Flood Talk
It never occurs to the experts that higher prices have something to do with the locked-in effect, and that home sellers have to move to where it’s much cheaper to make it worth moving. For those who pay cash for their next home, having a 3% mortgage didn’t keep them from moving today – or any day.
I think my +15% to +20% inventory prediction is looking pretty good:
Some segments of the U.S. residential real estate market started to thaw in January after December’s deep freeze, with a growing number of homeowners listing their homes for sale in a sign that the stubborn “lock-in” effect is finally beginning to ease.
The “lock-in effect” refers to homeowners’ reluctance to sell because they have a low mortgage rate and would have to take out a mortgage at a higher rate when they buy a new home.
Even though the 30-year fixed mortgage rates continue to be high, hovering at just below 7%, homeowners seem to have accepted this new normal and are not letting it stop them.
“While rates remain elevated, it is possible that we might be seeing that chiseling effect starting as sellers may grow tired of waiting for significant changes in rates,” says Realtor.com® Chief Economist Danielle Hale in her January monthly housing report.
“Further, while the lock-in effect remains a factor for many sellers, the strength of the effect is gradually waning,” Hale adds.
Realtor.com projects that home sales will rise by 1.5% in 2025, thanks in large part to the passage of time and slowly decreasing mortgage rates chipping away at the lock-in effect that has been hampering home sales for months.
The latest available data shows that newly listed homes were up 10.8% year-over-year, making it the busiest January in terms of new listing activity since 2021.
What’s more, freshly listed homes shot up 37.5% compared with December, marking the largest month-over-month spike in five years.
“Time and natural turnover could be leading some sellers to make a move this year despite higher rates,” explains Hale.
Looking at the big picture, overall home inventory across the U.S. was up 24.6% compared with the same time last year, a 15th consecutive month of growth. In terms of raw numbers, there were 829,376 active listings in January, plus 314,545 under-contract listings, also known as pending listings.
While home sellers are eager to sell, it seems that homebuyers are still hesitant to buy.
The average home lingered unsold for 73 days, making this January the slowest since 2020. Homes spent five days more on the market than last year and three days more than last month.
https://www.realtor.com/news/trends/mortgage-lock-in-effect-january-housing-report/
Money Will Fix This
This should be a piece of cake!
We had five offers to purchase this 1979 custom home, but because it is hard to look at, buyers expect a BIG discount. Here I review a simple plan to bring it into this era. The comp that just closed this week for $2,895,000 is a three-story house – have you ever seen a decent 3-story? Me neither – they are usually two great floors with a converted attic or basement, so the effective square footage would be about the same as this house. But we’re way off the busy street and right on the 4th hole at La Costa! Only $1,995,000.
Home Buyer Tips
What can home buyers do to simplify their search?
Being realistic is a great place to start. Virtually every realtor promises to find you a ‘dream home’, and it’s easy to believe that there must be a perfect home out there, no matter the price range.
The perfect homes start at $10 million though. If you are in that range, I will find you a dream home!
Everyone else will have to kiss a few frogs to help narrow the search to homes that are suitable.
Here are a few quick ideas to help qualify the homes you see:
- You will be considering older homes that could use some work. Only consider buying the homes that have at least HALF of the necessary remodeling already completed. Unless it has a spectacular location or other premium feature, then make sure the seller has given you a quality head start on the remodeling.
- Expect to spend $25,000 to $50,000 on any house you buy. It changes the mindset from searching for the perfect home to a realistic hunt for where you will spend the money to add your personal touches to someone else’s home.
- If this purchase might be your forever home, then insist on at least 2,000sf.
- Compromise is part of the package. But limit your compromises to one or two only. If you find yourself seeing more than two things you don’t like, then this home ain’t for you. Importantly, this isn’t the last home for sale – there will be othesr!
The preferred features to consider in your search: location, private, sunny backyard, interior with natural light, larger functional kitchen, one-story, view or visual openness, 3-car garage, bedroom suite downstairs, possible forever home.
Get Good Help!
Attractive Pricing Is Key
Why should home buyers be optimistic about 2025? It’s because sales have bottomed (hopefully):
San Diego County Annual Sales of Detached-Homes:
2003: 28,251 (high point)
2021: 25,252
2022: 18,378
2023: 14,003
2024: 14,837
It’s still going to be a challenge though.
This website says there are 530,430 houses in San Diego County, and this one says 634,366 houses. It means that last year somewhere between 2.3% to 2.8% of the total houses county-wide sold last year.
Yes – more than 97% of the detached-home owners in SD County didn’t sell last year!
About the best we can expect is to get back to the 2022 level, which would be a 19% increase in sales, year-over-year. It would take a major price adjustment for sales to go that crazy, because rates are going the wrong way and inventory will probably be going up, not down.
How will pricing break out of the gate? Won’t home sellers – the vast majority of them selling their home for the first time in 10-40 years – want to add a little mustard to their list price, just to see?
It’s easier to imagine that scenario, than agents talking their sellers into a very attractive price this early on.
We’ve received offers on my listing on La Costa Avenue but everyone wants a 10% discount, even though I think I have it priced in already. I’ve been hoping that a slew of new listings nearby will hit the market this month in the mid-$2 millions to make my $1,995,000 list price look more attractive.
How am I doing so far?
Here is the first nearby competitor, and it’s priced the same as mine!
https://www.compass.com/listing/2014-saliente-way-carlsbad-ca-92009/1748808396982187689/
Yikes! Bad for me, but great for the 92009 buyers.
If more of the 2025 listings hit the market with an attractive price, we could have frenzy-like conditions!
January Listings Are A Precursor
Virtually everyone is reluctant to predict the future of the real estate market. Even most realtors will throw their hands up and declare, “Who knows?”.
But around here, one fact has been clear and it tells us what we need to know about the rest of the year. The number of NSDCC listings in January ends up being 8% to 9% of the total for the year:
NSDCC Listings and Sales Data (La Jolla, Del Mar, Solana Beach, RSF, Cardiff, Encinitas, and Carlsbad)
It means that by mid-February we will be able to predict how many listings there will be in 2025, and thus, give us the likely direction of the market for the rest of the year.
I’ve been saying for three months that there is going to be a surge of listings, and it could be 15% to 20% more than there were in 2024. We’ve been doing the contest for Padres tickets to help put a spotlight on the January listings, and it has never been more interesting to see how many will hit the market this year!
Tomorrow, I’ll do a summary of the guesses so far and give everyone the rest of the week to enter or revise their guess so come back Monday morning.
The chart above gives more data for the analytical folks to craft their guess.
My Thoughts:
The last frenzy before Covid was in 2013. Pricing was stuck in a fairly tight range for the previous five years, but listings dropped and sales took off in 2012 and pricing followed in 2013 with a little more inventory. The variables weren’t all the same as today, but you may want to apply a similar effect from the animal spirits to today’s market. Or maybe not?
With another 9% increase in the median sales price and cost-per-sf in 2024, it shows that there really hasn’t been any limits on pricing. Will 2025 be the year that it changes? If so, will it be caused by another surge in listings? Or is there enough money floating around that more listings will cause more sales at higher prices like it did in 2024? It could go either way.
What about the political climate? Pro-Trump supporters are elated and will gladly join the buyer pool. Anti-Trump people are fearing the worst, but like we saw during the pandemic, fear is a fantastic motivator and it causes people to want to hunker down…at any price.
I had more people attend my open house yesterday on La Costa Avenue than I’ve had at the previous seven OHs. Most were just getting started, and the basic need for housing will keep them looking around. Will they buy? We’ll see.
We round-tripped four of our 17 listings in 2024 – and three of those were since the commission debacle on August 17th. Successfully working with buyers had already been a major challenge for agents, and now it’s worse. The affluent buyers will probably always want professional help, but will there be many, if any agents left who are willing to devote months of effort just to have their commission rate dangled in front of the seller for their approval?
Will the market survive it all? Yes, because there isn’t anything that price won’t fix!
Doom On The Way
I think we are in for several monumental changes in the market conditions next year.
Some will be quick to label it a simple change from a seller’s market to a buyer’s market and leave you hanging. But it is a description that needs more definition – specifically, what does that mean for the participants? Do buyers get a better price? Do sellers have to take less?
You better rely on a great agent to help you with those questions!
One change that will be more evident will be doom from the casual observers. The commentary from the cheap seats is already ramping up, and buyers and sellers need to decipher whether it has any relevance to their own situation.
This may be an accurate assessment….but it’s about Nashville, not here:
My prediction? The doomers will be back with a vengance in 2025, especially on social media.
They were vicious in the 2008-2012 era, and I’m sure it delayed home purchases for many potential buyers. Much of it was due to the unprecedented market conditions – foreclosures and short-sales everywhere, and the ez-qual/no-doc financing had been eliminated.
Because it’s been such a strong seller’s market since the pandemic, the basic inexperience with a surge in inventory will tempt buyers (and agents) to pause. The stronger the surge, the more likely the pause.
If you’re selling, get ‘er done early in 2025.
Get Good Help!
Pick Two
There is a saying in real estate that buyers can pick two of three: Size, Condition, Location.
I’m going to modify it slightly, because price should be in there.
Home Buyers – Pick Two: Price, Condition, Location.
- If a buyer wants a home in fantastic condition and in a great location, then expect to pay a premium.
- If a buyer wants to get a great price, then they can expect to sacrifice on condition and/or location.
- If you don’t care about location, keep driving further out until you can find a great house at a great price.
Getting all three is miracle work – buy a lottery ticket while you’re at it.
Here’s my version for home sellers:
Home Sellers – Pick One: Price, Condition, Convenience.
- Want your price? Then spend big money on a tune-up and vacate the home for max showings.
- Selling the home in its current condition? Hard to say when it will sell, and for how much.
- If you want the proceeds on a certain date, then sell to a flipper or auction the home.
There are many variables but you get the idea. Those who have a specific need can sacrifice in other areas to get the results they want. Typically, you don’t get everything!
Simple Buyer Tip
Great advice from long-time Compass agent from Atlanta – if the house you just saw isn’t a 4 or 5, then forget it immediately:
Six-Months Supply of Inventory
We’ve heard of the metric that measures the supply and demand in residential real estate sales. Lance called it the key housing metric going into 2025, but he is suspicious of its accuracy:
A rule of thumb in real estate is that anything below a 6-month supply of inventory is considered a ‘seller’s market,’ while anything above a 6-month supply is a ‘buyer’s market.’
However, that hasn’t always held true this cycle, and ResiClub’s view is that this rule of thumb is a bit outdated. In many housing markets, including Austin’s metro area, where house prices began to decline in June 2022 with only 2.1 months of inventory, that rule hasn’t applied effectively.
In fact, despite Austin’s months of inventory only reaching a high of 4.8 as of August 2024, house prices have already dropped by -19.8% from their 2022 peak in Austin. A better measure of this incoming pricing weakness was the abrupt active inventory jump that occurred in Austin in spring/summer 2022 (going from 0.4 months of inventory in February 2022 to 2.1 in June 2022), which quickly pushed active listings above pre-pandemic levels.
I agree that using six months is outdated, and four is probably too high also.
Let’s use three months as the new standard.
It is hard to believe how well our local market is doing.
There have been 120 closed sales this month between La Jolla and Carlsbad with a median sales price of $2,617,500 which is about 9% higher than last month when there were 165 sales! With the 120 sales already in the books, it means the final count should be around 150 sales in October – even with the political circus going on!
There are 470 NSDCC houses for sale currently, and the number has been steady.
Let’s do the math: 470/150 = 3.13
If three is the new standard, it means we are at the limit of a seller’s market. With higher rates and election backwash in November, it means this measuring stick will almost certainly be indicating a buyer’s market for the last two months of 2024.
Jim Klinge
Klinge Realty Group
Broker-Associate, Compass
Are you looking for an experienced agent to help you buy or sell a home?
Contact Jim the Realtor!
- 682 S. Coast Hwy 101, Suite #110
Encinitas, CA 92024 - (858) 997-3801 call or text
- klingerealty@gmail.com
CA DRE #01527365, CA DRE #00873197
