Through The Magnifying Glass: A Look At California’s Current Residential Real Estate Market (Part II)

Through The Magnifying Glass: A Look At California’s Current Residential Real Estate Market (Part II)

In last week’s blog post (PART I of our two-part look into the current California residential real estate market), we examined the underlying factors that came together to create the seller’s market of 2020 that has continued into 2021. In today’s post, we shift from last week’s retrospective focus to a look at where the market stands now and what we can expect moving forward.

While no one can predict with certainty what will happen with the housing market, a look at the current state of factors that impact the market may provide us with some insight. Some say that the current market will establish a trend of inflated home prices that will continue through 2021. Others argue that the components that gave rise to the inflated seller’s market are shifting in a direction that will result in a rebalancing of supply and demand resulting in a stabilization of home prices, likening the past year to previous top-of-the-market years. While we do not have a crystal ball, below we look at the information we do have to give us an idea of what is to come.

What do we know about the market right now?

While it is hard to say what will happen, the slow but steady increase in mortgage interest rates, the sharp and rapid increase in the number of Americans inoculated against Covid-19, the expected winding down of the federally mandated foreclosure moratorium, and the ramping up of new home build construction all seem to suggest that the tides may turning. 

Increasing Interest Rates

In the past couple of months, federal mortgage interest rates have slowly started to climb. This shift comes after a period of over one-year of declining interest rates, starting in the later months of 2019, in which the federal interest rate for 30-year fixed mortgages began to drop steadily until it reached historically low numbers in January 2021. From mid-February to early April, it appeared as though the 2020 interest rate drop was a thing of the past and that the post-2020 Presidential election era, which ushered in a massive increase in vaccinations and a drop in covid cases, would result in a slow revamping of the economy and a rise in the rates. However, since the first week of April 2021, we have observed a slow and steady decrease in the rates again – cementing the idea that market conditions are not as simple to predict as one would hope.

Decreasing Demand

The issue of demand is possibly more predictable than interest rates, while also being dependent on them to a certain extent. In a low interest rate market, like that of 2020, it is not uncommon to see an increase in prospective buyers. I like to liken this phenomenon to that of customers flocking to a sale. When confronted with a “good deal,” people who are otherwise maybe not in the market to make a purchase are induced into doing so. Similarly, buyers in a low-interest rate market are more motivated to borrow money than they would be in a normal/high interest rate market because the cost of borrowing money is “discounted” when interest rates are low. Following that logic, an increase in interest rates should, theoretically, result in a decrease in demand. If interest rates begin to rise again, it will be interesting to see how the return to the “full-priced” market will impact homebuying habits.

As discussed in last week’s blog post, not only was the increase in demand in the 2020-early 2021 housing market impacted by the historically low interest rates, but it was also a reflection of the desire for more space at home. With the pandemic forcing people to stay within the confines of their home for everything from work to play to school, many people entered the market in search of homes that better suited their newfound lifestyle and needs. While the pandemic is not over yet, with the number of Americans being vaccinated increasing daily, all California K-12 schools expected to re-open in the fall, businesses and places or work re-opening, and Americans slowly re-entering society, we may start to see a cooling off of the mass exodus from big cities to the desirable suburbs of Los Angeles, Orange and San Diego counties that led to the high demand market that we’ve been experiencing. Further, after a year of social distancing and staying at home, many people are planning busy summers filled with trips and travels. It will be interesting to see if these factors reduce the housing demand in the booming Californian markets and, if they maybe even, negatively impact the usually high-demand spring and summer residential real estate markets.

Increasing Inventory

As of March 2021, inventory for single-family homes in San Diego County was down 65.6% from March 2020…65.6%. That means there was less than half of the number of homes for sale last month then there was that same time last year. The drop in housing inventory, combined with the low interest rates and high demand of 2020, resulted in a market in which homes were sold quickly, with few contingencies and for historically high prices. As we make our way through the spring and summer months of 2021, we expect to see the cyclical increase in inventory. Some believe that the inventory shortage may have also been a direct result of the pandemic and prospective seller’s wariness to list their home at a time of so much uncertainty and health risks associated with opening their homes (and in turn, exposing themselves) to showings and inspections. We are also seeing an increase in new home builds, as the hurdles to new construction that existed in 2020 (interruptions due to the pandemic, lumber shortages, etc.) appear to be less obstructive today than they were last year. The federal foreclosure moratorium is also expected to expire in June 30, 2021, which could result in an influx in foreclosure and short-sale listings entering the market.

Based on what we know, what can we predict?

As we have discussed above, it appears that at least some of the factors that led to the red-hot seller’s market of 2020 and early 2021 are shifting. What we do not quite know yet, however, is the full extent and impact of these shifts on the housing market. What we can predict, though, is that the consequences of the past year’s residential real estate market will be felt for a while. Average single-family home prices in the hot markets of Southern California have inflated greatly in 2020 and are unlikely to drop anytime soon. However, if interest rates and inventory increase and demand decreases, the competition on each individual listing should theoretically decrease resulting in a cooling-off of the bidding wars that drove up home prices. It will be interesting to continue to observe the complex interplay of the economic, political, and Covid-related factors affecting the California residential real estate market and to see how they shift as we move deeper into 2021 and closer to the end of the pandemic. As always, we will keep you updated on any developments and look forward to answering any questions that you may have!

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.