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2023 Forecast – JtR

Yesterday, I offered my take on pricing for the San Diego 2023 real estate market.

For those who don’t watch videos, I said the overall median sales price will be down 3% next year, with the superior-home sales causing a +5% median sales price among themselves. Where the line is drawn between superior and inferior homes will be interesting!

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

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.

Turkey Talking Points

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:

The 2023 Spring Selling Season

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.

Predicting 2023 Annual Sales

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:

  • Out-of-towners
  • 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

2018: 22,740

2019: 23,124

2020: 23,829

2021: 24,611

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!

NSDCC October Listings

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

Year
Number of Listings
Median List Price
2018
401
$1,555,000
2019
371
$1,695,000
2020
400
$1,849,350
2021
228
$2,160,000
2022
174
$2,362,500

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?

Yikes!

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!

Wait Until When?

I tell potential home buyers to keep looking because you never know when you will find the right house – which is the most important part of the equation. Most will convince themselves that it will be easier to find the right house if prices came down, and besides, the current crop isn’t that interesting.

To keep it simple, let’s just calculate how mortgage rates have changed the equation:

Purchase Price: $2,000,000

Loan Amount: $1,600,000

30-yr jumbo rate: 3%

Monthly pmt: $6,746

Buyers who expect the sellers to make up the entire difference with a lower sales price will have to wait until they can find a home that meets this description:

Purchase Price: $1,400,000

Loan Amount: $1,120,000

30-yr jumbo rate: 6%

Monthly pmt: $6,715

If home prices come down 30%, it will enable buyers to buy the same house for the same monthly payment – and with a $120,000 smaller down payment too. If it happened over the next five years, it means we only need to drop about 6% per year, and we’ve already dropped more than that in 2022.

Or let’s say you want to roll back to pre-pandemic pricing.

NSDCC homes that sold in February, 2020 closed at a median of $509/sf, and last month the median was $793/sf which means we’d need a 36% decline to get back to pre-pandemic pricing.

How are you going to play it?

Are you going to wait until you actually see homes selling for 30% to 36% off to get back into the game?

Are are you going to wait until rates come back to 3%?

Or do we acknowledge that the buyers who have more horsepower are going to jump back in sooner, and there’s not much chance of prices dropping the full 30% to 36%?  The highly-motivated affluent folks will probably be satisfied with 20% off, and they will derail a full decline.  It’s what happened in 2012.

Can you live with 20% off?

Because if you can, then you need to stay in the game.

If the #1 variable is buying the right house, then #2 is timing.

I think the affluent will be looking next spring, and if they find a suitable house, they are going to buy it. By then, some of the statistical pricing gauges will be showing 10% to 20% declines, either nationally or in isolated markets. Because the local pricing isn’t that nuanced and buyers just want a house, they will decide that’s close enough and go ahead with the purchase.

To support my suspicion, I’ll note that during the frenzy, it was the same mentality, just in reverse.

When people found the right house, they just paid whatever it took – even if it meant paying $500,000 to $1,000,000 over the list price!  Nothing else mattered besides getting the right house.

Most buyers won’t believe their eyes, and the volume will be thin. But sellers will appreciate any momentum and be encouraged to price their home for about what they thought they could get, with not much discount. Buyers who want discounts will be relegated to scouring through the dent-and-scratch bin, or hope that moving during the off-season might be more fruitful. Great for them.

What are you going to do?

JB On The Bubble

Housing Bubble Set to Pop

By John Burns

In 2013, fresh off the biggest housing downturn in their lifetimes, 73 housing industry executives compiled the Top 10 Signs of a Housing Market Bubble at our Summit Conference in Laguna Beach, CA. Assessing the criteria that we set almost a decade ago (10 quantitative and 10 qualitative), we have found that 16 of the 20 housing bubble signs are now flashing red.

In last month’s client-exclusive housing outlook webinar, we called out some signs we are seeing:

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