Check this out. The median price for a San Diego home is up 20%. The median price for the entire country is up 17.2%. If you own a home in San Diego, congratulations. You are most likely up somewhere close to 20% right now, at least since April 2020. That’s 20% more equity in your pocket.
It’s absolutely mind boggling that during a worldwide calamity this could happen. But actually, if you look at it a little closer, it sort of makes sense why prices are rising not only in San Diego but the entire country. Part of me wants to make it more complicated so I can show off my econ skills but it’s really not that complicated… It’s just simple supply and demand.
Supply and Demand
You may have heard but San Diego and the rest of the country is experiencing a major drought in homes to buy… Like a massive drought.
Residential real estate markets are usually measured in terms of homes available to buy and months’ supply of inventory. Meaning if you add up all the homes available to buy today, that would be your inventory of homes available. If you divide that number by the number of sold properties, you get your months’ supply of inventory or the rate at which buyers would absorb the current amount of homes for sale.
This is literally the key measurement that indicates if we are in a buyers’ market, a balanced market, or a sellers’ market. If you watch months supply of inventory close enough, you can detect trends and changes faster than even the professionals.
So here were we are today. You can see we have only 3 quarters months’ worth of homes for sale as far as inventory. Not even a full month! That is absolutely insane.
Types of Real Estate Markets
Just so you know, a sellers’ market falls between 0-3 months of inventory, a balanced market is about 4-6 months of inventory, and buyers’ market usually lands 6 months or more. We start to see short sale and foreclosure activity around 7 months or more.
There are two primary reasons the inventory or supply of homes is low right now.
People are Afraid
One is that people are afraid to put their homes on market. Think about it. If you are kind of on the fence about selling, would you want a bunch of potential buyers coming through your home during the current worldwide happenings? Probably not. Resale home sellers on market right now tend to be sellers who really want to or need to sell.
Also, most sellers become a home buyer when they sell. Even though prices are up so high, many home sellers are anxious about joining the competitive buyer pool.
Why is there so much home buyer activity you might be wondering? It’s the low mortgage interest rates. They are at all time low levels right now and people are trying to lock them in while they can. It’s almost guaranteed they will rise soon so it’s a bit of a race in a way.
Here’s a little nugget for you: When we see a 1% change mortgage rates, we usually see a reactionary inverse change in home prices by approximately 10%.
For example, look at what happened in 2020: Rates dropped about 1%. Price were already increasing at about 7% to start give or take in early 2020. The rate drop helped propel those price gains even farther to today at about 20%. Hopefully that makes sense to you.
Lack of New Construction
Another reason have such low home supply is we have a major lack of new homes or new construction to buy. Builders are still behind from the economic slowdown from way back in 2008. In addition, the new builds are costing more money. Commodities like lumber are through the roof as far as costs. It’s disrupting the entire supply chains.
This will not last forever. Home prices can’t just keep on rising. At least I think so. We should see a slowdown in escalating home prices in San Diego and the rest of the country when mortgage interest rates start to rise and when we eventually see more housing inventory for sale. I do think the rise in interest rates happens first.
For example, lets say we see a rise in the mortgage interest rates to where they were in early 2020 at about 3.8% or so. I think we will see a drop in buyer demand and home prices will soften by 10%. That’s still an increasing market but not at 20% anymore. 20% just seems unsustainable in my opinion.
Anyway, prices will eventually slow down. Watch that supply of home for sale. That will tell you what kind of market we are in. The media doesn’t usually catch on until months later after the market shift has already happened. Those statistics will tell you what’s happening in close to real time or at least as up to date as the data you are viewing.