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Is the San Diego Real Estate Market Softening or Cooling?

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Is the San Diego Real Estate Market Softening or Cooling?

We’ve been seeing some changes in the San Diego real estate market lately. Slight, but real changes, so we wanted to post a mid-summer update on what we are seeing out there.

It’s time for our mid-summer real estate market update. There have been some changes happening in the market lately, and we wanted to share what we are seeing and experiencing with our clients. Prices are up and inventory has gone up for the first time in a long time. There are more homes for sale on the market, and July saw fewer sales than in July 2017. Is there a market softening or cooling? To try and understand what is happening, we first look at some key metrics and then see what real estate economists are saying.

Supply & Demand by Month - San Diego County - Last 13 Months

Supply & Demand by Month – San Diego County – Last 13 Months

The market recap below looks at the year-over-year numbers from July 2017 through July 2018, including some key metrics that we always follow. Included are all single family homes (detached) in San Diego County during this period.

Summer 2018 Market Update – By the Numbers:
Median Sold Price – $657,000 – an increase of 7% Y/o/Y
Median List Price – $749,900 – an increase of 5%
Expired Listings – 976 Listings – an increase of 16%
Average Days on Market – 36 Days – no increase – flat – 0%
Supply (# of Homes for Sale) – 8,037 – an increase of 5%
Demand (# of Homes Sold) – 1,991 – decreased by 6%
Months Supply of Inventory – 2.2 Months – an increase of 3%

We’ve bolded a few of the changes worth noting, because they signal changes from the patterns we’ve grown used to seeing. Since 2012 (6.5 years and running), we have seen the same basic patterns and trends, with prices going up year-over-year between 6-8%, inventory remaining low or going down, and homes selling quickly with the number of sales staying steady or rising. After noting in our last update that prices in the last half of 2017 were flat, we wondered if this was a new trend or if it was merely part of a market correction. At this moment, it is still hard to tell.

What we do know is that prices increased 7% year-over-year for July, but other metrics could be revealing some market changes, such as the number of expired listings (up 16%), increased inventory (up 3%), and fewer homes being sold in July compared to July 2017 (down 6%). Mortgage interest rates have also increased twice this year, leading some buyers to start tapping the brakes a bit. We are seeing more buyers standing their ground and not automatically offering full list price, and we are seeing fewer multiple offers on listings.

Some economists believe that with home price increases far out-pacing wage increases, buyers are finally reaching the limits of their buying power, especially in high-priced areas like San Diego. Here are 3 articles we’ve read recently, which all suggest that prices and sales volume have hit a current peak, while buyers and sellers assess where things are headed in the real estate market:

San Diego County Fast-Tracks Waivers To General Plan For New Housing – KPBS
Southern California Home Sales Crash, A Warning Sign To The Nation – CNBC
The U.S. Housing Market Looks Headed for It’s Worst Slow Down in Years – Bloomberg Businessweek

The gist of these articles, despite the dramatic headlines, is that the market is starting to correct itself, signaling that certain aspects of the market are out of balance. The authors conclude that prices can’t continue to outpace wage growth, that there are not enough affordable homes for sale (new and resale), and that buyers bought fewer homes in June and July as a result of these dynamics. We don’t see any systemic threats to the overall real estate or mortgage markets, but there are unmistakable signs that the sellers’ market we’ve seen since 2012 is definitely slowing down.

Summary: For the first time in years, we are seeing a slight shift in dynamics with the market data revealing some desperately needed changes. It all comes down to this: lower and middle-income home buyers in San Diego need more homes to buy. And until that happens, they will not go out and buy homes with the same enthusiasm that we’ve all gotten used to. Affordability and availability of homes are the big problems. Builders are still building luxury homes ($1M+), but there are not enough homes to meet demand for San Diego’s middle-income and lower-income buyers. Home prices have continued to rise about 6-8% year-over-year, and mortgage interest rates continue to increase. This will make homes even more unaffordable as time goes on, and we may be hitting that plateau now. California and San Diego’s governments are trying to address the problem by approving more permits for new affordable homes, but it will take a lot of new homes to make up the supply gap in the County.

2018 is not 2008. The system is not in jeopardy. The financial system is strong as is the general economy, and buyers still have to qualify for a mortgage. But it seems clear that state and local governments have to step up, as they have a big role to play in removing barriers and creating better market conditions for developers to build more affordable homes. Supply and demand have been out of balance for a long time, and this has lead to price increases that are now becoming unsustainable. Demand will always be constant, and increases in the supply of affordable homes will help to solve many of these issues. These problems are, in many ways, man-made and they are solvable if governments and builders work together to fix them.