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Remote Work Caused 1/2 Of Price Surge

There are many who insist that real estate will follow its historical trend, and I like to say ‘it’s different now’ just to irritate them.

What are the things that are different?

Every buyer has had to qualify for their mortgage and use a sizable down payment, the vast majority have been buying their forever home (even if they didn’t know it at the time), and homeowners at the coast will likely be paying six figures in capital-gains taxes if they sell – which means that they need to leave San Diego to really make it worth moving.  As a result, the number of people who are willing to sell has plummeted, which has kept the pressure on pricing.

The demand is different too. Back in the old days, it used to be loosely tied to incomes, but that flew out the window decades ago around here. The influx of affluent people has helped, but there is also a big difference that these researchers have explored – working from home:

It’s no secret that Americans’ newfound remote work lifestyles drove demand for larger homes with more comfortable workspaces.

What’s new: That demand may be responsible for more than half of the surge in real estate prices during the pandemic, according to a working paper published by the National Bureau of Economic Research.

  • It’s one of the first papers that aims to quantify how remote work reshaped the housing market.

Why it matters: If the research holds up, it signals a fundamental shift in the housing market — that it wasn’t just low-interest rates and fiscal stimulus that drove up housing prices.

By the numbers: It found that remote work led to about 15 percentage points of the 24% average increase in house prices between December 2019 and November 2021.

Details: The paper’s authors are John A. Mondragon, an economist at the Federal Reserve Bank of San Francisco, and Johannes Wieland, of the University of California, San Diego’s economics department.

  • The researchers found that after controlling for COVID migration, regions with the highest rates of remote work experienced much higher home price growth during the period.
  • They also observed a similar effect on residential rents — along with declines in commercial rents — in these areas.

What they’re saying: This implies a shift in demand, as many pandemic homebuyers and renters sought to upgrade to larger, and more expensive homes to support their telework lifestyles, said Mondragon.

The bottom line: Policymakers like those at the Fed would be wise to pay close attention to the evolution of remote work because it will help determine the future of home prices — and of overall inflation, the economists wrote.

https://www.nber.org/papers/w30041

Auctions Now?

It would have been a good idea to launch the auction format on an industry-wide basis during the frenzy.  But how about now? They are still a good idea because auctions bring transparency and certainty to the home-buying process, which buyers would appreciate and make them more likely to engage.  Excerpts from article linked below:

If a home has been listed for a long time without much interest, it may be overpriced, according to Mr. Lesnock. During the pandemic, heightened demand has created bidding wars among buyers, with some prime properties selling within days of listing. If a residence isn’t getting any traction in one of the hottest real estate markets of the modern era, there’s a problem.

“Why is it not selling? It’s the windiest day on record, why is this kite not flying, right? That’s the way to think about it,” Mr. Lesnock explained.

The auction process also allows more transparency, according to Mr. Pchelintsev. Both buyers and sellers can follow the bids, either at a live auction or, increasingly, online.

“You get a notification on your phone. Someone just made a bid bigger than you, and you go, ‘how dare you?’” he said. “You go on and place a bigger bid and now you’re basically, apart from trying to get this amazing house, you’re also In sort of a little bit of a competition.”

That competition can help drive up the price of the property, according to Randy Haddaway, CEO and founder of Naples, Florida-based Elite Auctions.

“Sellers get more through this process than they would otherwise,” he said. “You get a group of millionaires competing against each other—and none of them are used to losing. They don’t want to walk away and that drives up prices.”

Mr. Lesnock agreed. “If you do [an auction] correctly, it will generate fair market or better prices.”

Link to Full Article

Over List, June (Preliminary)

We are having fewer sales between Carlsbad and La Jolla, but about the same percentage are closing over the list price as we’ve seen in the previous months of 2022:

NSDCC Detached-Home Sales, June (Month-to-Date)

Number of Sales: 104

Number of Sales Closed Over List: 68 (65%)

Average List Price of Over Lists: $2,298,732

Average Sales Price of Over Lists: $2,448,509

SP:LP = 107%

Median List Price of Over Lists: $2,100,000

Median Sales Price of Over Lists: $2,267,500

SP:LP = 108%

Can we say that the list pricing has come down much? Not really.

The median days-on market of those that closed over list was 8 days, so pretty much all of the buyers were into the higher mortgage-rate era when they made their decision.

I know it’s tempting for waiting buyers to think it’s going to get better, later – but so far, all that’s happened is fewer sales.

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Getting Back to 5%

Over the last few decades, the 30-yr fixed mortgage rate has run at 1.75% over the 10-yr yield – which if true today, it would put us at 5.0%, instead of 6.0%. Here’s what the MND thinks about the bond yields:

As for Treasuries, yields are now high enough as to be pricing in virtually all of the expected Fed rate hikes over the next year.  Once that happens, the only way for them to go much higher is for the data to deteriorate further.  Bottom line: if we can avoid upside inflation surprises like last Friday’s, we may have just seen the highest rates of the year.

If the bond yields settle down (the 10-year was 3.48% on Monday), and bring in more MBS buyers, then maybe the mortgage companies can give up the extra 1% spread they are sitting on today. Our chances of survival will be much more likely with 5% mortgage rates, then 6%!

Read full article here:

MND Article

Fed Trying to Tank the Market?

Now he’s done it.  Chairman Powell’s remarks yesterday (and my comments at bottom):

Rates were very low. A good place to start is rates were very very low for quite a while because of the pandemic and you know the need to do everything we could to support the economy when unemployment was 14% and the true unemployment rate was well higher than that. So …

And that … that was a, uh, rates were low and now they are coming back up to more normal or above levels. So … in the meantime, while rates were low and while demand was really high … obviously demand for housing changed from wanting to live in urban areas to some extent to living in single family homes in the suburbs. Famously. And so, the demand was just suddenly much higher.

So we saw prices moving up very very strongly for the last couple of years.

So that changes now. And rates have moved up. We are well aware that mortgage rates have moved up a lot. And you are seeing a changing housing market. We are watching it to see what will happen.

How much will it really affect residential investment? Not really sure.

How much will it affect housing prices? Not really sure. Obviously, we are watching that quite carefully. You’d think over time … There is a tremendous amount of supply in the housing market of unfinished homes … and as those come online …

Whereas the supply of finished homes, inventory of finished homes for sale is incredibly low. Historically low. So it’s a very tight market. So prices might keep going up for a while, even in a world where rates are up. So it’s a complicated situation and we watch it very carefully.

I’d say if you are homebuyer, somebody or a young person looking to buy a home, you need a bit of a reset. We need to get to back to a place where supply and demand are back together and where inflation is down low again, and mortgage rates are low again.

This will be a process were by ideally, we do our work in a way were the housing market settles in a new place. And housing and credit availability are at appropriate levels.

Good grief!

One of the most powerful players in the world is making moves that will negatively affect every American, and he’s not sure how it will turn out?  Did you ask anyone?  Did you seek advice from anybody who is actively involved with the real estate market (not economists) to get some opinions?

Certainly, someone from the real estate industry will help him out….like Larry:

Oh, ok great. In response to her question about whether home prices will go down, he said we should produce more oil to reduce gas prices and lower inflation so mortgage rates could come down and make homes more affordable. Thanks for clearing that up, Larry!

What nobody is considering is that SELLERS GET A VOTE. If potential home sellers think that the Fed is trying to tank the real estate market, then they won’t sell now – they will wait for better days ahead.

I talk to buyers and sellers every day. I’ve knocked 1,000+ doors this year in search of potential home sellers, and haven’t gotten a single listing. The ridiculously high price they can get today isn’t enough to get them to sell. If they think that we’ve past the peak, they really won’t move!

Buyers need a reset, alright. But this won’t be it!

Who’s Left

By the end of today, the 30-year mortgage rate should be in the mid-6s – who would buy a house now?

Between higher prices, higher rates, and the hefty federal and state capital-gains tax, the move-up/move-down homeowners are effectively locked in to their existing home.  It’s just too hard to make sense of a move, unless there is another strong reason to overcome those.

It would help if they don’t mind leaving town, and probably leaving California.  But who wants to do that?

Without the move up-and-downers, the supply and demand will both be greatly diminished, and the number of sales should drop significantly. But there will always be sales!

Here are the potential buyers who might still be interested, even at 6%-7%:

The Mega-Rich – When they see something they like, they just buy it.

Tenants – They are sick of how high the rents have become, and they don’t want to keep moving around trying to ease the pain. Some inheritance would help.

Inheritance/Gifts – They have been waiting, and now their ship has come in.

Job Transferees – They are used to owning, and they usually have their company’s blessing – and relocation package ($$) to assist them with the transition.

Contarians/Opportunists – The deal hunting will kick into high gear.

Self-Employed – Lenders should ease up a bit on underwriting to keep the doors open, and the alternative mortgage products might get more love.  Qualifying with 24 months of bank statements, instead of tax returns, and getting a 8% or 9% rate won’t sound as onerous as it did when rates were 3%.

Most Everyone at a 10% to 20% discount – Those who stay in the hunt might get lucky!

Hopefully, the floor for NSDCC sales should be around 100 per month while the market recalibrates in preparation for the next selling season.

If sales drop below 100 per month, then I’ll be looking for the panic button!

Frenzy Wrapping Up

The frenzy wasn’t going to last forever.

Coming off the initial covid months, everyone thought the red-hot market was an acceptable reaction to the way our world had changed.  But it’s gone too far, and somebody had to do something – and the Fed is going to do it again tomorrow, which will continue the rise in mortgage rates.

It means sales are going to tumble, which is nothing we can’t handle.

Here’s how it looks so far:

NSDCC June Sales

2017: 360

2018: 299

2019: 282

2020: 274

2021: 357

2022: 61

Currently there are 198 homes in escrow, and 68 of those were marked pending this month.

Of those that went pending prior to June 1st, let’s guess that 100 of them will close in June – and there might be a few others that are just coming together this week with a quick close date in June too.

It will make for around 180-200 NSDCC sales this month!  It’s quite a bit lower than usual, but we’ll survive.

We’ll have more unsold listings, longer market times, price reductions, and fewer sales – it’s all part of the recalibration!  Additional price reductions are an unreliable indicator because you don’t know how crazy the recent list prices were in the beginning, and they have never been so optimistic, even for the frenzy.

The closed-sales pricing will be the last thing to change, if at all.

I’m sticking with my +/- 5% for NSDCC pricing here in Plateau City.

$475,000 Over List

As you can see in my mortgage-rate tracker (in right column), we had another meltdown today, and the conforming rate now is over 6% (with no points).

The idea of paying higher prices AND rates really discourages the move-up/move-down markets.  Combined those with having to pay federal and state capital-gains taxes and the existing homeowners aren’t going to give moving another thought. They probably weren’t giving it much thought any way! And now they might have to sell their home for less?  Forgetaboutit!

While most will be (rightfully) concerned about how the buyer pool could dry up, also keep in mind that for every move-up/move-down homeowner that decides not to move, the supply side shrinks a little more too.

Bill added more towns to this list, and it keeps showing how San Diego is bucking the national trend:

We’ve had enough buyers who NEED a house that sales will keep happening, regardless of mortgage rates.  I’m sure buyers are hoping to just pay the list price, or less, to compensate.

Yet, after rates got into the 5s and several ER sales closed for less, here’s another over-list:

 

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