It’s late spring and the beginning of the “summer selling season” for real estate. Instead of a bunch of flowery talk about how great everything is about local real estate, I’m going to go out on a limb and dare to be more realistic than perpetually optimistic. The local real estate market is setting up for a price correction. The bigger question, and one I don’t have an immediate answer to, is how big and for how long?
Let me explain. Annualized average sales prices in the South Bay and Palos Verdes have risen steadily since January of 2016 and are up nearly 73% since October 2009. In that same period, inventory has declined to our current average supply levels of less than 2 months supply of homes. (The charts below illustrate this over the last 10 years). At the same time, the sales price compared to original list price is hovering around 99-100% of list, but that’s where the change is about to happen. As the message of tight inventory has been spread around in newsletters like this and other media outlets, sellers have increasingly overpriced their homes. I don’t need to name specific homes, but any recent look at the MLS or Zillow, and you will see what I mean. In the meantime, interest rates are rising and are quickly about to cross over to the 5% range for a 30 year mortgage – the highest level in 7 years. Finally, add into the mix a slate of new homes lined up to hit the market this summer, and we are setting the table for what may quickly shift from a sellers market to a buyers market. If not a full blown buyers market, then at the very least, there will be good buying opportunities in late summer and early fall.
This exact scenario has taken place on several occasions over the last 4 years. After inventory spikes in the Fall of 2015, 2016, and 2017, by December, buyers were able to buy homes at a 5% discount to the original asking price. In all these cases, the market returned to a seller’s market shortly after, but the short term price correction provided excellent buying opportunities for those in the market for a new home. Will this happen again? I believe it will, and I don’t think buyers are going to have to wait until December. Challenges to this model would be a sudden drop in interest rates, or a bevy of new buyers coming to the market, but both are unlikely given the recent changes to tax laws and already inflated house prices.
In short, what I am suggesting is that, like the stock market recently experienced, it would not be unusual for a short term price correction in local housing prices. I don’t expect all neighborhoods will be affected the same. Some markets, especially those priced on average below $1.3m, will likely see little to no correction, but the higher priced areas such as the Manhattan Beach sand section, parts of Hermosa Beach, and areas in Palos Verdes are already showing signs of weakening prices. In places like Redondo Beach and Torrance, prices are still relatively affordable compared to other beach cities, and inventory is still trending at less than 1 month’s supply.
In the long run we’ll still see general price growth over the next two years, as long as there aren’t major shocks to the overall economy. Limited supply is still an issue in most areas throughout Southern California, and until significant building takes place or job growth drastically slows, the market will remain out of balance. To give you further peace of mind, economists at Fannie Mae predict a 4-6% price appreciation in 2018 and 2019, and 30 year mortgage rates are expected to hover in the upper 4% range (with a point).
So for now, if you are a seller, no matter the price, you need to be very realistic with your pricing if you hope to sell your home in a reasonable amount of time. If you are a buyer, I don’t know that sitting back and waiting for a crash is a good idea, but instead, be ready to pounce on some good deals when they come around.
Thanks for reading, and If you are wondering how the changing economy affects you and your real estate, give me a call, I’m happy to help!
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