State of the Market – San Diego Housing Market Forecast

Are you wondering if we are finally at the top of a housing market in San Diego and how has inflation impacting the housing market here in San Diego? We’re going to do a deep dive and cover all those topics.

1. Spread between Bid Price vs Ask Price

The first thing we’re going to be taking a look at is basically there is a big spread between the bid price and the ask price. What that means is what sellers are asking for and what buyers are willing to pay. There’s a big difference between those two things.

Essentially what’s happening right now is we are starting to see a lot of price reductions in the market. The overall housing prices right now are actually fairly stable in April. we hit $1 million dollars. In May, housing prices dropped slightly and went to $990,000. It was a reduction of about 1%.

The data hasn’t actually come out yet for June. That’ll come out in another couple of weeks and we’ll see what happened, but I see a bit of stabilization, but what’s been happening is sellers have been over pricing and now there’s been price reductions occurring. [Update July 7, 2022: The median price for June was reported after writing this, and it fell to $987,225 (0.3% reduction) – so in line with some stabilization of the market. We’ll see where the July data leads us soon. 

But what’s happening is a lot of buyers are believing that we are in a soft market. And there’s a lot of buyers that have dropped out. But because a lot of buyers think that the market has softened, they’re not willing to pay as much. So that’s the difference between what the bid, what they’re willing to pay and what sellers are asking for right now.

That’s certainly creating some downward pressure on prices, at least as far as bringing prices back down in line with reality versus before. For a while, it was simply that listing agents could overprice,and it would still sell for above ask price. It’s not really happening so much more.

There was a study that just came out, some data that just came out from Redfin showing that there’s an about a 15% of the homes on the market have had price reductions in San Diego. And obviously a big reason for all this is inflation and mortgage rates. We have gone from about 3% mortgage rates to about 6% in just a couple of months.

This has cut a lot of the buyers out of the buying pool. As buyers, fallout of the buying pool, that means they’re going into the rental market. That’s actually driving rent prices up. I’ll touch on that a little bit more here soon. And then of course, mortgage rates are driving mortgage payments up which is creating downward pressure on prices.

2. Homeowners are No Longer Relocating as Frequently

The other thing we’re seeing too, is that homeowners aren’t moving as frequently now because for a while, there is a great opportunity to trade up or downsize or relocate that sort of thing. Now it’s really not out of want or desire to move. It’s just purely out of necessity. If someone really has to move for a specific reason, whether that’s a job relocation, a divorce, or they just really need to be in a smaller home or really need to be in a larger home because of a growing family.

Otherwise, those sort of lateral moves within the city just to be in a better area aren’t really happening right now because homeowners, most likely you probably refinanced at 2.5%, 2.75%,  maybe 3%. And you’re not going to trade that in most likely for a 6% mortgage.

3. Interest Rates Are Rising

Traditionally mortgage rates are seemingly tied, although really just correlated, to the Ten-year Treasury. And a lot of people believe that they’re directly tied to the Federal Funds rate. None of this is really true. Those certainly correlate an impact rates, but they’re not necessarily the primary driver.

Over the last 40 years in a non high inflation environment, then they are correlated. However, in a high inflationary environment like what we’re in right now with inflation being right around 8% or so, and likely growing, interest is actually mortgage payments.

Mortgage rates are actually tied more directly to inflation. Inflation becomes the leading indicator of where interest rates are going.

Basically when banks are lending that money they need to make a profit. They’re not going to be losing money. They need mortgage rates to at least match inflation or be ahead of it. And that ultimately will help tame inflation as well. Right now we’re about 8.4% inflation.

Most folks that are in the masterminds that I’m a part of are seeing mortgage rates likely rising at least to match inflation.  And inflation does appear to be on the rise based on of course, how inflation is figured, where it’s dropping off lower price, lower inflation months from a year ago and adding in the higher inflation months from a year ago. Inflation will likely rise a little bit more and mortgage rates will start to rise as well.

Now, although I said that the Federal Funds rate does not directly correlate an impact of mortgage rates, it certainly does have an impact still. And so when the Fed meets in July, they’re likely going to raise rates again, the market will probably price in and increase before that meeting and then it might dampen down again. And that’s what just happened while there was a lot of news around the Federal fund going up, 0.7, 5%.

But what actually happened is once they did that, the interest rate drops slightly because it had already been priced in expecting that, kind of expecting the worst. And then it kind of calmed back down. We were at about 6.3-6.4% for a 30 year fixed mortgage, and then it fell to about 5.85. That’s kind of where we’re hovering right now for a mortgage rate.

What’s going to have to happen is that most likely mortgage rates are going to rise to meet inflation. We are at 6% right now and it’s very possible that mortgage rates could go to 8%, maybe even 10% to match inflation. What’s going to happen when that occurs? We don’t really know. I think we’re in for a bumpy road for sure.

Considering we’ve had so many buyers drop out of the buying pool already at 6% mortgage rates once we get to 8%-10%, probably quite a few more we’ll drop out. Most likely what will happen is that the Fed ultimately will continue to raise rates to try to dampen down inflation, but real inflation will start to fall before the Federal fund has fully gone through all their federal fund increases. And then actual mortgage rates will probably start to fall off before that. And we’ll start to see mortgage rates come down and then buying activity pickup again.

4. Rent Payments are Rising

Rents actually are rising right now, and the reason for that is because mortgage payments are rising. You can charge more for rents to match that because when it’s cheaper to own a home, then you’re basically turning your renters into homeowners, right? Because it’s cheaper for them to go buy a home.

If it suddenly is more expensive to own a home, then you’re going to be renting, but landlords can raise rents, essentially match mortgage payments. And so as mortgage payments get more expensive because of the rise in interest rates now, of course, rents can go up as well.

We are seeing a rise in rents and because there are more renters that we’re going to be buyers that have dropped out of the buying pool and now have become semi-permanent or potentially permanent renters that is again increasing the amount of demand for rentals here in San Diego. And that’s going to of course, drive more demand and there’s limited supply and rents will continue to rise.

We actually saw this in 2008 when the housing market very much crashed that rents really skyrocketed 2008, 2009, 2010, before that rents were fairly reasonable in San Diego. And it really shot up because so many people unfortunately lost their homes and went into the rental pool, that there was huge demand for rentals and prices went way up.

We’re starting to see that now, not because of a housing crash, but simply because people that were already renting are continuing to rent in the landlords, know that mortgage payments are higher. And so you can charge a little bit more for rent. Because of rent control limited 10%, it is kept at that, but it also allows landlords to just go right to that without much competition.

The other thing we’re going to see as a result of this is that of course, people need money to live on. And there’s going to be more demand for increased wages. And it’s going to put a big crimp on the working class in particular and those that are renting. It’s going to be a huge struggle for folks moving forward with rising inflation, eating into grocery budgets and gas budgets, you have to decide you’re going to eat out or you’re not going to eat out.

5. Should Landlords Hold on or Cash Out Now? For Non-owner Occupied Ownership

There’s a lot of choices that are very hard to be made. And this is going to increase inflationary pressure as wages do rise. It’s going to increase inflationary pressure, which is exactly what we’re trying to counteract. We’ll see how this actually all plays out.

Meaning you are a landlord, then you have a choice to make right now being that we are at the top near, the top, maybe on the backside of the top, what do you want to do? Do you want to ride out another 10 years as we go through a dip? I think that’s a safe prediction to make is that over 10 years, prices always rise in real estate. Are you ready to hold on for another 10 years? Or are you looking to cash out now being at the top? 

There’s a saying that no one ever went broke making a profit. If you have experienced a lot of appreciation in your property, and even if we’re on the backend of the top of the market, and you’re taking 5-10% less than what was the top of your house might’ve been worth more, you still are making a, probably a pretty good profit. You just have to decide you need that cash now, do you want to reinvest that somewhere else?

Or do you want to hold on for 5 to 10 years and see what happens in continue to take your rent payments? That’s just a decision that you’ll have to make. If you are a landlord and decide what you want to do there.

6. San Diego Market Predictions

Now for some market predictions, I will say, firstly, that I do not have a crystal ball. I do not know the future. These are thoughts that I have been formulating as I’ve been watching the market. And as I’ve been communicating with folks that I mastermind with, so I make a point to always mastermind people that are far smarter than me. I try to be the dumbest person in the room and learn from others. If you find yourself, the smartest person in the room, it means you’re in the wrong room.

And so these are thoughts that I’ve been taking from a lot of other people as well. That help form what I’m about to say. Essentially most likely we are in for a bumpy roads. I think that’s pretty obvious, we haven’t even talked about the stock market, crypto markets, things like that. With the amount of buyers that are falling out of the buyer pool because of this rapid rise in mortgage rates and will continue to rise. That’s certainly going to be creating downward pressure on prices.

As I mentioned before, we’re already seeing price reductions. We don’t know exactly where the median price is falling in San Diego at the moment, but probably in the next 30 to 60 days, we’ll probably have a much better idea of where things are going as far as: Are we at the very top of the market or are we on the backside of it?

I will say that we had so many offers as we, as the industry had so many offers on homes. There are so many buyers that there just not enough homes for folks. And so that’s how there were 20, 30, 40 offers on homes. We can lose 50% of those, which we already have and still be fine.

In fact, there are still homes that in general are getting 3 to 5 to 10 offers on homes. That’s still very strong, still means you have to be very competitive with your offer. What’s happening is these price reduced homes. These are just way overpriced and they’re having to come back down to earth right now.

There are really hot pockets in San Diego, such as Ocean Beach, for instance, right now I’m representing someone there and we’re having to be extremely aggressive and competitive to win our bid. We’re getting outbid with multiple offer situations. And even though we’re going in very aggressive on a lot of terms, but then there’s other areas that are softer, like Scripps Ranch for instance, has softened up quite a bit.

It really depends on the area of San Diego and the specific home, as far as what’s happening. If it’s still a highly desirable home, it’s still getting a lot of offers and going quickly. If there are inherent issues with the home or the neighborhood, then that softening up quite a bit. We’re certainly going to see as mortgage rates rise and I think we’re going to see easily mortgage rates at least at 8% soon.

And we don’t really know how big of an impact that’s going to be. I would say buckle up and get ready for some opportunities as things come up as far as being able to purchase. But I am here to serve you and to inform you of what’s going on. A lot of agents right now have no clue what’s happening. Unfortunately they’re not surrounded by leaders in the industry that can help guide. And so I am here to provide the information and inform you so that you can make the decision that is best for you, whatever that might be.

I’m not here to make a decision for you. I’m not here to tell you if it’s a good time to buy yourself.

I’m just here to provide you information as far as what’s going on in the market. And then you have to decide for you and your specific needs, if that makes sense. So either way, I’m here to help you, guide you through your real estate needs, wherever you might be in that process and the journey.

Curtis Chism, Realtor
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