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Hurricane is One More Deterrent

If mortgage rates around 7% weren’t bad enough, today we are experiencing another major setback to the San Diego real estate market.

Florida has been one of the main destination points for those moving away from here.

How many people who were planning to leave San Diego next year are second-guessing their plans now.

  • Would you leave San Diego, and move to Florida, after seeing this hurricane?
  • Would you move to Texas after the whole state was frozen over recently?
  • Would you move to Phoenix, where the temperature was over 100 degrees pretty much all summer?

Yikes!  I expect the local inventory of homes for sale in 2023 to be the lowest ever!

Real Estate 3.0

Pete has been trying to disrupt the real-estate-selling business for years, but here it seems like he is giving up on replacing realtors and is acknowledging the American tradition:

This type of “classic” residential home ownership is likely not dying. 65% of families in the US are home owners. There’s a reason this number has stayed within a remarkably narrow range of +/- 4% from an average of 65% over almost 60 years. A home is still seen as financial stability, security, safety net. Despite exciting rises in nomadic living fueled by the pandemic, when it comes to schools and families and establishing community, being in one place and owning is going to continue to be important for most Americans. Certainly not all, but most.

But he’s still optimistic that disrupters can manufacture ways to get a piece of the pie. Read full article here:

https://www.nfx.com/post/real-estate-3-proptech-the-ownership-revolution

High-End Slump?

Here we go again with the click bait on the front page of the local birdcage liner.  They also used a photo of the most prime real estate in the county, insinuating that a slump is underway there?

Link here for the full article, and this is an excerpt:

San Diego luxury home sales are down by more than half as the high-end market sees its biggest drop in at least a decade. Out of the 50 most-populated metro areas, San Diego had the fourth-highest drop in luxury sales from June to August, said a report from Redfin released Thursday. The number of sales was down 55.3 percent from the same time last year.

The markets with the biggest drops were Oakland (down 63.9 percent), San Jose (down 59.6 percent) and Miami (down 55.5 percent). The lowest drops were in Kansas City (down 10.4 percent) and Indianapolis (down 7.5 percent).

Redfin defined luxury housing as the top 5 percent of the highest-priced homes for sale. So, what is considered luxury differed greatly across metro areas. For example, the median price of a luxury home in Cleveland was $629,000, compared to $3.3 million in San Diego metro (which includes all of San Diego County).

Rising mortgage rates are cited as the main reason for the entire housing market slowing down. Redfin also said economic uncertainty and a tepid stock market also were dampening sales.

Sales are down by more than half?

High-end market sees its biggest drop in at least a decade?

Maybe the higher-end sales in the rest of the county aren’t as boisterous as they used to be, but sales and pricing between La Jolla and Carlsbad looks pretty good to me. These are the stats from the last 2.5 months which should reflect the worst period of the summer slump they measured:

NSDCC Sales Between July 1st and Sept. 15

Year
# of Sales $3M-$4M
Median SP
# of Sales $4M+
Median SP
2017
30
$3,375,000
29
$4,995,000
2018
22
$3,315,595
28
$5,243,130
2019
32
$3,325,000
30
$6,382,500
2020
60
$3,372,776
51
$5,385,000
2021
74
$3,300,000
78
$5,650,000
2022
60
$3,450,000
57
$5,270,000

When I search the MLS for detached-home sales over $3,000,000 for the whole county between June and August, this is the result:

2021: 260

2022: 213

It doesn’t look like 55% off to me.

I have requested that Compass get into the real estate reporting business so media types have access to what’s really happening, instead of using Redfin’s stories which sensationalize the data to draw more attention to themselves, rather than help consumers properly interpret the market conditions.

Where To Get A Deal

Are you waiting to buy a home until you can get a sizable discount?

Is it because you know a guy who will give you a deal on any home improvements needed; you’ve got your eye on some new appliances down at the scratch-and-dent outlet; and you were thinking about going through Redfin until you heard they are cancelling their rebates? You want a deal on everything!

Well, here you go!

These late-1990s tract homes in SE Carlsbad and in the Encinitas school district are priced LOW. The pending listing on Corte Clarita should close at $2,300,000+ because it had already gone pending once in mid-August but came back on market – then the agent refreshed the listing once he found a second buyer a couple of weeks later. He told me there was no big discount happening there:

You know that my listing is going to be closing for $2,250,000 nearby, plus this one should be over $2,300,000…..so these actives are 10% to 20% under. It looks like the market is crashing….is there a catch?

Look at their locations:

The first three are on the corner of Calle Acervo, and the fourth is next door, but hey, La Costa Canyon High School is walking distance!  But you have the traffic from high-school drivers too, and you know it will be a madhouse during football games. A deal is a deal though, and you can save hundreds of thousands compared to the remodeled home with larger canyon lot (in purple at bottom).

Or save millions here!  This house is listed for $32,500,000, or go down the street and buy this home that was newly priced today for only $4,900,000!  Both are oceanfront La Jolla!

https://www.compass.com/app/listing/5650-dolphin-place-la-jolla-ca-92037/1136258851857198681

The difference? This house is 1,167sf on a 2,982sf lot….at least for now. But it’s 85% cheaper! And the more-expensive one RAISED their price from $25,000,000.

My point? The low comps won’t suck down the expectations of future sellers of superior homes – it’s too easy for them to ignore/explain away the low comps, and will only consider pricing theirs like the other superior sales nearby – which there will be some.

Oh, what about a foreclosure? Well, they are starting to spike:

Or are you going to wait until you can rub my sizable nose in it?

Hey, I wish prices were lower, and if they crashed it would only mean more opportunity for buyers, and hopefully more volume, which is what I want.  I’m not trying to coax buyers into paying too much – I’m showing you where the deals are today, if you don’t mind an inferior home or location.

I just hoping that the coming standoff only lasts a couple of years, instead of 5-10.

Post-Frenzy Coffee Bet

The last coffee bet began in 2006 when it was obvious to me and others that the market bubble was popping, so let’s examine the data back to those years to see if we can learn anything that might be helpful when trying to predict the future:

NSDCC Listings and Sales between January 1st and August 31st:

Year
Number of Listings
Number of Sales
Median Sales Price
2006
4,596
1,822
$997,375
2007
4,046
1,883
$1,000,000
2008
3,865
1,413
$915,500
2009
3,741
1,346
$803,503
2010
4,065
1,684
$826,407
2011
3,988
1,780
$828,745
2012
3,423
2,086
$825,000
2013
3,747
2,355
$925,000
2014
3,640
1,978
$1,020,000
2015
3,797
2,169
$1,086,000
2016
3,926
2,084
$1,157,465
2017
3,549
2,125
$1,225,000
2018
3,578
1,957
$1,320,000
2019
3,597
1,927
$1,310,000
2020
3,254
1,853
$1,410,000
2021
2,861
2,265
$1,870,000
2022
2,190
1,451
$2,400,000

The most recent non-pandemic years, 2018 and 2019, were eerily identical, which suggests that the same market conditions can prevail for years in spite of rates (which varied from 4.03% in January, 2018 to 4.87% eleven months later, and then back down to 3.72% in December 2019).

The most stunning data point is how the number of listings has plummeted this year, even though sellers could have sold for all-time high prices. Record pricing used to motivate more people to sell, not fewer!

Agents sitting on unsold properties will ‘refresh’ their listings every month or two, and those days are back so we’ll probably have at least the same amount of 2023 listings just due to the extra 10% to 20% of refreshers. But the inventory is going to be bleak no matter what happens, so that alone will drive the market in 2023 and beyond. Here is a visual:

The thing I remember most from the last downturn was how the market turned earlier than expected. There was a blog post from April, 2009 entitled Coffee Bet 2 where I thought prices would go down another 25%, when that month ended up being the actual trough for the SD Case-Shiller Index.

Even with the buyers who over-analyze and stay on the sidelines for 2-5 years, there will be others – mostly those out-of-towners who don’t have a house here yet – who will buy when they find the right house.

Sales will likely be dreadfully low, and I think NSDCC pricing will be FLAT in 2023.

During the selling seasons, there will be some spectacular sales of those family estates with big yards and pool on culdesacs…..and prices trend higher!  But then as the inventory diminishes over the rest of the year, the pricing either goes flat or we give it all back in the second half of the year – like what happened in 2018 and 2019…and what will probably happen in 2022 too:

Here are NSDCC markers for this year:

January 2022:

Median List Price: $2,219,888

Median Sales price: $2,250,000

August 2022:

Median List Price: $2,200,000

Median Sales Price: $2,150,000

If it weren’t for those crazy three months before rates went up last spring, the 2022 data would probably have already looked fairly flat anyway, so it’s really not risky for me to guess that it will continue. There will be crazy-high sales, and stunningly-low sales too, but in the end, we’ll be living in Plateau City.

In the first coffee bet of 2006, I used the Davidson Starboard tract as a marker, and coincidentally I have a listing there now.  The neighborhood is arguably the best in the area, and La Costa Oaks South homes in general, are among the newest and most desirable homes in SE Carlsbad.

Let’s look up at the end of 2023 and see how the LCOS median sales price compares – even with it being inflated by early-2022 sales.  These closings are from the last six months:

Even if the median sales price deteriorates somewhat in the next 15 months, I predict that my sale will be the lowest Plan 2 sale in the interim, and there won’t be any LCOS sales below $2,000,000 between now and the end of 2023 (the $1.875M sale was FSBO).

The ultra-low number of listings in 2023 will throttle any big price changes in either direction.

My NSDCC pricing guess for 2022 was +/- 5%, and is close, and next year will probably be similar too.

I’m sticking with ZERO change in pricing next year – which isn’t a sexy number but will reflect the general malaise and discomfort among the participants we hope for lower rates but know they won’t change enough to make much difference anyway.

The Impact of Rates

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Trying to predict what will happen to our local real estate market in the short-term?

No surprise that mortgage rates will play a big role in how it plays out, and they have been extremely volatile lately. But it’s just not about affordability, and ‘losing’ buyers. They can always recalibrate by either looking at cheaper homes or cough up more down payment if they really need to buy a home. But will they?

The invisible impact on the market will be how buyers expect higher mortgage rates to convince sellers to lower their price. But sellers aren’t very empathetic, and most will go with their retail list price based on the highest comps ever recorded, and hope that cute young couple with 2.2 kids falls in love and just pays what it takes to win it.

If rates miraculously drop back down to 5% and under, then buyers won’t have a good reason to expect better pricing, and they will be tempted to give in and just pay what it takes. But if rates are 6% and higher, they have a rallying cry and the Big Standoff will be on.

How much lower will prices need to be to satisfy those buyers? They probably won’t have a number in mind, and the answer will just be ‘less’.  It will likely end up being a binary decision – either rates are low enough that we’ll just go ahead and pay these prices, or we won’t.

When the bigger challenge is to find the right house, it will be most interesting to see if the superior homes – the real creampuffs – sit for long, or if they blow out to cash buyers or to those who care more about getting the right house, than the right mortgage rate.

If there is a steady trend of creampuffs selling, it will help to get more buyers to engage.

https://www.mortgagenewsdaily.com/markets/mortgage-rates-09022022

Post-Frenzy Definitions

The doomers are hoping to drive the real estate market into hysterics, just for fun.  It’s easy for buyers and sellers to get caught up in it too, and think the sky is falling.

Let’s identify the terms, what doomers want you to believe, and the truth:

Inventory Surge

Doomers: Sellers are hitting the panic button.

Truth: If we are taking about a surge in active listings, it is because the list of aspirational sellers (those who will only move if they get their price) is growing longer. They aren’t the market makers; they are only helping those that are.

Price Reductions

Doomers – Home prices are falling.

Truth: Sellers mis-priced their home from the beginning, and now they are hoping that if they knock off a couple of bucks, it will make a difference.

Affordability/Revert to Mean

Doomers – Home prices must come down so regular people can afford to buy.

Truth – Around here, homes haven’t been affordable for the common man in years, yet home prices have accelerated.  The NSDCC market is only for the affluent now.

Higher Rates Will Crush the Market

Doomers – Home prices and rates go hand in hand. When rates go up, prices must come down.

Truth – The bumps in rates are only giving the affluent a reason to pause, in hopes of a price correction.

More Open Houses

Doomers – Realtors are panicking.

Truth – More realtor trainees are trying their luck.

Home Sales Dropping

Doomers – Market is being crushed.

Truth – More sellers are holding out for their price.

Sales Crushed

Doomers – Zero

Truth – If the NSDCC monthly sales stay in the 100-200 range, we will be fine. Those are January counts, and the usual market seasons have been topsy-turvy since March 2020 so it will give the demand more time to get pent-up.

Prices Crushed

Doomers – 50% off

Truth – Sellers determine what they can live with, and their ego plays a bigger role than you might imagine.  Nobody has to sell any more, so expect resistance to selling for lower than the last sale.  Only the extremely-motivated sellers will sell for a big discount today – it will take years for that to become commonplace.

I’ll add a few more later!

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