The Breaking or the Bending Point

Well, hello, everybody, and welcome to another Southern California Housing Market Update. My name is Steven Meade with Domicile Real Estate, real estate for people who love houses. And this is where we talk about what is going on in the market. What effects are we seeing, we do these whole market updates every two weeks. And we alternate with a first time homebuyer market update. So if you're an entry level buyer, we actually do a market update for those on alternating weeks, that is specifically geared towards the entry level end to the market. So definitely check that out.

You know, one of the things we're talking about this week is something that we've heard is kind of a popular refrain, right. And that is, there has to be some kind of an end in sight. Affordability is not unlimited, there is a point right where that price payment level is going to reach some kind of a ceiling here in Southern California. And that's been a rather elusive ceiling. Thus far, people have said prices will have to come down to match the heightened interest rates, it didn't really happened, at least not in a very strong degree.

So what's going on? Why are we finally starting to see a little bit of a point of inflection. And is this a breaking point, or maybe just a bending point in the market? Let's go ahead and take a look. The numbers don't lie, though, they don't always tell the truth either. So okay, let's go back here. And first of all, let's talk about some good news, if you are a buyer out there, and some good news is that we are seeing inventory build a little bit. And what's funny is this is normally not the time of year when inventory builds normally, we sort of coast through kind of this late summer and through kind of the fall until about the middle of October, and then things start kind of going down or as you can see here, even at our one to $2 million, it's kind of more of a a gentle drop in inventory towards the end of the year, at least that's what happened last year.

Now, I will caution you by saying in Southern California, for whatever reason, and I've got a few theories. August is typically a slow month for home sales August through about the middle of September. My personal theory is you've got two big things that distract buyers in the marketplace, you've got back to school, and you've got summer vacations. And I think between those two things, we generally have a very soft market in August, through the middle of September. So I usually tell buyers, that is one of those times, it's a great time to be a buyer out in the market, because you're going to have a little bit less in the way of competition. So we are starting to see that inventory start to grow a little bit. And this is in both of our price categories.

So some good news there. If we look at our new listings, though, these are pretty flat, right? Like we kind of saw things come up through the spring, and then they just kind of sat under a million dollars, this was kind of about 2000 new listings in LA in Orange County under a million dollars, you know, every two weeks. And if you look down here for our one to 2 million category, we're kind of hovering right around 1000. So not a lot of movement on that front sellers are really coming onto the market at about a very stable rate. But if we look at our new escrows, this is something that's really interesting.

And the reason why we track both of these pricing categories. So if you look here under a million dollars, we're seeing a little bit of downward pressure on these new escrows. Why is that because under $1 million buyers tend to be much more interest rate sensitive than those in higher price ranges. And we can see that here, with this new escrow number really kind of growing gently. So this is a time when these which generally move together are actually moving in an opposite direction right now. Interesting.

Now, if we look at our absorption rate, again, that also tells like another story, we're at about I don't know, high 70s for under 1 million and kind of mid 70s here for our one to 2 million. These are still seller's market type numbers, just not a very strong seller's market. Now, I'm going to caution you right now, because I know what you're thinking, does this mean multiple offers are over and done? No, it does not. This really depends on the house and the pricing as always, but this means there is a lower likelihood, likelihood of multiple offers, when you start to see these numbers on this absorption get a little bit lower, it means that supply and demand are not quite as out of balance, at least when looking at the big numbers.

And what do I mean by the big numbers of the aggregate? Well, the problem is if you are looking for a turnkey property in a particular neighborhood, and there's only one available, well then supply and demand are probably still out of whack, right? Because if there's three people want that and there's only one house, there's going to be you know multiple bidding activity going on, but as a whole All on the market, we're seeing supply and demand a little closer in balance. Before I talk about this, I say this every time these are some words of caution, this data is four to six weeks old, because it is based on closed data and not contracts being negotiated today.

And what do we see prices rising in all three categories. And honestly, if you look at where they are, there is some natural fluctuation to this, right. But we generally see like, I mean, this is a new high for that 25th percentile entry level closed prices, I think that is still the area of the market that has a lot of competition in it, mainly, because first time buyers, I think there are a lot of people who are on the sidelines. And the second thing start to dip a little bit, or there's a little bit of softness, there's this kind of pool of shadow buyers who really want houses we're going to, we're going to talk about that again in a second actually. So if we look at are still active. After 14 days on the market, you saw that deteriorated and then kind of stabilized. Remember, higher numbers are less competitive, lower numbers are more competitive, but really kind of a lot of stability in the market.

You'll notice some of these indicators conflict with each other, right? Like, we're just going to see that inventory, or number of new escrows is up for a one to $2 million category. But here, we see that still active is also up. So I think what you're seeing is when when you start to see some of these numbers, conflict with one another, what that means is we're really kind of riding on that bubble, not really sure whether things are going up or down, it's a bit of a point of inflection. So if you look at our close to this ratio that is holding steady, above list price we're seeing on average.

This is a number though, that I find particularly interesting. So this isn't just days on market, this is days on market for new contracts. So these are homes that went into escrow in the last two weeks. And we are seeing kind of some big gains on the stays on market. And what is this telling us right? It's telling us that buyers are taking a little bit of a pause. And to me, it's an indicator that we may be bouncing against a little bit of an affordability ceiling here, we've seen rates go up in the last two weeks, I think that that is actually having an effect on our market, I'm a little surprised to see this affecting that one to $2 million category just as much as it is affecting our under 1 million category. Now before you get too excited notice that under 1 million, this is still below 30 days on market, right? Like these are still very short marketing times.

And we are right about 3031 days here for our one to 2 million. So understand that even though these are going up, it's all relative. And we actually have our three way graph here. And this is where I want to talk a little bit about that idea of a breaking or a bending point. And we've seen some rate increases. We're going to talk about that in a second, right. But one of the things that we are constantly tracking, right is this difference here, between the yellow line and the blue line. And the blue line is a payment index. So what is this as it is a payment at prevailing interest rates versus, you know, and based on our median home price, right, and if we look down here, this is our rent index.

So what we did is we took basically similar property types, single family homes, and we're comparing across the US. So this isn't a Randox rent index of all rents. This is just single family homes. And again, our median home price is the same thing. So if we go back to June of 2018, and we start these at zero, at zero or 100%, or unitary game one, we say where are we today, right over five years later? Well, our payment is at 180%, of what it was in June of 2018. And our rents are at about 142% of where they were in 2018.

So we've got really almost a 20 point spread here. Between these two, the red line is of course inflation showing what's happened now. Housing typically does go up faster than CPI, which is by the way, this is the number one reason if anybody's saying prove to me why buying a home is a good financial course of action. This really is it over time housing, whether you rent or buy tends to go up in cost faster than inflation. If you are looking at the same area, and this is because land is scarce.

So we this is not an unreasonable thing. We're we're looking at doing a cool kind of episode just about this idea of why does housing move faster than inflation in General and how has that happened over historically. But when you look at this here, this spread between that payment index and that rent index, right? Anytime we have, we've kind of touched this, this big spread like this, it's ended up coming back together. And I don't think this 20 point spread here is long term sustainable. I think that that is sort of a little bit of an out of market equilibrium.

Because if this exists long enough, what happens is some of the people here in this fire camp are going to switch over to the renter camp, to bring it closer together, I truly believe that that's what ends up happening in the long run if this exists. So, you know, the real question here that we have to look at is if we agree that this is not a long term sustainable? Well, really, there are two ways for this to change. Number one is that rents end up going up, right to sort of meet where payment indexes are.

And the other is that the payment index, which is comprised a price and interest rate has to come down, right. So either any or all of those things must happen to sort of address this kind of disparity here. And I think we are seeing signs that that this really is that sort of affordability horizon. Now, what's interesting about this market is that we have a lot of buyers that are waiting in the wings, they are people that want to buy a home, right, but either they don't have the money to do it, or they don't have the inclination at this point in time. But it is a long term goal there.

So if there's any easing on the prices, what happens is that shadow buyer pool starts to rush in, right? It grows, as the price drops, the pool grows with more people. And that kind of keeps things propped up. So the question is, we're kind of bouncing off this limit. And I've used that term several times, because I think that's really what's going to end up happening is we're going to see if there's any decline in either prices or interest rates, more buyers are going to jump in, and we're going to kind of keep riding that line. I'm gonna go back to screen share, because I did a little bit of a thought exercise yesterday, I was kind of curious about this myself.

If we look here, our prevailing mortgage rates are right around the 7% ish level, plus or minus an eighth or so. So if we look at this, this is based on where the payment index is at 7%. Do you know what happens if interest rates were 5%? If interest rates were 5%, what ends up happening is this ends up dropping below this 116 number and getting very close together. So I actually think that, on the other hand, is actually too close together between with rents, I think there needs to be a little bit more spread.

Our market seems to be happy in this zone here, right? Between 20 and 40 points, more growth in that payment index, I think if interest rates go to five, what's going to have to happen is that those prices will have to rise. So for people that are hoping for 5% interest rates, be careful what you wish for if your home buyer, if your would be by are waiting in the wings, because I don't think you're going to get that windfall of affordability that you're expecting, I think you might get some of that that might ease us a little bit down into this zone. I don't think it's going to bring these two lines together. I think if anything, we've kind of seen that, that the reality is, even since June of 2020, there's been some differential here, between these numbers, I think that's just kind of a way it's going to be as there's going to be a little bit of a homeownership long term premium built into this pricing, I do think it's going to ease off this level that we're seeing right now, which is where these are pretty far apart about 20 points apart here, I think we are going to see that number, though, come down and join to get closer to maybe a 20 point spread between these two.

We've got our little interest rate chart. So you know, we're where we at this point last year? I think that's a great question. Well, we were between five and six. So we're on our way of our big run up where we went up to 7% by the end of October. Then we eased off and we jumped again, you can kind of see the trend line. Everybody is asking me what do I think's gonna happen to interest rates in and I'm gonna be perfectly transparent here. If I knew what was going to happen to interest rates with any level of certainty, I wouldn't be on YouTube right now. I'd be on a beach as a bond trader rich, wealthy, enjoying drinks with little umbrellas. That's what I would be doing right now if I had any certainty over predicting interest rates.

But I will tell you this, you know, I think there is a general consensus that rates are going to come down in the next 24 months. The question is by how much and how soon will that decline start? I think some of the longer term estimates are that we have another year in The Sixers as it were right, many will go past in the three Q, next year, some of the schools a lot think that we will start a little bit sooner with declines and that we may end up in the fives by, you know, in the third quarter of next year. So what we're really talking about is kind of this idea of timing, and when these things are going to happen, and I think if you're a, if you're a seller out there, you know, what's the killer strategy right now? Well, honestly, the killer strategy for sell if you can make it is finding those homes that are in that soft market range, right, that kind of middle ones range.

Buy one of those if you can make it happen, don't sell your current home, keep that rate, keep that tax basis, rent it out. If you bought more than four years ago, it's probably going to be cashflow positive from a renter, enjoy that and be able to buy the next property, which will undoubtedly in my mind, have some appreciation. When those rates drop, you'll be able to refinance, and you'll get the best of both worlds, you'll be buying at today's prices, and you'll end up with a lower interest rate that's coming next year at some point. I think that's a killer strategy. If you're a buyer, you know your ideas. Well, do I wait, do I see is this an inflection point where the market is going to dip? I think we're gonna bounce on this kind of affordability ceiling? I think that's what we're gonna see. I think, you know, people are asking, how much higher do I think interest rates are gonna go? I mean, you know, anybody can, I think there are a couple ways to look at this. I don't think we're going to stay much higher than 7% for any length of time.

But that doesn't mean there will be some periods of a month where we bounce well into the sevens, and then come back down. I think that's certainly a possibility, especially in the next 90 days. You know, last month, we had some great inflation numbers. But you know, the real question is, what is the prognosis look like for the next few months going forward? Right, one month of good numbers does not really make the Fed change course, from what they're doing or adjust. So I think we still need to see where that's going to end up. Like always, I tell people, if if you are a buyer out there, and there's something that works for you, it is almost always better in the long run to do it sooner rather than later.

Yes, can you have hindsight and have perfect market timing and make more money? Of course you can. But if anybody has that kind of a crystal ball, I'd like to meet them. I don't know anybody like that. I've never met anybody like that. And I feel like that people who truly have that ability, if they do exist, they don't really advertise that talk to anybody else. So that's kind of my two cents on where we are and where we're going. I hope you've enjoyed this. If you are looking for someone to offer you expertise in developing a strategy to help you buy or sell a home here in Southern California. Definitely think of us reach out. Questions, comments. We'd love it all. Don't forget to like, subscribe and hit that notification bell and check out we've got some links for you down in the description as well. Thanks so much, everybody. We'll see you again real soon.