Real Estate Market Update October 2022

UNCHARTERED TERRITORY

It would not be an overstatement to say that the real estate industry is in entirely un-chartered territory. Anyone who claims they know how things will play out is most likely wrong. We can all have our opinions - mine is that this is not 2008 part 2, but that’s just speculation.

If you want to understand where home prices may be heading, best to look at four key criteria:

• Supply

• Demand

• Affordability

• Credit availability

I’m pretty sure I’ll be touching on these topics frequently over the coming months and possibly years.

While the first two components don’t tend to change quickly, affordability and credit availability can move very rapidly as we’ve seen over the past few months.

Here’s one of the major data points you might want to consider as we move forward - an overwhelming number of homeowners are on fixed-rate mortgages, and because home equity is still high, most are well protected from any coming price shocks.

This does comes with a cost though. Let’s refer to that as the “lock-in effect“. Specifically, current homeowners, in order to sell their home would have to replace their current low interest mortgage with one that might be 200, 250, or even greater than 300 basis points higher than their current mortgage. (One hundred basis points is 1 point.)

That means that for many traditional mover up buyers - they're just not going to be willing to sell their home at a lower price point to buy at a higher price point and rate. The lower price point they may sell would most likely be the traditional and more affordable homes for first time buyers.

So the chances are high that we might be moving into a market where our usual measures of housing activity deteriorate rapidly.

RESET OR REBALANCE?

Are we going through a market reset or rebalance and is there a difference? Truth is, probably doesn’t matter.

While a trickle of buyers have come back into the market, demand is nowhere near where it was at the beginning of the year. Why? You know the answer. Mortgage rates are now touching 7% and poised to go higher. And contrary to those waiting for a FED “pivot”, it may be quite a while before rates go down again. And when they do, chances are we’re looking at something in the 5-6% and nowhere close to the 3% and lower everyone had become accustomed to.

And according to many of the leading economists we haven’t even seen the full effect of the higher rates yet.

It doesn’t take a lot of deep analysis to determine that mortgage rates are at the highest they’ve been in a long time and by a lot. This is happening at the same time that prices are just slightly lower than their all time highs which were probably April-May of 2022 with closings in late May and June.

Over the summer months, buyers basically stopped cold in their tracks as they grappled with the higher rates. And with many sellers having no need to sell right now, what’s been going on has been a tug of war between buyers and seller. In fact many sellers have decided to turn their former primary residence into rentals or to not sell their rental units. Which leads us to….

RENT VS BUY

While most of the news focuses on the higher mortgage interest rates, there’s another part to this story. That is, rents. It was high rents coupled with low interest rates that fueled the run up in prices. Many people who had the downpayment and credit simply found that it made a lot more financial sense to buy rather than rent. Particularly when home prices were going up so quickly that many people had appreciation by the time their escrow closed.

But those days are over.

Other than rates, what will tip the equation and bring buyers back to the table is when rents go up. For now, in many instances it is more economical to rent rather than buy.

With that out of the way, let’s take a look at where we stand compared to 2021 with 9 months of sales in the books.

SOUTH BAY SALES JANUARY - SEPTEMBER

So now that we see cumulative YTD sales are down across the board - and in some cases dramatically, what conclusions - if any, can we come to?

Well first, one of the strongest 2021 markets, Redondo Beach, has shown a dramatic drop off: 2021 sales 769, 2022 531. That’s about 26 fewer homes per month in ‘22 than ‘21. Redondo, more than almost any other South Bay city benefitted from the rent vs buy misalignment over the past few years.

Hermosa Beach, by comparison, went from 212 the first 9 months of 2021 to 144 this year. Hermosa has always been well positioned between Manhattan Beach pricing and most of Hermosa.

Speaking of Manhattan Beach, 256 sales through the first 9 months this year compared to 396 in 2021. Manhattan Beach with homes generally priced higher than the other 2 Beach Cities is more likely to suffer as the higher mortgage rates are compounded by the higher price points. But at the very high end many buyers are simply not affected by rates because they are either paying cash or have alternative financing.

How about other higher priced cities? Let’s go up the hill and take a look.

Palos Verdes Estates went from 191 sales during the first 9 months of 2021 down to 133 this year. Rancho Palos Verdes posted 368 sales this year compared to 467 last year. And Rolling Hills Estates saw a decline from 124 last year to 112 this. By far the smallest decline I’ve seen.