Through The Magnifying Glass: A Look At California’s Current Residential Real Estate Market (Part I)
What Is The Current State Of The Local Real Estate Market?
Whether you are actively involved in the current residential real estate market or not, you are probably aware of the current state of affairs – specifically, that homes are selling quickly (often before they are even listed and sometimes sight-unseen), for historically high prices and with many, if not all, contingencies waived. The last two deals that I was involved in garnered over 25 offers each, which – although referred to as a “crazy market” by the many veteran realtors I have crossed paths with this past year – has come to be the norm. Below, we explore some of the factors that gave rise to the current market and explore where the market is headed.
How Did We Get Here?
Low Interest Rates
As 2019 came to an end and we entered 2020, residential mortgage interest rates started to drop to historically low numbers. Fueled by the pandemic and the uncertain state of the economy and politics in 2020, mortgage interest rates dropped to numbers that had never been seen before, not even during the most recent interest rate drop of 2012. The historically low rates brought in a wave of buyers eager to lock in attractive rates (more on this below).
Decreased Inventory
On March 18, 2020, the U.S. Department of Housing and Urban Development authorized a moratorium on Enterprise-backed, single family foreclosures that went into effect immediately. The moratorium, in relevant part, served to relieve the financial pressures on homeowners who, as a result of the impacts of the Covid-19 pandemic, risked defaulting on their home mortgages by freezing mortgagees’ abilities to foreclose on their homes for a certain period of time. As a result of this federal action, the number of foreclosure sales in California dropped over half a percent from the previous year’s numbers.
The decade-long housing shortage was exacerbated further in 2020 by extreme weather conditions, material shortages, the recession, and the ongoing pandemic. The result was an even further reduction in new home permits and new home builds in California in 2020 than in prior years.
Two less easily provable, more anecdotal possible contributors to the drop in available inventory are that (1) due to fears of contracting Covid-19 and out of an abundance of caution, some would-be Sellers opted not to list their homes for sale in order to avoid having strangers tour their home amid the pandemic, and (2) that the drop in interest rates encouraged some otherwise would-be sellers to refinance their home mortgages rather than sell. Whether these suspected market contributors actually had an impact on the current state of the housing market is unclear.
Increased Demand
What is clear, however, is that there has not only been a net decrease in listings in Southern California markets in the past year, but the unprecedented demand for homes, particularly in desirable local real estate markets (such as Los Angeles County, Orange County and San Diego County) has meant that the balance between demand and supply has weighed even more heavily in the direction of a seller’s market.
Where is this demand coming from? Some of it can be attributed to the drop in interest rates discussed above. With rates dropping to historically low numbers, many renters or inactive homeowners found themselves motivated to enter the market for the first time or for the first time in a long time.
Further, the pandemic resulted in state and locally mandated quarantines and school closures which resulted in many businesses moving to a remote work model and many families homeschooling. All of these factors gave rise to an increase in desire for homes that offered the square footage and outdoor space necessary to fulfill all the newly required functions of a home. Increasing demand even further, was the mass exodus of employees – who were now working remotely from home – from the famously pricey Northern California markets to the desirable zip codes of sunny Southern California. Not only did these new residents enter an already Seller-friendly market, but they also came with full pockets and a familiarity with inflated home prices. The influx of residents accustomed to exorbitant housing prices further contributed to the current market that we find ourselves in where bidding wars, all-cash offers, waivers of contingencies and greatly inflated home sales’ prices are becoming more and more commonplace.
With all of these interplaying and compounding conditions, the stage was set for the perfect storm…the current residential real estate market. While no one knows exactly what lies ahead for the short or long-term residential real estate market, one thing is for certain: the conditions that led to the current housing market are slowly shifting, and in doing so are raising questions and providing some insight into what lies ahead…all of which we explore next week in Part II of our two-part look into California’s current residential real estate market.
To learn more about the real estate market, or to specifically discuss the San Diego real estate market, please contact Paris M. Torkamani at ptorkamani@esquirereb.com or 949-413-6699. To learn more about the Los Angeles real estate market, please contact Amir Torkamani at atorkamani@esquirereb.com or 213-973-9439.
