Housing experts warn prospecting buyers from further delaying their homeownership plans in hopes of price depletion in this uncertain, economic market.
“Deciding to buy now or wait is going to depend on the individual buyer’s motivation and situation. Waiting may not be a viable option,” says Krista Forsberg, a real estate agent at Keller Williams in Edina, Minnesota. She also adds that even if a buyer can push pause on buying to later in the year or 2023, there isn;t likely to be significant improvements in prices or interest rates.
Experts say that buyers should be mindful of and keep an eye on the economy because it’s being pulled in all directions by inflation, soaring gas prices, the ongoing war in Ukraine and the pandemic, are a few reasons. In the US, it’s the housing economy that’s being affected by rising interest rates, making it harder to access affordable housing.
Steve Simmons, founder of October Real Estate in Los Angeles said that he believes that the stark rise in interest rates scare both the buyers and the sellers; they’ve no idea if the rates will stay or continue to increase. This lack of predictability causes many buyers and sellers to sit and wait while there are others who will scramble for a sale or purchase before things get worse.
That being said, MBA economists don’t see home prices falling in the near future. They report a median sales price of an existing home to be $361,400 in the first quarter going up to $402,000 in the second quarter, and slightly leveling off at $379,000 in the third.
Because of this inflation, high mortgage rates and record-high home prices are making it harder and harder for buyers to afford their mortgage payments. Today, according to Zillow, a typical monthly mortgage payment is 75% higher than it was in June 2019. The frustrating part is that earnings are not keeping up with the inflated costs. Wages grew 6.7% in June, but then fell behind the 9.1% increase in inflation.
So, the question, when will housing prices start to decrease? We’re not so sure. Since we’re not seeing any decrease in housing costs for new buyers any time soon, our tip for buying a house in a hot housing market is to start off with a budget and stick with it. But even with a slight increase in the number of homes for sale, buyers would still be facing steep prices and mortgage rates in the 6% range.
There are a lot of factors to consider when buying right now, and a lot of people are scared to make a mistake. Our advice is to go with what your gut says. If the timing feels wrong, then you will always find the wrong home, so wait, But if you feel that this is the right time for that, then you should go ahead with your homeownership plans.
The Big Story
Record highs and lows in the housing market
- Home prices in the United States hit a record high, while housing inventory declined to a record low.
- Homes are selling extremely quickly, and the high demand and low supply have dropped the Months of Supply Inventory to its lowest level in history.
- Rising prices and low supply have shifted who’s buying homes.
- The average 30-year fixed mortgage rate rose over 1% in the past year, mostly during the past two months. Economists expect the Federal Reserve (the Fed) to start raising rates in mid-March, the first of six 0.25% increases throughout the year.
Amplified seasonal trends
Seasonality in the housing market was incredibly steady before the pandemic. Prices typically rose from January to June, when inventory was low but rising, and then flattened from July to December, when inventory was high but declining. In January 2020, homes were already undersupplied, hitting a record low with just over a million homes for sale on the market. When the pandemic hit, demand for homes exploded, dropping inventory to shockingly low levels. During the 18 months between January 2020 and June 2021, inventory declined 49% and prices increased 32%, doubling the total price increase of the previous three years combined. By January 2022, inventory had reached an all-time low, down 60% in the past two years, while home prices reached a record high, up 34%.
Home sales have only gotten quicker as the market has become more efficient. We can see this trend through the Days on Market and Months of Supply Inventory (MSI). Before the pandemic, homes were already selling more quickly, primarily because of technology and an increasingly competitive market. A more efficient market matches the right people with the right home at a fast pace, causing a drop in supply when new homes aren’t being built. MSI, which quantifies the supply-and-demand relationship, is at a record low, further indicating a sellers’ market. The low supply, high prices, and speed of purchases have shifted homebuyer makeup.
The number of first-time buyers dropped 6% over the past year, while sales to investors rose 7%. All-cash offers increased significantly, often disproportionately affecting first-time buyers, who are most likely to need financing. With rising mortgage rates, many first-time buyers will once again be hit hardest with higher monthly payments. Rates have already risen, because the Fed is expected to start increasing rates in mid-March, and they will only climb higher. Because of the rising cost, the average age of homebuyers is climbing. The average first-time buyer is now 33 years old, and the average repeat buyer is 56 years old, an all-time high. As we enter a new chapter in the housing market, one characterized by rising rates and very low supply, demand can only go one direction: down. But for now, prices aren’t in danger of declining.
Over the next several months, we expect supply to matter more than the interest rate hikes when it comes to home prices. Economists anticipate that the Fed will start the first of six incremental 0.25% increases in March. The Fed uses interest rates in particular as a tool to meet its dual mandate of maximum employment and price stability. With inflation at a near-40-year high, prices for most goods are rising while incomes are not. This situation gives the Fed little choice but to raise interest rates. Essentially, when the cost to borrow increases, fewer people want to borrow, leading to less consumer spending (less demand), which lowers prices.
As we enter this new chapter of rising mortgage rates, we don’t expect home prices to decline significantly, if at all, because supply is still such a driving factor. The low supply means that demand can decline without negatively impacting prices. We don’t expect home prices to appreciate at the record level we experienced over the past two years, but we do expect to see an increase. We are still in the middle of one of the strongest sellers’ markets in history. Buyers must come in with fast, competitive offers in this environment.
The Local Lowdown
- Home prices increased dramatically over the past year across Southern California counties, reaching all-time highs across markets and property types:
- Los Angeles County: +10% for single-family homes; +17% for condos
- Orange County: +28% for single-family homes; +22% for condos
- Riverside County: +20% for single-family homes; +34% for condos
- San Diego County: +18% for single-family homes; +25% for condos
- Home sales remained elevated despite historically low inventory, which reflects the high demand in Southern California.
- Months of Supply Inventory further indicates a sellers’ market. Homes are selling quickly as buyers compete over the limited inventory.
Home prices hit record highs in front of Fed rate hikes
Single-family home and condo prices rose to all-time highs in February 2022 with the exception of single-family homes in Los Angeles County, which are just under peak level. Mortgage rate hikes really only lower demand in the long-term, but in the short-term, demand increases as buyers try to lock in a lower rate. The Southern California housing market has a major advantage in that people simply want to live there. Southern California leaves little to be desired, which attracts affluent individuals. This tends to have a snowball effect, making these areas more and more desirable places to live. Despite the huge increases in home prices over the past 12 months, the lack of housing supply will keep prices rising in the year to come.
The Fed is expected to raise interest rates by 0.25% six times this year, going from 0% to 1.50%. We are now entering a period where factors that affect prices are more mixed, unlike the past two years when all the factors caused prices to increase. Rising interest rates, which will hopefully curb the still-rising inflation, will make homes less affordable and dampen demand over the course of the year. But inventory is so low that even with less demand, the market will likely be undersupplied. It might seem counterintuitive that home prices can still appreciate after increasing so much over the past two years, but with inventory at record lows, home prices in 2022 will still increase — though at a slower rate than in 2021. With high sales relative to the available inventory, we anticipate a competitive market in the year ahead.
Record-low inventory persists
Southern California, like the rest of the country, has a historically low housing inventory. The sustained high demand and lack of new listings over the past year brought single-family home and condo supplies to record lows across markets. We are seeing that far more people want to live in Southern California than want to leave. Sales have been incredibly high, especially when accounting for available supply, which again highlights demand in the area. Sellers can expect multiple offers, and buyers should come with competitive offers. The incredibly high demand we’ve seen over the past year might wane as interest rates increase; however, the supply is so low that the market can handle a drop in demand without negatively affecting prices. The 30-year average fixed rate mortgage hasn’t climbed above 4% yet, but it almost certainly will as the Fed starts raising rates. If mortgage rates reach 5%, demand will likely decline more substantially. In the next few months, demand will remain high relative to available supply.
Months of Supply Inventory further indicates high demand and low supply
Homes are still selling extremely quickly. Days on Market declined in February, bucking the typical seasonal trend. Buyers must put in competitive offers, which, on average, are at or slightly above list price.
Months of Supply Inventory (MSI) quantifies the supply/demand relationship by measuring how many months it would take for all current homes for sale on the market to sell at the current rate of sales. The average MSI is three months in California, which indicates a balanced market. An MSI lower than that indicates that there are more buyers than sellers on the market (meaning it’s a sellers’ market), while a higher MSI indicates there are more sellers than buyers (meaning it’s a buyers’ market). Currently, single-family home and condo MSIs are exceptionally low, indicating a strong sellers’ market.
Our team is committed to continuing to serve all your real estate needs while incorporating safety protocol to protect all of our loved ones.
In addition, as your local real estate experts, we feel it’s our duty to give you, our valued client, all the information you need to better understand our local real estate market. Whether you’re buying or selling, we want to make sure you have the best, most pertinent information, so we’ve put together this monthly analysis breaking down specifics about the market.
As we all navigate this together, please don’t hesitate to reach out to us with any questions or concerns. We’re here to support you.
– Dominic Pietrangelo, LIC #01860025