Hopefully you have had a chance to relax or have plans in the works for a vacation or some time off before school and schedules return to normal. As for our family, we have a little road trip up the coast and some camping scheduled and I can’t wait to pack up the Sprinter Van and hit the open road. For those that will be in town, I have included my favorite things to do in the South Bay during the remaining weeks of summer. Some of them are pretty obvious but my hope is that it may inspire you to start a new tradition or just find a new way to enjoy our beautiful area. The beach is always a given, but with all the summer outdoor concerts and fun events, there is something for everyone on the list.
The Market – “It Is What It Is”
The first half of 2023 has been a sort of rebalancing in the local real estate market. The end of 2022 saw a big pause in momentum as higher mortgage rates shocked buyers. However, as the reality of 6% or higher rates has settled in, buyers have accepted the reality that if you want a home, you have to bite the bullet and take the rate you can get. After all, “It is what it is,” especially when it comes to interest rates. As a result, spring and summer buyers have come out in force, and tight inventory has led to bidding wars once again. There are still some good value buys out there, but move-in ready, high quality properties have seen prices close above the list price for most of the year so far.
Worth considering…. If you scan the headlines or just look at numbers without understanding the context, it looks like overall prices have dropped this year. On paper the median prices have declined, but it’s more about what is not being listed than a true price drop. In many cases what we have seen more than anything is a drop in the sale of higher end properties. Sales of homes over $3.5M have declined by nearly 38% compared to one year ago – higher than any other price point. Current homeowners in this price range are reluctant to give up a 3% mortgage to move to a home with a 6% rate. Overall, the constraints on new inventory is keeping upward pressure on prices, and it will likely remain that way until enough owners become motivated to sell.
South Bay Market Review: 2023 So Far…
- Overall Price/SqFt is up 43% since 2019, and 141% since the market bottom
- Listings are closing at 100.6% of the list price, down from 104.5% a year ago
- Months Supply is off across the board by 1/3rd compared to pre-pandemic markets; active listings are down 28%, while closed sales are down 25%
- Rolling Hills has seen the biggest jump in the Median Price since 2019 (96%), followed by North Redondo Beach (57%), and Valmonte (54%)
- Even with supply down 28% compared to 2022, North Redondo Beach remains the most affordable beach city option in the South Bay, followed by South Redondo Beach
- Rolling Hills has the highest months supply at 5.3 months (Median price is $5.8M)
2nd Half Outlook: Moderate Seller’s Market
There has been enough talk about interest rates in the news to keep my comments on the subject brief yet a few things are still worth mentioning. As we all know by now, the Fed has raised rates to their highest levels in several decades, and it is still not clear when rates will level off, let alone drop. After a decline in rates over the last 40 years, there’s a thesis forming that we could be in a new Fed cycle where rates stay higher longer than anticipated. The more I read and attempt to understand the interest rate cycle we are in, the less confident I feel that there will be a return to 5% or lower interest rates. In fact, according to the FRED blog, rates are “quite a bit higher now than they were a year ago, but lower than they’ve been for more than half of their recorded history.” In other words, rates are still historically low, even at their seemingly high current numbers. What does this mean for real estate for the next 6-12 months?
With debt service levels as a percentage of household income at almost half of what they were in 2007, current homeowners costs of homeownership (paying a mortgage is the largest component of this) is low enough to make moving and taking on a higher interest rate a significant burden compared to staying in their current residence. This will likely lead to a low inventory environment for the year ahead, and potentially well into 2024. I do think there is still a widely held belief among buyers that interest rates will drop in the not too distant future and we will be off to the races again. As an optimist, I like to believe that too, however, it is far from guaranteed. Thus, until rates or prices drop, affordability will remain a challenge, especially for first time buyers. My advice: don’t wait for a buying opportunity based on lower interest rates, instead buy the house you want in order to meet your lifestyle needs when that time is right for you.
Investment Properties – Reversion to the Mean
Higher rates could have the biggest impact on commercial and investment properties that have loan maturities of 10 years or less. If the property was a highly leveraged purchase with the belief that it can be refinanced later at a low rate, that could force owners to sell. With enough owners in this situation, we could see a significant drop in prices. When considering the financial theory of the reversion to the mean, after years of elevated prices and depressed cap rates, it is likely that cap rates will adjust towards the mean. As it stands today, with short term treasuries paying a very low risk rate around 5%, cap rates on investment properties need to rise significantly to make the risk reward worthwhile.
What to Do If you Plan to Buy or Sell?
- If you can’t pay cash, consider buying down the mortgage rate with points. This can be done by coming up with cash at close, or even asking for a seller to credit back to the buyer to buy down the rate. This could save you hundreds of dollars each month, and potentially hundreds of thousands if you hold on to the loan for 30 years if rates don’t drop below where they are today.
- Buy investment properties based on cash flow, and not solely on appreciation. Look for something that you can break even on from the outset. Rising rents and value add opportunities may allow you to raise rents in the future, but don’t buy with the thought of a quick turn around unless the asset is priced significantly below market value.
- If you are a seller, I expect you to benefit from lower competition and steady buyer demand to hold on to the gains you made over the last several years. However, we find the most success when our sellers price their homes at FMV and not aspirationally.
One more thing to note: keep an eye on rising insurance premiums. With several insurers not issuing new policies in California (BTW, we are not alone, the same is happening in high fire risk areas and Gulf states including the wildly popular “exodus states” of Texas, and Florida), I have been hearing of insurance rates tripling in some cases. This could have a huge impact on the type of property and location of your next purchase.
I have said before and it bears mentioning again, with the high values of real estate in our market, it is wise to have a solid real estate plan in place – just as you would for any other valuable asset or investment. Take the extra time to think deeply about “the why” behind your desires and needs. While the real estate market has been a major driver of wealth over the past 40 years, things are changing. Taking the time to develop a plan that accounts for your real estate needs, both personal and investment, is the best way to protect your family’s wealth. If you would like to schedule an appointment for a 20-30 minute real estate review, please call or email and I will be happy to set up a time for a meeting or call.
July 2023 South Bay Market Activity Report
- Active Listings: 582 (-27.7%)
- New Escrows: 194 (-36.2%)
- Closed Sales: 258 (-24.6%)
- Ave Price/Foot: $868/foot (-1.7%)
- Median Price: $1.328m (+2.8%)
- Average Days on Market: 25 (+31.6%)
- Months Supply: 2.4 (+9%)
- List to Close Ratio: 100.6% (-0.7%)