Are Rates Killing The Market? - SoCal Housing Market Update

Well, hello, everybody and welcome to a another Southern California Housing Market Update. My name is Stephen Meade, I'm the managing broker here at domicile real estate, real estate for people who love houses. Let's jump into it. I've had maybe in the last three business days, I think probably close to 10 conversations with people about Silicon Valley Bank and a banking system, how mortgages work and what's going to happen next. So I thought I'd share some very brief highlights from that.

I'm talking about this a little bit before on here that I don't think I've mentioned in a while, my degrees are actually in economics and physics, not in real estate, surprisingly, in probably the one of my most favorite courses that I took in, in college was a class called bank simulation. And basically, it was a more or less a contest that lasted an entire semester, where teams ran fictional banks, and you had to make decisions each week about what were you going to offer on deposits? What were you going to how much were you going to invest in Treasury bonds, all these things, and you looked at economic indicators, and you tried to guess what was going to happen, and then it went quarter by quarter, and at the end, they rated your bank on profitability.

And probably the the number one thing that I learned in this class is that running a bank is not easy, because if you run your bank very conservatively, which is safe, right, then you don't make very much money, which is a problem because your shareholders get mad. If you run a bank, not very conservatively, you have the potential to make a lot of money, but you also have the potential to lose a lot of money very quickly. So you know, there's really kind of this window in this needle that you're threading as someone who runs a bank. And you know, unfortunately, when you make guesses about certain things happening, and they go the other way, and if you placed a reasonably sizable bet, that can land you into trouble.

So what are we going to tell you about the banking thing, and then I'm going to tell you how to fix you. So if there was going to be a real true systemic risk to the banking system, and multiple runs on banks and sort of a banking panic, it probably would have happened yesterday on Monday. I think the FDIC was very smart to step in and say that they were going to guarantee all deposits. For those of you who might not know, the FDIC is kind of a pseudo government agency. They're entirely funded by the banks themselves. And so they made a very calculated risk and said, It's better for us to insure everything at Silicon Valley Bank and Signature Bank, and probably likely to first republic bank, than it would be to stop the insurance a turn to 50,000.

And see if other banks went they are banking system is based on confidence. When you deposit your money at the bank, it does not sit in a vault somewhere, that money goes out, it goes out into loans, it goes into long term investments, and some of that is held as cash for people coming in making withdrawals. If that money didn't go back out into the world banks would honestly not be very useful. They would just be cash storage facilities. And banks are really quite a bit more important in our system than that.

So how does this affect you if you are in real estate? Well, to be honest, I actually don't think it affects you very much. And I know there's kind of a lot of sort of Chicken Little type commentary out there. But the reality is, I think Goldman Sachs yesterday made a statement that oh, my gosh, the Fed is going to stop raising rates. I actually don't think that's true. The inflation numbers that came out this morning, were decent, but they weren't great. I think the Fed is going to continue on that path. And they're going to hit us with a quarter point next week. I don't really see this fundamentally changing their calculus on that.

I think the only thing that would make the Fed truly change their trajectory would be if it looked like there was a snowballing collapse. I don't think there is I'm not expecting that to happen in the banking system. And I think they're going to continue doing what they were doing, which by the way, has been lessening those interest rate increases, right. So that's kind of on that front. The other thing that's going on, and I think one that's kind of interesting is you'll might hear people talking about an inverted yield curve. And that really is probably the best predictor of a recession that we have.

I think there is kind of growing likelihood of a recession coming. Believe it or not, this is great because it means inflation will be squashed. And that's part of the reason that you're seeing in the last few days, especially kind of a bit of a rally in mortgage backed securities, and that's actually what lowers interest rates. So I am expecting us to either get a little bit of interest rate relief and believe it or not counting today. And so we've actually gotten quite a bit. But I'm also thinking that that might have a little bit of a suppressing effect on those mortgage rates in the short term, or a short to medium term.

So, you know, on that front, I do think that that will affect you. Now, here's the problem. And we're gonna go into this with the charts. And we're gonna weave this in, because we really have a lot to talk about with interest rates and how they're affecting the market. So now that we've kind of gotten the Fed thing and the SVB conversation out of the way, let's go ahead and jump in. So if we look at our total active listings, right, and I like starting with this chart, because at the end of the day, really supply is what's required if people want to see wholesale price reduction. So you know, we had a rise in supply last year, and then it kind of nosedive for the year and you know, it is showing some signs of flattening out. Right. And I mean, it should be rising about now. And maybe that'll start to happen.

But the reality is look at where we are, in terms of our inventory like these are, these are not great inventory numbers, we were at really lousy inventory last year, right? I mean, I would call that really a true low point in inventory. And we're not that much better off. And things have kind of stabilized out. But I mean, this is not, there's no by no means some glut of inventory out there, especially for properties that are desirable, and priced well. So if we look at our new listings, we have actually finally started to see a little bit of an uptick in new listings. And I think part of that is this response to sellers seeing that, hey, the sky's not falling.

And now prices are maybe even starting to rebound a little bit, maybe a few of us will jump back on the market. So kind of some modest new listing activity, we've seen some new purchase activity under a million dollars, which is great and kind of flat activity for one to two. So if we look at these absorption rates, they have really actually started to come down a bit. But I think it's a little too early to crack open the champagne. And part of my reasoning for that is I think a lot of the numbers that we're seeing here are based over the last two weeks, two weeks ago, rates were crummy. And these improvements and rates have only been in the last couple of days.

So I don't really think that data is incorporated into this information yet. So we're seeing these absorption rates slide but I mean, under a million dollars, we slid to 90% That's, that's really, you know, still on the board have a very strong seller's market, for a one to 2 million category, we're kind of in 75 percentile, that's actually still pretty solid, I think these numbers are going to rebound a little bit. Because now that we've seen some dropping rates in the last couple of days, I think that's going to fuel the next two weeks sort of buying. If we look at our prices, you know, as always, this data is six, two weeks, six, you know, four to six weeks old, in most cases. So if we think about that, where were we four to six weeks ago? Well, we were at the beginning of beginning of February.

And you know, that really was kind of a time of rebounding when these homes are printed. But look at this, every one of these categories, we have seen prices go up. And so I think this notion for the people that finished out last year saying I'm just going to bide my time you get a great deal come the beginning of 2023. You know, if you're that kind of a buyer, you guessed wrong, you know, your affordability, purchasing power is lower and your the price you're paying for the house is higher than it would have been at the end of last year. Now, the second follow up question is is do I think this is going to continue?

Well, the spring is always kind of a great time to bump in prices, I do think we are still in a huge inventory shortage. And I just don't see that changing in a very meaningful way. In the next few months. I could be wrong on that. But I just don't see it, we've seen a little bit more inventory coming. But I think with these drop rates, that's just gonna make you know, there will be buyers to pick up that slack, especially for the desirable houses. So I don't know if we're gonna see rebounding at this rate on prices. I mean, these are pretty steep price increases across all three price levels. But I do think my overall outlook for 2023 is that we will close out 2023 With higher prices than we began 2023. So I feel firmly confident that that's going to be the case. I think that's very likely at this point.

If we look at our still active percentage, you know, this is kind of a measure of how competitive is the market, higher numbers or a less competitive market. So we kind of saw this question, where are we now in that level of competition? We're right back in the middle of May of last year. So You know, this is still fairly competitive, but you'll notice it kind of came down and then it's kind of evened out and bounced a little bit. I think a lot of that was rising interest rates in the last two weeks. But now the last couple of days, we're gonna have to wait another two weeks to see how that ends up going to the market.

Let's close to list ratio. This one is my favorite because guess what, in our one to 2 million category, the average home, the average home closed for about 101% of list price. We have not seen over list price since the summer of last year. Now in our under 1 million things are a little bit more tempered. But we have also, you know, we are creeping closer to that 100% mark, meaning those of you expecting to write offers for 5% of the list price and get them that might be possible on some of those long sitting undesirable and or overpriced homes. But for homes, the average home competitively priced in the market, you're not going to be getting big discounts off the list price, it looks like we are above 99% here.

Here's another piece of data this one's fun days on market for new contracts. Look at what happened in that one to $2 million category. Boy that sure dove down. What does that mean, these fresh new listings are getting eaten up very quickly, things have stabilized under a 1 million, again, that under 1 million category is going to be the most sensitive to interest rates. I think the one to 2 million category really has two parts to it. I think there is a category of people that are fluid enough, it does not matter. But there's also a category of people in that price range who were would be move up buyers. And when the interest rates reach a certain point, they can no longer do that. For under 1 million though those buyers are absolutely sort of very interest rate sensitive.

So if we look at sort of our three way chart, this has always been a favorite of mine. You'll notice that we saw some diving single family rents. I think that's pretty interesting to see kind of where that is coming from that's been over the last two weeks. Part of me wonders, is this a sign of sort of some more macro economic activity, right? Increased layoffs and things like that, or is this a sign that a number of sellers converted would be sellers converted their homes into rentals. So we are sort of flooding that rental market. In either case, we're seeing kind of a growing delta here, between this payment index and this rent index. And usually when this happens, Something's gotta give. I think given the absolute shortage of listings, and that we're seeing some new renewed lower interest rates coming so the next time we run this chart, you'll see this blue line curve over here, I think, I think that'll bring these closer together, you'll see we have our February inflation data in here, that has been steadily creeping up.

As you can see, what's interesting about this is the delta between our inflation line, and our rent line is actually not that big. Meaning that since June of 2008, rents have largely paced of single family homes with inflation. And if we look at our prevailing mortgage rates, what do we see, you know, this really tells that story, at the beginning of last year, they sort of rose up through the spring, then they bumped up again, and then sort of once we hit that late summer, they really just shot for the sevens, came down a bit, and then started heading back up. But you'll notice this curve is starting to bend over, I think we're gonna see another, the next when we run this in two weeks, you're gonna see this fall a little bit with a little bit of luck there. And we're gonna see that change coming.

So you know, what's the overall message here, this is a market that is very interest rate dependent. But we're seeing this this interesting effect that keeps things from moving too far. And that is, as soon as those interest rates go up, not only does that reduce demand, but it seems to reduce our supply of new inventory, as well. And that really is effective, kind of keeping that supply, demand balance in about the same place. And that's really what's been propping up prices and what's caused an increase in prices, January and February of this year. Like I said, I don't expect this to be a huge year for price increases, but I do expect us to finish the year, a little bit higher than we started. I think the interest rate story is a very interesting one.

And honestly, if I can predict those, I wouldn't be doing videos on YouTube. I would be sitting on a beach with drinks with umbrellas in them and I would never have to work again if I had that ability to predict interest rates. I think that you know as these talks of inflation, I these talks about recession, I think really are calming a lot of inflation. Shouldn't fears I think there's this feeling like we're just waiting for the numbers to get better. And you know, I think the Fed will bump us a quarter percent.

But I don't think you know, the the end is in sight. I'll put it that way. It's not here yet, but it's in sight. Anyhow, that's all I've got for you. Thank you so much for watching. Do not forget to like, subscribe and smash that notification bell. If you are looking to buy or sell real estate in Southern California and you would like to use our expertise. We would love to represent you and your interests. Definitely reach out to us. Have a great day everyone. If you're in Southern California, try to stay dry out there. These winter storms keep coming. And we'll see you again real soon.