March 2023 - San Diego Real Estate Market Update

By now you have likely heard news of the Silicon Valley Bank and Signature Bank failures over the weekend. I have received many calls over the last few days from clients and colleagues to discuss the impact this may have on the economy and ultimately the real estate market locally. The concern, of course, stems from the fallout of the 2008 banking crisis and subsequent crash of the housing market. That financial crisis, however, was caused specifically by sub-prime mortgage lending which was regulated by the Dodd-Frank act in the wake of the crisis. It’s true that these recent bank failures are a result of loosened restrictions on banks as Dodd-Frank legislation was altered, but those loser regulations did not extend to mortgages. Essentially, most financial experts agree that the failure of these two banks was “idiosyncratic” in that their investments skewed towards high-risk venture capitalism in the tech startup sector as well as cryptocurrency.

“I don’t think the bank failures will have a material impact on the housing market in the western U.S. The failures are idiosyncratic, and given the government’s decision to pay all depositors, I don’t expect there to be a problem in the broader financial system,” Mark Zandi, chief economist at Moody’s Analytics, told MarketWatch. Banks will still provide mortgage loans, he added, and “if anything mortgage rates may decline given the flight to quality into the bond market and prospects that the Fed may delay its rate increases.”

Why do we feel confident that a housing crisis is not on the horizon? Today, US homeowners enjoy fixed-rate mortgages for which they are very well-qualified, with the added benefit that nearly all mortgagers in the US either financed or refinanced their homes while interest rates were at all-time lows. Unemployment numbers are quite low and homeowners are flush with equity, so the likelihood of a housing crisis where supply explodes, demand dried up, and home values plummet is extremely low.

Does that mean that these bank failures are not a canary in the coal mine for larger financial problems in the US? Of course not. Financial markets are inherently volatile and we will be seeing new impacts of the Pandemic unfold for years to come. These events and their domino effects are unpredictable but one thing can be sure, it’s always something.

It’s important to remember that real estate statistics are always running on a one-month delay. This month we can only speak to February’s stats. Median home prices have been relatively flat since November of 2022 but were up ever-so-slightly in February over the previous month. Median home values are still down overall from 2022 prices, but notable is that volatility in financial markets is having an outsized effect on the luxury real estate market, meaning fewer luxury homes are selling than starter homes, which could be driving the median home price downward even while lower priced home values are still rising.

Overall inventory is down in February over January signaling that buyers have been more active, as evidenced by pending and closed sales both rising in February. New listings coming to the market were down in February over January which is a surprise at this time of year - we would expect to see the number of new listings rising from January through the Summer in a “normal” year. This low inventory environment is the real problem facing the housing market - no one is incentivized to sell, but there is still buyer demand, especially when mortgage rates dip below 7%.

Buyer demand is strong enough to sustain the higher prices we continue to see as a result of low inventory as there is more than enough demand to absorb the low level of supply. If we saw a new glut of supply with current high interest rates and high prices, demand would not be adequate and prices would begin falling - but there are no signs in the market of an influx of supply - in fact, quite the opposite, it’s hard to see where any new supply would come from when you analyze it from all angles. There’s no space for substantial new builds. Homeowners are settled in their homes with low interest rates and tons of equity, even if they would like to move, the question is, “where would I go?” With high prices and high interest rates, their money doesn’t go very far in increasing their quality of life compared to their current living situation. There is no indication that we would have any kind of foreclosure activity to speak of. These are the scenarios that could lead to new supply and there is very little likelihood that they will materialize. This is protecting our market and homeowner equity but is frustrating for buyers due to decreased affordability and limited options. But even as buyers grow weary, most are not going to simply give up, so finding the right home at the right price with the right interest rate is a patience game. 

Interest rates fell in late December and stayed lower through mid-February, but began rising again in mid February. Some of the buyer demand we have been seeing since then has been a result of buyers who rate-locked at lower rates during that time frame which sustained buyer activity while rates continued to rise in the first part of March. However, as of this week, rates are back down around 6.5% again as a reaction to the financial market impact of the recent bank failures. The question now is whether the Fed presses pause on rate changes as a result of bank failures or consumer behavior goes unchanged keeping inflation high and the Fed continues to raise rates.

As recently as last week, Federal Reserve Chairman Jerome Powell told members of Congress that the latest economic data has come in stronger than expected. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,” Powell said. While mortgage rates don’t follow the federal funds rate exactly, they are heavily influenced by both the Fed’s monetary policy and its thinking on the future of inflation.

Al Otero, portfolio manager at Armada ETF Advisors, also said that the bank collapse may have forced the Fed to hit the brakes on raising rates, which helps the housing market. There’s a rally in rates across the yield curve, Otero said, “and an expectation that the Fed will now ‘pause’ raising the funds rate at its March 21-22 policy session.” And this means that “we could see a material reduction in mortgage rates going into the spring sales season,” he added, “which would be a substantial positive for the housing market.”

Of course, the Fed rate is not the only thing that influences mortgage rates. Today, rates are lower following stock market uncertainty and 15-point decrease in 10-year Treasury yields. These dynamics will likely heavily influence the 2023 real estate market, so we will keep a close eye on them and continue reporting about how things are evolving.

WHAT DOES THIS MEAN FOR YOU?

If you’re a homeowner:

If you own a home and you’re not looking to move, ride the wave. You likely have substantial equity and a low interest mortgage that is manageable. If you’re considering moving in the next few years, let’s talk about your ideas. If you’re considering remodeling or tapping into your equity, give me a call for lender referrals that can help you access the lowest rates available right now.  

If you’re a hopeful homebuyer:

If you’re newly in the market or revisiting buying a home after choosing to wait the market out for a while last year, we should talk sooner rather than later. Buyers have a great deal more power in the real estate market right now than they have in the last few years with sellers more willing to make concessions including rate buydowns, repairs and price reductions. Keep in mind, though, inventory is still low so there is still more limited selection. When you lock your rate for a home loan is very important right now as rates have been very volatile and changes of even .5% can save you thousands of dollars per year in interest costs. If you love a home, you need to take steps to secure it quickly.

If you’re a potential home seller:

If you’re interested in selling your home, it’s still a great time to sell. It’s true that you may have missed your peak price last Spring, but your home has still earned you substantial wealth over the last three years. The key to selling in this market is to price your home intelligently, make it as appealing to buyers as possible, market it strategically and come to the table ready to create a win-win scenario for both you and your buyer. This is my expertise and I’m never too busy for you or your referrals whether you’re considering selling or you just have questions about the market.

Most importantly, if you have questions or concerns about your specific situation… CALL ME to help sort through them. That’s why we get up in the morning - not just to sell homes, but to serve our clients.

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.

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