Tale of Two Markets - SoCal Housing Market Update

Hello, hello, hello and welcome back to a another Southern California Housing Market Update for May 9 2023. My name is Stephen Meade, the managing broker here at Domicile Real Estate. And we are glad to have you with us, we kind of got a tale of two markets going on. And we've always divided our stats into kind of an entry level sub $1 million market, and then kind of a more advanced kind of, you know, move up, or 1.1 to $2 million market. And we've done that because most of the time, you see markets effects kind of moving in unison, but sometimes you see a very interesting effect, develop where these markets diverge, right, and they start behaving differently. And if you're a buyer or a seller, this is especially important, right?

Because the strategy that may work for you in the one to $2 million market may not work for you in the sub $1 million market, and vice versa. So we're going to talk about that today. But we're also going to talk about the why and what's really happening here. So let's go ahead and get started here. And we're going to go ahead and start to talk about why we're seeing these interesting effects. So first off, let's go to our total active listings. Our blue line is under a million dollars. And our red line is one to $2 million in board appoint a couple of things out. Number one, we are absolutely 100% lower in inventory under a million dollars than we were last year. And not under by a tiny amount actually under by a sizable amount. And again, look at the slope, right this is the spring run up of new listings that crests here in July, August, September, October, even in November before dropping down towards the end of the year. And what is going on here it is a lapped inventory is not growing.

And in fact, it's actually going down slightly in that under $1 million category. So that's what's happening under a million dollars, the situation is not nearly as dire right in our one to $2 million listing. So we're still a little bit less than last year, but it is a tiny bit last year in terms of inventory. And there is a very, very slight uptick in inventory. The other thing I want to point out to you is you'll notice that there's always a differential in inventory between this under 1,000,001 to two minutes, I was more under a million, then there are one to $2 million active listings, look at how these have gotten close together here. And how that range has narrowed a little bit. That is interesting and unique, especially given that prices are not entirely dissimilar from where they were at this point last year. So this isn't a market makeup question. We're seeing a little bit of signs of life. But again, it is still not seeing the inventory growth that we would normally be seeing this time of the year, definitely not even the inventory growth that we saw last year. So if we go ahead, and we move on to our new listing, so what's going on here? I mean, the good news is we actually are getting some uptick in listings, right, like I mean, you can see down here, this is kind of a trough right, but beginning of the year, and new listings have kind of gone up over 2000 units a week, our one to 2 million. That's kind of gone up a little though it's slipped a little bit recently in terms of new listings hitting the market.

But we've at least got a little bit of an upslope. The problem is we have a bigger upslope in demand. And one of the things we have talked about before, right is that this under $1 million demand is very interest rate sensitive. So as you can see demand popped here. What happened, interest rates are low. Right now it's just it's gone a little bit, it's in demand starting to populate. So it's kind of always in this 1500 to 2000 units a week. And honestly, it's been that way in that range since about June of last year, except for we dip towards the end of the year. If you look here compared to last year, you know, we are way down and demand right. And I think that makes people have this belief right that the market is not competitive. The problem is, it's that rate of new homes coming on to the market. And let's just look at that here. Right last year, this time. 3000 units a week under a million dollars this year. 2000. Last year, we were what 1700 new units a week, this year, just over 1000 for one to two minutes. So the problem that we have is that yes, this number is down in terms of new escrows but it's down for two reasons. One, yes rates are higher, not as many people can afford it. That's the X The effect you'd expect, but it's also down because frankly, there just are not enough homes for people to buy. And we can see that by that active inventory level that we started off with, which is worse than last year, we're inventory levels were low.

So you know, if we're looking at these new escrows, that's the problem is, you know, we're getting a little bit more listings, but it's more than offset by these new escrows that are coming in and eating away at that inventory. If we look at our absorption rate, right, we did see it fall last week, and it's kind of done a little bit of a hockey stick maneuver here. We're almost to 90%, under a million dollars, that is a very competitive market, and certainly more competitive than we really saw pretty much for most of last year. And then our one to 2 million. Again, it's the same thing. It's still, maybe you know, 75% 77%, that is competitive, but it's higher than we were at for most of last year. And now if we look at our prices, right, this one is interesting to me. So look at our median price here, and this red line that's really jumped up over the last month. In fact, we draw a line back here, we are now looking at July prices, right? If you're going back, and we're only a little bit less than where we were, at this point last year, we look at our 25th percentile or our entry level pricing, you know, that, again, is not really that far off, it's a flat or maybe a slight downturn, I think you're gonna see this one pickup. Remember, this 25th percentile, that is really your entry level into the market, they are the most affected by interest rates. The median is sort of your high income earners, but still probably a good portion of first time homebuyers. And then the 75th percentile. This is our, you know, higher income earners possibly move up buyers, etc. And those prices have also gone up a little bit. And we are kind of trending back where we were, again back in that July timeframe.

Looking in terms of these prices, so I think we're going to see this 25th percentile move up, especially if we do notice a little bit of relief on interest rates. If we look at our percent still active, after 14 days, this is where we kind of start seeing an interesting effect, right? Where we're starting to see a divergence between these two markets. And I'm going to explain why in a second. So this red line is one to 2 million, you'll see that market is getting less competitive, whereas our under 1 million market has continued to get more competitive, right. And you're seeing a divergence here. Look at this over the past year, these lines for these two markets were fairly close together, we've got a little bit of a data anomaly here. Not sure why we hit that. But if you look for the most part, these lines kind of move together. And look what's happening here. I mean, we're getting a pretty wide divergence, I'm curious to see if that is going to continue. So let's talk about why that might be happening, right? Why is the $1.2 billion market decidedly different than under a million. And just to give you anecdotally, right, the stories that we're hearing are, if it's under a million dollars, especially if it's a single family home, but a lot of times if it's a condo to it is back to that sort of and Plus offers kind of, you know, circus type event when a new listing hits the market. Whereas, you know, these one to $2 million listings are interesting, it seems they either hit it, or they are just crickets and they end up lowering their prices. So it's kind of an either or like either either you really hit the market, you get the market demand, and you get lots of activity, or you don't get much activity at all. So a very different market for buyers and sellers in that one to $2 million range versus that under $1 million range.

So if we go back here, and we look at this close to list ratio, right, this kind of tells you what's happening about this is really the the effect of a low inventory market. And that is we are starting to see that on average, homes are back to closing for above list price. And that's consistently both of our pricing categories and just really speaks to the lack of inventory. It means that when people do find something, they're willing to kind of throw down to the math to get it. What I find fascinating though, is that these graphs look the same. But anecdotally, we are hearing a very different story out in the market, meaning on the one to 2 million if it's something people want, it goes a bit over list price of it's something nobody wants, it goes under. So remember, this is based on averages, and this is also based on closings that happened 30 days ago. So if we look at our days on market, that's the other sign right of a competitive market.

You'll notice that these days on market for and remember this is for new contracts. So this is the days on market for the properties that are actually going into escrow, right, which are the ones that we care about the most. And again, we're seeing that that has now dropped below 30 dais for both of our price categories. But again, this is the home's going under contract, not necessarily the ones that are sitting in inventory, and the ones that are sitting in inventory, I think you're gonna see a much higher number from one to 2 million and under 1 million, I may start preparing that chart. So we can talk about the differences between those. If we look at our threeway chart, right, what are we seeing happening? Well, we're seeing that payment index starting to go up and why it's because of that median price point is getting is getting squeezed, we're seeing rents are again, kind of generally holding steady in this range, right? Like we had some softness in the market through the end of the year, and then it kind of bounced back a bit. Much like our prices, this is not a function of interest rates on this payment index.

This is a function of that median home price going up. Because we look at our interest rates. This is really kind of where we'd settle I think, you know, at this point last year, we were in the fives, right, and then things at the end of the summer accelerated to 7% before moderating a bit. Now I think we're trending in this in the sixes type of zone. Now, I don't have a crystal ball, I think people are talking about interest rates receding at some point. I think they absolutely will recede at some point recede to where I don't know. And when that recession will take place in interest rates, not exactly certain. The Fed is talking like they don't want to lower anything. But that really doesn't tell the whole story of mortgage rates, mortgage rates really move based on the bond market, based on what we think is happening based on expectations about future inflation and fed policy. I do think we're going to see a little bit of moderation and interest rates, especially towards the end of the year. But you know, there's a little bit of moderation mean five and a half percent does it mean, just under 6%? I think that's really the question that everybody wants to know. But right now, like I said, we're seeing is kind of dual market. They're both competitive markets, like don't make any mistake about that. But that under 1 million market is seeing inventory, really starting to create or more quickly. And you know, what, why is this happening? Right, I pose this question. And I think it's really about our buyer pool, you have to understand where are the buyers for these price ranges coming from so are under $1 million buyers, are going to be far more tilted towards first time homebuyers. In Southern California, under 1 million, it's going to be a much higher mix of first time homebuyers.

Their income qualifying will not be as strong. So that market segment is very interest rate driven. It's very fear driven about interest rates, that one to $2 million range that still has a fluid first time homebuyers, right. And these are still people very, you know, susceptible to interest rate fluctuations. But there's another kind of big group of people, right, and it's people buying another house or buying a move up house. And what we're seeing that range is something very interesting is happening, the people are not putting those homes up for sale, or they're not putting their under $1 million house for sale, they're keeping that as a rental and they're finding way to buy that $1.2 million house. And they're kind of hoping interest rates are going to subside, they'll be able to refinance in a year, and end up with a lower payment on the same price house. So what's really kind of driving the difference in these markets? Is it so much the demand, but I think it's more a supply side equation, we're just not really seeing hardly any new listings really coming up in the marketplace, when it comes to that one to $2 million range, there is the lock in effect, it is totally real. And I don't think it's going to change anytime soon, right? I think interest rates have to drop below 5% to sort of shatter that that lock in effect, and you're gonna see more people put those homes on the market. Because right now it's one of these situations, it doesn't matter what the prices are, you know, if you own a $1.5 million house, and you've got a 3% mortgage, if your house close to $2 million, it doesn't matter to you, you're still not going to sell it. If you know, you're gonna have to trade that for a six and a half percent mortgage on the other side, right? The only way you'd make that move is if you can at least keep the $1.5 million house as a rental and keep that 3% mortgage and the benefits of that and then maybe go to something else. So that's really what's driving that one to $2 million market is a lack of supply in a lack of foreseeable supply.

It's not just we don't have supply now. It's just there's not really anything on the horizon that can increase supply, other than a drop in interest rates that will that will you know, change that lock in effect and the dynamics of that. Anyhow, thank you so much for watching. We love the questions and comments. Don't forget to like subscribe and hit that notification bell. If you are in Southern California and you are looking to buy or sell real estate namely Los Angeles and our counties we would love to help you with that definitely reach out to us so we can lend you our expertise. Let's see what they say. Don't forget to like, subscribe and hit that notification bell. It does totally help us out. We will see you again real soon.