales.
Yet, just seven months later, home pricing hit the bottom in San Diego (see graph above).
We are enduring a once-in-a-lifetime spike in mortgage rates that are rightfully taking some time to digest. But people need to move, and by next spring, many will be buying and selling homes around here.
The Fed will have slowed down by then, the political landscape looks like it will drift more towards the center, and realtors are figuring it out that you have to have a spectacular-looking home with an attractive price to have a chance at selling. All will play a role in giving home buyers more confidence.
My listing from two weeks ago that generated 18 offers – 17 of them financed – and got bid up by 27% over the list price is proof that, in spite of the common perception that the market is dead, there is a strong demand right under the surface, just waiting for the right house, at the right price.
Those who were reading this blog in the 2008-2013 will remember how negative we were about the market, and how long it would take before it bottomed out – most figured it would be years and years. True, we aren’t going to get the government stimulus this time, but I don’t think we need it.
There will be a lot of skepticism in the market – and most people will wait until others go first before they think of entering the market themselves. We probably won’t ever see the sizzling frenzy conditions again, but a healthy semi-surge for a couple of months next spring seems like a good possibility. If it happens, it will be because sellers and agents got smart about selling in the post-frenzy era.
A benefit of prices going up so fast in early 2022 was that future sellers may not have noticed – and they might be happy to sell for 2021 prices next year. But there are other items that will complicate the matter:
- With sales are down as much as 50%, the evidence used to determine values will be as thin as ever.
- Most of the listings are not selling. It’s been so long since that has happened – what do you do?
- Players will want to believe old principals – namely, it takes longer to sell now.
- There will be no change in the perception of realtors’ ability to help.
- Higher mortgage rates are here to stay. No help is coming, which is unusual in recent history.
The only hope is that there will be enough decline in pricing between now and March that buyers will be pleasantly surprised, and proceed with their plans to purchase. Working in our favor are the lousy tools we use to measure ‘pricing’, and how nobody wants to look any deeper.
It was here that I estimated that sales prices would have to come down by 30% to fully offset the effect of higher rates. I suggested that it would be a comfortable ride if that happened over the next five years, because sellers today shouldn’t mind getting 0.5% to 1% less than the last guy. It’s the cumulative effect of years’ worth of prices dropping that could see declines of 30% or more.
Will there be sellers who go for a 30% hit next year? Very doubtful, and most would rather wait it out for years before surrendering that much equity – and they may decide to never move.
What might revive the market next spring are reports that prices are 10% to 20% lower.
Could we get there by March?
The San Diego median sales price in May was $913,750.
In October, it was $850,000, or 7% lower.
The sales volume will be hitting all-time lows over the next 2-3 months – there are only 2,756 houses for sale in the county today – and only the highly-motivated sellers will be getting out. If the median sales price drops 2% per month, by March it will be around $770,000, or 16% lower than it was in May!
It may not impress everyone, but it should be enough to get buyers to take a look around! Of course, a lower median sales price is a lousy gauge and it doesn’t mean prices have dropped everywhere. There will be plenty of new listings priced really high, but will buyers keep in the fight? They should, because there will be 10% to 20% of the sellers who really need to move – you just need to dig them out.
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In California, about 70% of the outstanding mortgages have a mortgage rate below 4%, which means it’s unlikely that many of those homeowners will move if they have to qualify for and accept a much-higher rate. Plus, about 30% of local homeowners don’t have a mortgage.
Who is left? Anyone?
Home Buyers Who Will Keep Looking:
- First timers
- 1031 exchangers
- Parents buying with/for kids.
But with an all-time low inventory of homes for sale expected in 2023, we won’t need the same demand as we’ve had in the past. Let’s look at the annual sales counts.
San Diego County Annual Sales of Detached-Homes
2022: 16,086 through three quarters.
The impact from higher rates kicked in during the second half of this year. Up until then, the frenzy carried buyers to the finish line even though they were getting rates in the 4s and 5s. Once rates went over 6% in June, the sales started declining, and it looks like there will be approximately 7,500 sales in second half of 2022. Add to the 10,469 sales from the first half, and the total annual sales will be around 17,969 this year.
Higher rates will probably persist, and the annual sales next year will likely be under 17,000 in San Diego County – an area of 3.3 million people.
The number of listings in 2022 is running about 11% lower than last year, and if there is another 11% decline next year (likely), it will leave us with roughly 22,654 homes for sale in 2023. If only 60% of those actually sell, then sales would be 13,592 for the county, which will be roughly 24% fewer than in 2022, and 45% fewer than in 2021.
The only thing that could change the outcome is if we have the Big Capitulation, where both sellers and buyers give enough to make more sales happen.
There’s nothing that price won’t fix!
Next year, everyone will be talking about how mortgage rates in the 7s or 8s will be causing a lack of affordability, but I have bad news for those who still want to buy.
There probably won’t be many homes for sale.
It will only take one or two headlines about the real estate market being crushed by high rates to cause potential sellers to pack it in until “the market gets better”.
Look how few sellers came to market last month:
NSDCC Detached-Home Listings, October
||Number of Listings
||Median List Price
Before last year, the lowest October-listings count over the last twenty years was 312 in 2012, and back in the golden years of real estate, there were 452 October listings in 2001, and 510 in 2002!
510 vs. 174?
Hopefully, those who do list their homes for sale next year will be highly motivated, and, lucky for them, having so few competitors will cause their list prices to stay elevated.
Don’t be surprised if the 2023 spring selling season ends up being the Greatest Standoff Ever!
NSDCC Average and Median Prices by Month
||# of Sales
BOTH THE AVERAGE AND MEDIAN SALES PRICES ARE -23% SINCE MARCH.
We saw that the difference needed to fully compensate for the higher rates is -30%. We’re almost there, and the full effect should be built in by springtime!
Please note that I didn’t say home prices are down 23%.
The median sales price is 23% lower than it was six months ago.