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Limit on Doom

Hat tip to long-time reader Todd who we saw at the game last night – we did bug out early, but it was only to pick up Kayla at the airport. The Padres walked it off in the 11th inning!

Meanwhile, people are wondering where the local real estate market is going to end up.

For conditions to change much, sellers would have to panic, and dump on price. Otherwise, we will just be taking a leisurely stroll through Plateau City, admiring all the homes that aren’t selling.

Here are the favorite zip codes around North County – SE Carlsbad (92009), Encinitas (92024), Carmel Valley (92130), and Rancho Santa Fe (92067).

A few months ago, we had the lowest number of active listings of all-time:

While lately the number of the active listings have been growing steadily, they would have to double from this point before getting into the danger zone – but we’re going to run out of time before that happens.

Now that doom is being broadcast everywhere, sellers will decide that ‘now isn’t a good time to sell’, and by August they will quit listing their homes for sale.

There are 396 NSDCC active listings today (and 180 pendings), and we might hit 500 before August, but that will be the peak for 2022.

The market won’t keep getting worse – it will just taper off for rest of the year as buyers AND sellers lose interest. Instead, we’ll be talking about the playoffs and our first-place Padres going to the World Series!

Happy Father’s Day

“A father doesn’t tell you that he loves you. He shows you.” —Dimitri the Stoneheart

“A good father is one of the most unsung, unpraised, unnoticed, and yet one of the most valuable assets in our society.” – Billy Graham

“Dads are most ordinary men turned by love into heroes, adventurers, story-tellers and singers of song.” – Pam Brown

“My father gave me the most valuable gift anyone could give another person. He believed in me”.
Jim Valvano

“When my father didn’t have my hand, he had my back.” – Linda Poindexter

“In my career, there’s many things I’ve won and many things I’ve achieved but for me, my greatest achievement is my children and my family.”
David Beckham

“Any fool can have a child, but that doesn’t make you a father. It’s the courage to raise a child that makes a father.” – Barack Obama

“A father carries pictures where his money used to be.” – Steve Martin

Fewer Pendings & Sales is Relative

The California Association of Realtors said that the number of pendings has been falling.

They don’t give any other details or interpretations, so what will casual readers conclude?

The market must be coming apart!

Thanks C.A.R.!

But because pendings and sales are directly related to inventory, we must consider the impact of having fewer homes for sale.  Look how dramatically the inventory has dropped recently, and yet we still had a good amount of sales, relatively:

NSDCC Detached-Homes

Year
Total Listings, Jan 1 to May 31
Total Sales, Jan 1 to May 31
Sales/Listings
2018
2,222
1,112
50%
2019
2,273
1,099
48%
2020
1,855
871
47%
2021
1,780
1,322
74%
2022
1,349
946
70%

In 2021, the frenzy was so hot that every house was selling, and the lower inventory wasn’t as obvious because the sales count was tremendous. But now that the number of homes for sale has really dried up, the impact on pendings and sales is more noticeable – at least for those who are willing to look that far.

This year has been really great! The rest of the year will probably be less great. It might even get back to 2018-2019 levels, which is fine – that’s the way it always was.  We could handle worse if we had to.

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:

 

Generational Wealth Transfer

Are you wondering if our local housing market could maintain current pricing – or even go higher? It’s possible, and if it happens, a major reason will be baby boomers pitching in to help their kids buy a home.

Compare the 2018-2022 era to what’s expected to happen over the next 20 years (chart above).

And then there’s this:

It’s hard to determine exactly how many buyers are receiving help from their parents, in part because few are willing to discuss how they’re paying for a new home. But financial advisors say they’ve seen a wave of ultra-wealthy parents seeking advice on buying homes for their kids because of the increased gift and estate tax exemption.

The Tax Cuts and Jobs Act doubled the amount that Americans can pass on to heirs tax-free, to about $12 million for individuals and $24 million for couples in 2022. It will sunset at the end of 2025, when the exemption is scheduled to be cut in half.

It’s not just for the ultra-wealthy either.  Every homeowner has picked up enough additional home equity lately that they might find a way to tap into it to help out their kids:

Unfortunately, the generational wealth transfer will do nothing to add to the supply of homes for sale – it will only create more demand of affluent buyers playing with money that’s been given to them.

The Fed will be forced to keep trying to control inflation, and Rob Dawg thinks mortgage rates will get as high as 7.25% (and they could go higher). It will cause an uncomfortable frenzy-transition period because the longer it takes, the more money will be inherited. Yikes!

How long will people wait-and-see?

Get Good Help!

Post-Frenzy Transition

With mortgage rates blowing through the fives and another Fed meeting coming up on Wednesday, I think we can declare that the frenzy is over.

Or at least we can expect that it’s over in the buyers’ minds.

But one fact remains the same: There still isn’t anything to buy.

Will there be a surge of new listings? It would be very unlikely.  If homeowners weren’t motivated to sell for all-time record prices during ideal conditions, they won’t be interested in the thought of taking less either.

There will be a transition period while buyers, sellers, and agents get comfortable with the new environment. The talking heads will keep reminding us that rates are still historically low, and that buyers have more negotiating power now (up from zero, previously).

By the time we get to the Selling Season of 2023 though, the market players (buyers, sellers, and agents) should establish a decent comfort level with the direction of the variables.

The big question is: What will happen between now and February?

We can probably count on these:

  1. Superior homes that are priced at 10% under recent comps will sell.
  2. Inferior homes that are priced at 20% under recent comps will sell.
  3. Buyers will wait it out, sellers will wait it out, and agents will keep doing what they’ve been doing and ignore anything that’s negative.
  4. Sales will plunge.

Ponder the other likely possibilities:

  • There are going to be occasional deals, and almost all of them will be on inferior properties. Because all homes will need more improvements to be able to sell for retail, more agents will be inclined to recommend a dump-and-run on the original-looking homes.
  • There will be a ton of false starts. We are already seeing new listings get cancelled pre-maturely or being refreshed with a new and improved price (but not improved enough to make a difference). There will also be wicked buyer’s remorse as friends and family react violently to those buying now.
  • Surprisingly, there will be bidding wars and homes selling over their list price.  Of the 55 NSDCC houses that have closed in June, 62% of them sold for more than their list price.  It’s almost like an addiction!

The market will be driven by the out-of-town buyers who really want and need to live here.  They didn’t let higher prices stop them, and neither will higher rates.  What are they going to do? Not move here?  There might be fewer of them, and they might take longer, but they will keep coming – count on it.

We will survive this!

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