Does anyone else in this real estate market feel like we are in the back of a roller coaster that just finished getting pulled up a huge incline and is slowly starting to build momentum…..down? Regardless of which way this coaster takes us, it’s definitely been a fast and furious ride the last few years. Here’s the stats from the 2nd quarter of 2023 for San Diego real estate, along with predictions for the rest of year. Always hand-written with stats direct from our local MLS.
2023 Q3 Summary
Sales Volume Down: Q3 of 2023 had 18% LESS closed sales than Q3 2022
Inventory Increasing: Up 33% from end of Q2 2023. Up 9.3% from end of Q3 2022
Loan Rates UP: Started Q3 at 7.03%. Ended Q3 2023 at 7.44%
Home Values Up: Median price went from $865k to $865k in Q3. Up 6.8% from Q3 2022
Govt./Policy Changes: Fed Fund Rate stayed level this quarter
Rental Rates Up: Median Rents are up 3.2% year to date
The Above image is a visual summary of my statistics reference from our local San Diego Association of Realtors.
2023 Q3 – The Details
Sales Volume has been dropping for over 2 years now. Year to date, 2023 has 26.8% less sales than 2022 after 3 quarters. It’s at the point now that Realtors are dropping out of the business. The obvious reasons are higher home loan rates + higher prices = lower affordability. Our affordability index hit 30, which is the lowest I can remember ever seeing it after the 32 I wrote about last quarter.
Inventory has been quite low for the last few years, and is still quite low historically speaking. However, Inventory started trending up in Q2 and has steadily risen for 6 months straight. Inventory did not rise as quickly as it did in Q2 2022, but we are just now hitting the same peak of inventory at September’s end that we hit last year at the end of July.
New listings are down about 33% YTD for 2023 over 2022. Clearly the decrease in new listings is keeping inventory low. Rental rates have continued to shoot up with home values, which means homeowners (with super low rate loans) are less likely to sell if they don’t have to. High rental rates combined with low rate fixed loans from 2 years ago are contributing to the lack of new listings as would-be-sellers have become landlords. Also, those looking to do move-ups, or even move-downs, can’t afford today’s rates (and prices), thus limiting inventory again. But since very few sales are happening, the inventory has been climbing…
Home loan rates have been steadily rising all year, including the 3rd quarter. The 30-year fixed MND rate average started the quarter at 7.03% and kept rising before ending Q3 at 7.44%. As I write this late October, the MND average 30-year fixed rate is at 7.88%.
When will rates come back down? Don’t ask a mortgage lender as they are in the desert looking at mirages with hopeful thirst. Every time I ask a lender they say rates are coming down soon….well, they haven’t. Unfortunately, I’m in this weird state that good macroeconomic news is a punch in the gut because I know the fed will keep tightening the economy by raising rates and meanwhile my business is getting crushed. I believe we have to see a recession and a notable hit to the job market before loan rates drop again, which will also send home values dropping, too. But when? Last week’s GDP news was strong….argh.
Home loan rate charts:
Long Term Rate Chart: 1971 – 2023 Short Term Rate Chart: 2023 Q3
Govt / Policy Changes:
Fighting inflation continues to be the Fed’s main goal. Inflation has dropped from close to 10% annually to about 4%, which is great, but it’s still not at that magical 2% number. The Fed last raised the rate .25 in July but did not raise it during the 3rd quarter. While many of us in the industry are optimistic they are at the end, The Fed has signaled that we could see another small increase before the end of the year.
I’m expecting at least 1 more rate hike this year and I hate to say it, but we may see rates over 9% in 6 months before they drop again. Either way, you can expect more short-term woes in the lending market. I’m told 40% of lenders did not renew their licenses this year. Another 6-9 months like this and more will leave.
Home Values have been cranking all year, after a steep up and down 2022. Unlike 2022 where we peaked late spring, this year prices kept rising through the end of the summer. We just recently saw a small pull back in September.
We have seen major seasonal movement, but not a lot of year-over-year differences. In June, we hit $1,000,000 as the median price for a detached home in San Diego. We hit this mark in April 2022 as well, but then Median values dropped a solid 15% at years end. We peaked much later in 2023 and home values appear to be holding their ground in Q3 and even hit a new high of $1,015,000 in August for the detached median home value. Will Q4 be a major pullback like it was last year?
Rental rates peaked a few months ago mid-summer near 4% and are currently up 3.2% since Jan 1. Historically, rental rates have been climbing, along with home values, for over 10 years. With the sales market getting more and more expensive, San Diegans who don’t own are forced to rent at today’s high rates. Median rental rates have gone up 36% in 3 years and 56% in 10 years according to these statistics. But these median numbers seem low to me. In my area and throughout central/coastal san diego, I’m pretty sure rents have gone up more like 75-90% in the last 10 years.
Despite the rental market declining a bit, with no one buying, I was able to rent a property for Nov 1 with just 1 week to market it. So the rental market is surprisingly strong for this time of year.
Median Rent SD: 2019-Present Median Rents SD, CA, USA: 2005-2019
What does the future hold? My theories & predictions are below…
Of course, these are just predictions….that said, I think we will see prices dip in Q4, which is not abnormal seasonally. I am predicting an approximate 3-5% drop in home values Q4 based on rising inventory (opposite seasonal norms), high prices and high rates (although as I’m writing this rates just dropped .75% in 3 days, so….?). I do think inventory is peaking for the year, which will keep prices from dropping as much as they did last year.
I’m expecting rates to stay fairly stable in the short-term and hover around 7.5-8% in Q4. But, if I’m wrong, movement above or below that range will likely shift the market enough to change home values – a drop close to 7% would likely yield a more flat priced market, whereas rates over 8% will likely send prices dipping more than 5% in Q4. There are definitely a number of would be buyers on the sidelines, waiting for an opportunity to get in or make a move without doubling their monthly housing costs and their decision to buy or not is financial and rate dependent.
Rents are sliding down a bit, which is completely normal the last 2-3 months of the year. That said, there are still more renters than rentals in my area so as long as landlords are reasonable with their expectations, you can still rent for close to what we could over the summer. I expect rents will fizzle a bit more towards the end of the year finishing with a solid, but modest yearly gain around 2-3%, similar to last year.
Want a free lunch?
If you got this far and read my entire article, please let me know what you think with an email/text/call. You’ve got a free lunch coming to you! Or, we can share a glass of wine 🙂
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Broker / Owner
73 Degrees Realty
ps. feel free to check out my San Diego Green Homes site if you have a passion for living green/sustainably and contact me (cell: 858-761-1707) for a free consult regarding how to green your home.