It’s still too soon to tell. But as Steven Thomas* points out, the first three weeks in April have bucked 8 years of rock solid statistics. As usual, the number of homes for sale has increased. What’s different is that we’ve sold 6% fewer homes than we did last April. Increased interest rates and reduced tax incentives may well be the cause.
A 6% slide in 3 weeks can easily be a blip. Or it can signal the beginning of a local correction.
Experts disagree on the health of the real estate market and their arguments run the gamut. All have sound logic, ranging from home prices accelerating faster than the cost of living adversely impacting affordability, to job growth and signs of local economic stability. Yet with such extremely unprecedented market forces, a la Trump-enomics, no one can say with certainty what will actually come next. Certainly if our economy remains strong and mortgage interest rates don’t rise too dramatically, too fast, then we can call this most recent anomaly a blip – not the much prophesied “tipping point”.
However if, as some experts predict, the new income tax changes spur residents of California (and other high cost areas) to move to states with lower home prices, there could be big changes. Migration would make sense because traditional geographic work centers already appear to be changing, making it easier for employees to work from almost anywhere.
The majority of my own work is now done from home where I am free from interruptions while analyzing market data. Yet I am obviously tied to Orange County, because the product I sell is here. However, my boyfriend works in sales and commutes to his office less than twice each week on average, and he could do his job from almost anywhere. Another friend of ours has worked for a California lending firm for several years, in spite of having moved to Costa Rica. He flies in when it’s important for him to attend meetings. When I consider all of my closest friends, the vast majority work from home versus commuting to offices most of their work weeks.
According to LinkedIn, 22 of the top 50 Companies where Americans want to work are technology software or device making firms. A few are headquartered in Southern California and most have offices here. If you don’t work in technology, you may be open to moving away.
(After my recent visit to Australia where coastal homes cost an average $750,000 USD, I understand the temptation to pull up stakes.)
As I mentioned in my January 7th report, the new tax code changes reduced the average California home buyer’s first year tax incentive from $5782 to $362. Interest rates have also ticked up .50% this year, increasing the (80%) loan payment for this same home by $1,500 annually. The combined “costs” to own now versus last year equals + $6920 in the first year. That’s enough to make some folks reconsider.
So what does this all mean?
It means we have slightly more sellers than buyers compared to prior years. So sellers need to be spot on with their list prices, or their homes will take longer to sell.
Buyers may have less buying competition. But they’ve already made it clear that they’re not happy effectively paying more to own the same home, no less paying a higher price for it. I do not expect them to skip happily into a spring buying frenzy as we’ve seen in years past. They’ll continue to dig in their heels and wait for interest rates or home prices to fall, bringing their costs back down. Neither of which are going to happen.
I expect prices to stall while buyers figure this new reality out. If interest rates continue to rise, this stalemate may last several months. If they don’t, I expect to see a surge in units sold and modestly higher prices by late summer, with a year end total of homes sold pretty similar to last year.
If there is significantly catastrophic news, like unprecedented poor earnings for local companies, disastrous job reports or threats of war or other terrorist activity targeting our immediate area, then this blip will certainly tip and we can expect to see the beginning of a population exodus and falling home prices.
Obviously the latter is highly improbable. So either sell your homes now, offering buyer assistance with their costs or even short term financing to make your home appeal to cost conscious buyers. Otherwise plan to be a patient and carefully negotiate the best deal you can without being ridiculous.
Call me for advice about how to navigate this changing real estate market. It’s beginning to get interesting.