Why Is the Housing Market Broken?

Hello, everyone, and welcome to another episode of our Southern California Housing Market Update. My name is Stephen Meade with Domicile Real Estate and I'm your host. Thank you for watching with us today. And I kind of open up with a little bit of a question here is why is our housing market broken? What can we do to Unbreak? It, we're going to talk a little bit about how the steps we've ended up, I'm actually going to jump to the end. So the original question is, is it really broken? And how broken is it? So we're gonna go ahead, we're going to take a look here.

This is a chart, I call it the three way. And this is the relationship since 2018, between payments, rents, and inflation. And if you look here, you can see what's happened is, and I'll tell you why this payment shark has just gone completely off the reservation here. Going up, I mean, we are almost at a 40% kind of a spread here, relative back to June 2018. Between rental single family housing and purchase single family housing. So the way to read this as if we sit back in June 2018, these things were all the same, how have they changed in the last five years or so. And, you know, we can see here is that payment on a medium priced homes gone up 180% B rent on a medium priced home has gone up 140%.

And inflation itself is a little over 120%. And you know, this graph really is this is really a new trend that we've seen pretty much since about the last year or so these numbers were way closer together. Before that, so what's what's going on? And why is this happening? Why are we seeing this spread? And I think you know, people often describe economists especially there's a thing called demand pull inflation, basically, the colloquial version of demand pull inflation is too many dollars chasing too few goods or services. And I think in this case, one of the things we're seeing is that we have a housing shortage. So number one is we had a housing shortage before the pandemic. So we had a problem in California with just frankly, not enough housing. Now. Some of you, I imagine, are thinking to yourself, but how is that possible? Our population is going down? We're building houses, right?

Well, California's net population is in fact reducing a little bit. This is true, not by a huge amount, but the bigger issue is individuals don't live in homes, households, determine how many homes that you actually need. And household formation, on the other hand is way, way up. And what that does, is that puts pressure on your housing needs for any community. So it's not about the number of people who have it's, are they living together? Are they living separate? Guess what more people are living separately? In California. But what's interesting about this is there's a corollary to this, right? And if you think about that for a second, what does that also mean, if more people are choosing to live separately, I think it actually tells you that, that level of I don't want to I don't want to use the term prosperity.

I think that's not really a terribly great word to use right now. But the ability for people to live on the road, despite everyone complaining about the price of houses, the reality is their actions dictate something different. Their actions dictate that people actually have more money for housing than they thought. And this is why there's more demand for housing. And that's that's kind of how it works. I think what's interesting is the groups of people that can afford housing are different.

So obviously, the group at the top of the market can of course, afford housing, they've always been able to afford housing. The groups in the middle, I think, are a little less likely to be able to afford housing than they were in the past. I think this is where you're hearing a lot of things on the internet, groups of people that were solidly middle class that were definitely in the home purchase camp, are no longer in that home purchase camp. But what I find fascinating is the group at the bottom has actually gained more in terms of real wage increases in the last three years, then the middle class. So the rich have done pretty good, but it turns out the bottom 50% have actually done pretty good too. And I think what that's done is I think there's been a little bit of some role reversing happening, right? People that were at the bottom of the middle are now finding themselves in that having trouble affording housing category and a larger group of people who are in the I can almost afford housing but not quite have actually seen some of their status elevate and that's part of the reason why we're seeing this huge pressure housing.

Now going back to our chart, there is a big difference between for sale and rental housing. Right. Number one, I think we noticed that rental housing, believe it or not actually moves a little bit more slowly. Part of this is because most people signed leases, and they don't, they can't move on a dime. Whereas I think for sale housing, you have a lot of people moving in and out of areas and we start to see these numbers, we, we find that this rental housing, sometimes trails behind, and I'm wondering if that is going to be the case here, in the next month or so if we start to see this number rise up, because if you if you look here, since maybe like, since March, that's really where we've seen a big part of this. Now, a lot of this has been interest rates, right. And as every realtor you've probably ever talked to, in the last six months has told you, you marry the house and you date, the rate, right rates are not permanent.

So I think some of this is kind of taken up by this idea that these are transient spikes, and we're going to see this come down, right, people are thinking long term. But I also think, you know, part of this really may actually be a little bit of a shift, the same people who newly find that they can afford apartment type housing, they may not have the wherewithal or the resources to get into that purchase housing. And so we're seeing that group of people is kind of coming down here. And it's and we're seeing other groups of people jump towards that purchase housing, especially those people that may be in our more that Rich Camp saying I better buy it while I still can, because it's doing better. So we're gonna have to see how that works out in the next couple of months.

But I think there's some bigger shifts happening from a society perspective here. And bigger trends that we may want to keep an eye on, I don't think it's nearly as simple as people make it out to, which is, homes and apartments have gotten more expensive, and people can't afford them. In fact, the opposite is true, more people that turns out, could actually afford them. Even though that might mean that the median person is or the average person is less likely. Because we have some of these shifting income demographics, we're finding by and large, the demand for housing goes up, how does the demand for housing going up, people have more money to spend on housing or more people have money, have the appropriate amount of money to spend on housing.

So sometimes your housing going up is actually a function of more money in the marketplace, not a people being broke, as the narrative might lead you to believe. Okay, so we're going to jump backwards, we're going to talk about some good news, because I don't like everything to be a downer. All right, here is some good news for you if you are a buyer who is stressing out. And the good news is we are finally starting to see a little bit of inventory going up. Is this temporary? I don't know. But there's at least a trendline. Here for that one to $2 million category, I think that's a noticeable amount. Is it still way less than last year? Yes. But at least it's moving in the right direction. That under 1 million, there's been a little bit less kind of resiliency in that market. But we are seeing at least a little bit of an uptick.

By the way to let you know, kind of in our seasonality, right of our housing market here in Southern California, we kind of have this summertime peak of inventory. And then as we head in towards the end of the year, it drops, right, and then it starts building back up in the spring. So you know my fears, historically, we are kind of done building the inventory. And I'm afraid this might be a short lived small little bump. But hey, we'll take what we can get if you're a buyer out there, more houses is better. And what's driving this? Well, guess what, we actually have some more homes coming on the market. And this is a little bit more encouraging. So if you look last year, right, if you if you look at where were we last year, this is the time of year where the number of new listings is actually dropping, and it's dropping pretty quickly. And we're actually seeing either holding steady or improving somewhat.

So that's definitely an area we've got an improvement over last year. Like I said, I will take the improvements where I can get them. We're seeing a small uptick in new Astros for under a million dollars and kind of a pretty flat reaction here, maybe a little bit down for our one to 2 million. I think this graph kind of tells another interesting little story, right? What group of people is more affected by interest rates? And thus demand right? Is it the people who are in the one to $2 million category who are actually not that far off from new escrows as of last year? Or is it this under $1 million, where we're seeing a pretty significant decline into escrows. Part of that is a lack of inventory. And is it just the demand decline? But I think also this group down here under million dollars is a lot more sensitive to interest rates than that one to $2 million group. Now for looking at absorption rate on paper, this does look like it's falling a little bit It needs are under 1 million is still at 80%.

That is not a buyers market at all. We are seeing one to 2 million this has dropped below 70. I think that does start to feel least more like a balanced market, maybe a shift towards a slight buyer's market. But again, something these graphs don't tell you, you know, this is a DC or aggregate statistics for Los Angeles and Orange counties together. You know, aggregate statistics are great for overall trends, but they don't tell you what's going on in your particular neighborhood. And if you've got five people who are looking for a home in your neighborhood, and there's only one home that's come on the market, you're going to have bidding wars, that is just a reality of the situation. Now for the graph that kind of puts this gives a shape to what I think a lot of us have been feeling for the last few weeks. Right, and that is that prices have been on the rise. And really they have risen in all three of our pricing tranches here. So our 75th percentile pricing, that's kind of above that 1.2 5 million that has increased, by the way we look at where we are versus last year, almost every one of these categories is higher than it was a year ago in price just to let you know, our 75th percentile way higher. Our median price is a little higher than it was at this point last year, it was in fact dropping in the trending downwards.

And it is now of course trending upwards. And I think our entry level is right about the same again, that has that entry level that is a lot more affected by interest rates and affordability. If we look at what's still active after 14 days in the market, remember lower is more competitive. You know last year, it was a less competitive market, it kind of dropped this spring. And then it's it's really kind of been holding in the zone for the most part. This is the other one that should tell you something right, this is our close versus loss ratio. And we have in fact shot well back over 100%. Both are under 1 million, and our one to 2 million, or in that one under two, one or two 5% over list price, on average. So this is saying of the things closing, on average, they are closing for above list price, what is a normal market, I don't even know what a normal market means. But historically, in Southern California, we've generally been between 98 and 100%. That is a typical historic market. Obviously, we've spent a whole lot of time over 100% In the last few years.

And then our days on market, they dropped and it kind of stabilized out here. But they're under 30 days for both are under 1 million, and are 1 million to 1.1 to $2 million market segments. These are short marketing times, right? This is not normal, I'd say normal is probably between 30 and 60 days, somewhere in that range. This is not a normal market, we are still very much in a competitive market, the freeway chart, we have been over that. Obviously, this does not reflect some of the interest rate decreases, we saw as a result of better CPI numbers. But a big factor that is driving this is in fact this increase in median home price that's really driving that payment index upward. Finally, we do have our mortgage graph, things headed up, but I'm telling you, they're actually closer, you know, you know, maybe down a little bit around in that high six zone, those better than expected CPI numbers definitely help. So that's all I got for you. But honestly, I think that's a lot. Right? This is a lot to digest, I think this is a market and a housing market that is a little bit more complicated than anybody is letting on there are really socio demographic shifts happening in the Southern California housing market.

And I think, you know, a wise person is going to want to take a little bit more of an extended look at those things. And maybe we'll do kind of a special episode in a video here to try to break down some of these things. Because these are going to affect the housing markets in ways that I don't think a lot of people are anticipating. And some of these changes may be permanent in the housing market. So kind of understanding where you are, this might give a little bit of light to some of these things that we're that we're seeing out there in the marketplace that might not make a huge amount of sense, right when you look at them at face value, but if you understand some of these socio demographic shifts that might explain some of the behavior and some of the kind of market resilience that we're seeing.

Anyhow, thank you so much for watching questions and comments. We'd love it. Don't forget to like subscribe and hit that notification bell. If you are looking to buy or sell a home in Southern California, especially Los Angeles and Orange counties. And you'd like to work with a firm that actually understands real estate by the way, we have a listing in Fontana right now and i It is sad to say the way these offers are written is very disheartening to me they're not put together in a professional way. Don't be that buyer. A buyer with a very well put together offer right now would even though we have 16 offers on this property that would go a long way towards increasing their chances of offer acceptance. So if you're looking to buy or sell in Southern California and you would love to use our expertise, we would love to be your experts and represent you definitely reach out to us. Trying to think that's pretty much it. Have a great day everybody. We'll see you again real soon.