The median home price in San Diego has increased 15.3 percent to a record high of $680,000 in the past year (source: CoreLogic as provided by DQNews). The price gains across the 6-County Southern California region averaged 14.5%. This news has many people speculating whether we might be in a ‘bubble’ and if so, when that bubble might burst.

This increase in home values is being driven by record low inventory, surging demand, low mortgage interest rates and increased consumer savings. These factors were certainly accelerated due to the pandemic, but each of them were trending in this direction before the start of 2020. This has been a recipe for accelerated growth to be sure, but these market factors were already at play before COVID.

  • Low inventory is not a new issue, particularly in Southern California. We have been battling increasingly low inventory since the housing market began it’s recession recovery in 2014.
  • The demand for housing is being driven primarily by millennials reaching home buying age. The pandemic accelerated their timelines, but this trend was due to impact the housing market even without the pandemic.
  • Although mortgage interest rates have reached a peak of around 5% over the past decade, historically speaking even the highest interest rates of the past decade have been favorable and have not substantially impacted consumer demand.
  • Large numbers of Californians are leaving the state for lower-priced, less regulated markets such as Idaho, Arizona and Texas, however it seems for every Californian that leaves, a New York or Washington resident moves in search of better prices and better weather than their home state.

As of the first week of April, US search queries for the phrase “when is the housing market going to crash” jumped 2,450% compared to May, and is now searched more than it has been since 2004, according to Google. But while there is fear, there is no substantial evidence that the fear is legitimate. “It gives the feel of a bubble,”  said Lawrence Yun, the National Association of Realtors’ chief economist, “but the fundamental factors are different.” Referring to the subprime mortgage crisis of 2008.

The record year-over-year price growth of 2004, just a few short years before the Great Recession, was at 27% and fueled by subprime lending and market speculation – a very different recipe than today’s market growth which ultimately led to disaster. Because we are no longer seeing the reckless lending that we saw in the early 2000’s, the risk of short sale and foreclosure inventory flooding the market as it did during the Great Recession is very low – homes are appreciating, homeowners were well-qualified for their loans when they purchased their homes and the risk of inflated mortgage interest has been eliminated because of the widespread use of the 30 year fixed-rate loan. While many homeowners nationwide are delinquent on their mortgages and utilizing forbearance, their homes are not underwater. They will be given the opportunity to refinance or sell for a profit.

The ever-rising home prices in the highly competitive housing market which has tormented homebuyers may be precisely what will prevent a repeat of what happened during the Great Recession.“Housing market strength is reflecting many of the positive and continually improving signs of the economic recovery,” wrote CoreLogic deputy chief economist Selma Hepp,”including employment gains, consumer savings and more purchase power among home buyers, all while mortgage rates remain historically low.”

That being said, interest rates are up to 3.1% and rising from their record-low in December 2020 of 2.68%. Once interest rates hit 4%, experts predict that demand may begin to slow slightly, but not enough to cause home prices to drop, just enough to slow price acceleration.

In a recent NerdWallet poll 17% of homeowners reported that they were considering selling in the next 18 months. If all of those potential home listings were to come to fruition, that would be nearly 1 in every 5 homes changing hands over the next 2 years. Were that to occur, we would certainly begin to see price acceleration slow if not begin to decline slightly, but likely not before early 2023.

As always, we will be here to continue to provide you with updates about the housing market and answer any and all of your questions. Feel free to reach out to us anytime.

All the best,
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