Just when you thought it couldn’t get any crazier in the SD real estate market, it did.
My biggest take away for 2020 with regards to record low levels of inventory was “DOWN 46% COMPARED TO LAST YEAR”!!!
Well, it’s only gotten worse in 2021 as we are now seeing even fewer homes coming on market, making our inventory levels DOWN 57% COMPARED TO LAST YEAR!!!
SO WHAT’S GOING ON?
Homeowners aren’t moving. Why would they? Replacement homes are not seemingly affordable and they have low fixed-rate mortgages on homes that are appreciating at blinding speeds. They are refinancing, remodeling and staying put for the long haul. That decision in-and-of itself is contributing to the increasing home prices. Home builders can’t build enough homes to meet demand in part due to the cost of materials and lack of labor available, and in places like Southern California there is simply no buildable land.
WHAT IS THE EFFECT OF THIS?
We are seeing huge pent-up demand because we are in the midst of an inventory shortage crisis that has been gathering steam for the last 5 years. Right now, it’s basically free to borrow money as interest rates are being held artificially low. These factors combined are effectively creating such strong buyer demand that it has driven home prices up 15% in 2020 and it is forecasted to increase by an additional 10% in 2021.
WHAT TO WATCH FOR . . .
INFLATION. That’s where we are likely headed in the next couple of years. We are currently recovering from a recession triggered by the global pandemic, with millions of people still out of work and a government that is pumping lots of money back into the economy. The sectors of the economy that are still suppressing our overall economic health, such as travel and tourism and consumer services, will rebound. Prices of those goods and services will rise in the face of increased demand. Higher costs of goods and services and excess money in circulation is an obvious recipe for inflation and US dollar devaluation.
Presumably the Fed will respond to that eventual inflation by raising interest rates, slowing or stopping the purchase of bonds and decreasing the amount of money in circulation. People will want to access their liquid money and we’ll see that liquidation demand in the real estate market. Inventory shortages will ease up as more homes are listed for sale. Prices will fall and we will see more of a buyer’s market emerge. A buyer’s market occurs when the supply (available homes for sale) exceeds demand (the number of buyers seeking to purchase homes). You might be able to buy a great home for a lower price than you would in a seller’s market, however, it doesn’t necessarily mean buyers are getting the better deal. With higher interest rates and lower demand, buyers will simply be less easily persuaded to part with their money, and sellers will need to be more flexible with their terms and offerings in order to attract buyers.
BUT FOR NOW . . .
We remain in a white-hot seller’s market. So if there’s very little real estate for sale in the areas you want to live and none of it is desirable and affordable to you- what do you do? You likely begin to look at other location options. You look at areas with amenities and benefits that serve your purposes and lower property values. Previously rural areas are built up with strip malls and entertainment complexes. Low-income urban areas are gentrified. We’re seeing this locally and nationwide. And while on one hand, property owners who are benefiting from appreciation in these situations may seem like they’re the winners, low and moderate income workers are pushed out without affordable housing alternatives nearby and as a result, their employers either go under or raise prices to cover increased labor costs, passing the buck to consumers.
So who wins and who loses in this economic climate? Truthfully, anyone who is gainfully employed and has cash and assets available to them has a winning proposition in most scenarios.
IF YOU ARE A BUYER IN TODAY’S MARKET:
You are certainly facing tough circumstances in finding and negotiating on a home, but it’s still a great time to buy and take advantage of the benefits of homeownership. There will probably never be a lower mortgage interest rate than you can get this year and we don’t expect to see equity gains slow down until at least the middle of 2022. With access to low-interest fixed-rate mortgages, you will have the ability to wait out any financial downturn and loss of equity – and real estate always comes back around and performs well in terms of price appreciation over time.
IF YOU ARE A SELLER IN TODAY’S REAL ESTATE MARKET:
If you are considering selling your home and cashing in on that appreciation you’ve been snowballing, the question is, where will you go? The most common situations we’re seeing for home sellers right now include people moving to another part of the country where home values are lower, move-down buyers who are looking for less home to maintain and millennials who are reaching career peaks and are ready to upgrade from their starter homes or have delayed buying altogether for the last decade. If you have a plan for a smart move, now is definitely the time to cash in on your equity as we are approaching peak home prices and one thing we know about the housing market is that there will always be a correction.
IF YOU ARE A HOMEOWNER IN TODAY’S REAL ESTATE MARKET:
If you have no plans to sell your home, you will want to review your current mortgage to see if you have an opportunity to save money by refinancing and track your home value to see how much equity you have built into your home. You can explore your options on how to leverage the equity you have built into your home to do a number of things such as buy an investment property, rent your current home and buy a new one, create an emergency fund, make home improvements, add more livable space, eliminate credit card debt and explore new investment opportunities. If you have a family trust or have been thinking about creating one, now would be a great time to transfer your home and any other property you own into that trust. Heaven forbid, if anything should happen to you and if you have small children in particular, you do not want your home to go into probate where the courts have ultimate decision on how to manage the sale of your property, which can take years and cost thousands of dollars.
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.