“Is the market going to crash?” is the most popular question I get these days. The second most popular question: “Is this a good time to buy or sell?”
If you’re reading this, you’re probably wondering the same thing!
While I certainly cannot predict nor guarantee the future, all indicators point to a price correction. Many individuals fear another recession looming and if we follow historical cycles, we’re about due for one. I am NOT an economist and cannot predict a recession; however, I do actively study my market and can tell you that the activity I see is trending towards a price correction in residential real estate.
The pivot began in earnest, this past summer (right around July 2018). The San Diego region has been plagued by a housing shortage for decades and that shortage became more pronounced over the last decade. As we came out of the ashes of the great recession (circa 2010-2011), large investment institutions started to scoop up dirt-cheap properties to fill their portfolios.
Many new-construction projects were tabled or completely scrapped because many potential consumers were NOT able to finance purchases due to the negative credit impacts caused by short sales and foreclosures. Those consumers had a need to rent- hence rents in San Diego have skyrocketed! As the inventory on the resale market dwindled and consumer demand increased, prices began to inflate to near pre-recession levels (fueled heavily by extremely low interest rates). And, as of this year we’ve reached that peak!
So to the naked eye, you’d say, “Oh man, here we go again!” But, I believe this is a different type of correction – I don’t believe we’re experiencing an economic bubble burst (at least not yet), rather we’re experiencing an “Affordability” bubble burst! The truth of the matter is that something had to give! Housing has become too expensive – plain and simple.
If you take into consideration median incomes compared to housing costs, the only two cities (in California) that are more expensive than San Diego to live in are San Francisco and Silicon Valley (i.e. San Jose). Let that sit for little bit. This means that it is technically less expensive to live in Los Angeles proper, than San Diego! That’s insane! So of course, consumers say, “Enough is enough!” And, the market has stalled! Add National economic trends to the mix, along with the Fed increasing interest rates and BOOM – a perfect recipe for prices to trend downward.
When this price correction trend begins, listings begin to sit a bit longer on the market with absolutely no offers in hand and quite possibly no showings. Then price reductions begin…
Neighbors who’ve been sitting on the fence waiting for the peak to come, place their home on the market to hedge against any further equity loss. Wanting peak pricing, they list high and their house sits endlessly on the market with nothing happening. They reduce the price…no bites…and then they reduce it again…nothing. The price reduction trend goes viral, inventory doubles (almost overnight) and buyers have more leverage to negotiate a deal…
Increasing interest rates however keep buyers on guard because their purchasing power is dwindling. So they write lower offers and stick to their guns… They will even walk away from the offer they made you and bid on the neighbor’s home instead (even though they like that house less). But heck, they’re getting a better deal, and this pattern continues – on and on…
…This is where we currently are in the market – at the beginning stages of an affordability bubble bursting!
Here are some stats on inventory:
The number of homes for sale has increased dramatically in the last quarter. San Diego is up 26.5% from the same time last year with 8,051 Active properties today. Last year this time there were 6,537. According to Infosparks, San Diego sales were down 20.7% in September, rolling three months down 11.4% and for the year down 8.9%.
So what should you do? First and foremost – DO NOT PANIC! Do not act out of fear. First assess your situation and determine what your goals are (the “WHY” of things). Once you’ve defined your WHY, team up with a pro to define and create a strategy for the “WHAT” and the “HOW”!
Keep an eye out for my next article where I address what you should do if you’re a condo owner!
*this article expresses the opinions of the author and is NOT to be considered as legal, tax or financial advice. *