Prices are still going up, as are interest rates. Despite this, the market is currently going strong. It’s unclear whether this is temporary or seasonal, or part of a larger trend, but the near future of real estate is looking fairly good.
The reason for the rate increase is a recent increase to the federal funds rate of 25 basis points. The initial announcement didn’t have an immediate effect, but later caused an increase in interest rates. This, in addition to rising prices, has contributed to a decrease in home sales. However, it’s still above pre-pandemic levels, and supply is improving, which should help keep prices in line.
Part of the reason for supply increases is increased construction. Though construction actually decreased in the Western US, it has increased elsewhere and is at its strongest since 2006. Builders remain confident despite a slight drop in confidence, from 81 to 79, due to increased costs.
Some property owners don’t like the idea of allowing pets on their property. However, it’s probably a good idea to consider offering a pet-friendly rental property. 72% of renters own pets, so pet-friendly rentals are in high demand. This ensures you’re more likely to find a tenant and also allows you to charge more for rent. You can also ask for a pet deposit, in addition to the normal security deposit.
You also shouldn’t be too worried about property damage. Yes, pets can cause minor damage to property, but it’s actually more likely that costly property damage is caused by young children or even adults. In addition, you can reduce property damage by replacing carpets with linoleum, vinyl, or laminate floors. These are more resistant to damage and easier to clean. It may also be a good idea to install pet doors and gates.
WalletHub examined 182 of the largest cities in the US in an effort to answer the question of which cities were the happiest. Their research focused on various aspects of emotional and physical well being, income and employment, and community and environment. As it turns out, their data suggest that California could be a very happy state. 6 of the top 10 ranked cities are in California. This includes Fremont, which was the number 1 ranked city, as well as San Francisco, San Jose, Irvine, Huntington Beach, and San Diego. The other four cities in the top 10 were Columbia, MD; Madison, WI; Seattle, WA; and Overland Park, KS.
However, these results should be taken with a grain of salt. WalletHub never directly asked anyone whether they were happy or not, though their methodology does include –among many other criteria — a few clear correlations, such as suicide rates and depression rates. Their data may be accurate, but the conclusion that their data points to happiness is up for debate. In addition, the focus was 182 of the largest cities. It’s entirely possible that the happiest places are not large cities, or even cities at all. Not to mention California has a huge advantage in this regard, since it is very large, is almost entirely urban, and makes no legal distinction between cities and towns. California therefore has far more cities analyzed by the data than any other state, at 28. WalletHub’s selection criteria did include at least two cities per state, but many states only use data from those two cities.
The results of a November 2021 survey of real estate professionals about the 2022 forecast are in, and they’re rather split. 41% expect prices to continue to rise and 41% expect them to fall. The remaining 18% predict prices will remain about where they are. Keep in mind, though, the survey was conducted a few months ago and may not reflect experts’ current beliefs. In addition, all of those who predicted continued rise in price conceded that the rate of increase will probably be slower.
There are a few factors pointing to slowdown, whether it’s a decline or a slower rise in home prices. Interest rates are increasing, which decreases buyer demand and buyer purchasing power, pulling down prices. The job recovery is still lagging behind. Forbearance exits mean greater inventory. Even global events are threatening to destabilize the economy, and uncertain buyers makes for less frequent buyers.
Most people who have been paying attention to real estate are aware that the construction industry has been struggling lately. But there’s one area where the industry is doing just fine, and that’s townhouses. Townhouse construction dropped in 2020 along with everything else, but it’s already recovered and is now above pre-pandemic levels. It seems townhouses are simply in fashion right now, as they feel like single-family homes — and are considered as such by some categorization methods — but are generally less expensive.
The truth is a little more complex, though. In reality, townhome construction has been on the rise for about a decade, and 2020 was merely a small dip — which also happened in 2011 and 2012. Perhaps townhome construction specifically was largely unaffected by the most recent recession, and this is just a continuation of the trend. It was actually the Great Recession in the latter half of the 2000s that caused townhome construction to plummet, and it’s been steadily recovering ever since. It’s not quite back at 2006 levels, slightly lower than the 2005 peak, but it’s not far off.
Technology has made it easier than ever to secure a tenant for your rental property, as long as you’re making good use of the technology. There are several websites that you can use to help spread the word about your listing. Some of these are websites you may use already for other purposes, and others are specific to real estate. You can even create your own website, though you’ll have to make sure people find out about it.
There’s a number of websites that allow you or your agent to list properties for rent. There’s the local MLS, which would need to be accessed by your agent, but this will also spread to aggregator sites like Zillow and Redfin. Alternatively, you can post to Zillow and Redfin yourself. Other similar websites include Zumper, HotPads, and ListHub. Make sure to verify the information after a property is listed, since automated systems can get things wrong. In your descriptions, include certain frequently searched keywords, like the school district, amenities, area, and some basic features.
Email campaigns still work, but it’s not the only way to expand your reach. Social media websites are excellent at this. It’s especially necessary if you’ve created your own website. The obvious ones include Facebook and Twitter. perhaps less obviously, you can post pictures or videos of your property on Pinterest and Instagram. You can also reach out to your network on LinkedIn.
The commercial real estate market has been experiencing mixed performances, with some sectors doing better than others. That’s not about to change any time soon. The industrial sector is still going strong, the retail sector continues its recovery, and the office sector keeps lagging behind.
Already low vacancy rates in industry have dropped to near-zero, as what few vacancies remain are completely unusable. New construction isn’t focusing on the industrial sector, except in the Inland Empire, which nevertheless still has a mere 0.9% vacancy rate, down from 3.1% in 2020. San Diego has the highest vacancy rate in Southern California at 2.3%. In the retail sector, the vacancy rate didn’t change much, only increasing 0.2% in San Diego from 4.7% to 4.9%. However, the availability rate — which includes all properties on the market, whether vacant or currently leased — dropped from 6% to 5%. It’s likely that this is representative of off-market leases. Offices are still struggling, with vacancy rates above 12% and availability rates around 17%. The solution to the office problem will probably come in the form of conversions to residential or mixed-use property, which are far more in demand than office space.
As of the end of last week, the average 30-year FRM rate is at 3.69%. It’s been steadily increasing since the historic lows of 2020. The ARM and 10-year Treasury Note rates also increased between January and February. Periods of historic lows followed by steady increases aren’t necessarily unexpected, though. That’s been the trend for at least the past three decades — ups and downs but a clear overall downward trend. Precipitous drops have tended to result in a period of reduced average. For the past decade it has averaged somewhere around 4%, but it’s unclear whether the sharp decline in 2019-2020 will result in a reduced average for the coming future.
What may prevent a reduced average is the Fed’s plans for the future. Their gradual reduction of purchases of mortgage-backed bonds (MBBs) has kept mortgage rates relatively stable. They will cease buying MBBs entirely in March, at which point they will begin increasing their benchmark rate throughout 2022. This is going to result in higher interest rates. With the rate already approaching 4%, the increasing rates will likely result in the average going above 4% and continuing the trend of the past decade.
As of the end of 2021, fewer buyers are choosing to waive contingencies than earlier in the year. This is a return to normalcy, as the frequency of waivers was inflated during the period of heavy competition. Buyers had sought to improve sellers’ perception of their offers by foregoing things such as inspections and appraisals in order to expedite the process. As competition dwindled, fewer buyers felt the need to do that. In addition, the appraisal process is starting to move faster with increased vaccination rates, and home prices remaining high means buyers want to make sure they’re getting their money’s worth.
The percent of people who did not waive any contingencies increased steadily from the trough of 21% in June to the peak in December of 40%. Inspection and appraisal contingencies were most often waived, though there are other types of contingencies. For waivers of inspection contingencies, the peak was 27% in July, down to 19% in November and December. The percent waiving appraisal contingencies decreased from 29% in June to 21% in November and December.
More and more young adults are moving back in with family members after college. The assumption is that this is an economic necessity, as those saddled with debt are unable to buy a home. However, even if this is true at the time, it turns out it could be more temporary than expected. Many are transitioning directly into homeownership right after their stay, rather than having a period of renting as most people do.
About half of those living with parents or other family members are paying rent, but it’s likely less than actual market value, though this hasn’t been confirmed. The other half are staying rent free. In both cases, their expenses are much lower than if they were attempting to live on their own. That could be because they can’t afford it otherwise, but it’s also possible they would be able to afford getting their own place, but saving money helps them pay down debt or save up for a down payment. Of course, the vast majority of people — 73% — are still renters before they are buyers, but the percentage who lived with parents, relatives, or friends before buying their first home has increased from 12% to 21% over the past three decades.
Owning a home used to be a large part of the American Dream. Homeownership was considered a point of personal pride, signalling that you’ve achieved something that everyone in the US wants. It still demonstrates the same thing, that you are able to own a home, but nowadays the reasons are far more practical than simply pride.
In 2021, 43% of first-time homebuyers cited pride of ownership as the reason to buy. In 2022, though, this plummetted all the way down to 0%. Instead, investments took the #1 spot at 51%, though this was still important last year at 34%. Replacing that spot is reducing housing costs at 38% in 2022, a similar reason to 2021’s #3 spot, saving money, at 15%. Added to the 2022 list is social pressure at 11%.
January 2022 showed a different face than we were seeing all last year. Of course, in many respects that’s a good thing. Depending on whether you’re buying or selling, the real estate market for 2022 could be wonderful or horrible. As always, the location will make an even bigger difference.
Sales Volume Dropping
Check out all the red ink in the table below. Compared to December, sales volume is down by nearly 50% at the Beach and on the Hill. November and December of 2021 were heavy with transactions spurred on by the fear of increasing interest rates. The number of homes sold in comparison to January of last year also dropped, though not to as great an extent.
Sales volume down, prices up
As of right now interest rates are expected to hover in the 3.5% to 4% range for the balance of the year. The increase from under 3% to roughly 3.5% has served to lock a substantial portion of entry level buyers into the rental pool. Those who found a place and could afford to buy last year did. The first part of this year is expected to continue to show declining sales volume as many first time buyers drop out of the purchasing market.
Prices Starting to Reverse Direction
Prices meanwhile are faltering in the unsustainable march upward. As the table above shows, the Beach and the Inland areas have already begun declines in the median price. Simultaneously buyers in the Harbor and Palos Verdes communities have continued pushing purchase prices higher, though not nearly as fast as last year.
We expect price corrections in all four areas as the year rolls out. Initially, we anticipate buyers in the Inland and Harbor areas to balk at the combination of higher interest rates and historically higher prices. Lower priced homes are traditionally impacted sooner and to a greater degree by changes in mortgage interest.
Homes on the Palos Verdes Peninsula and in the Beach communities of the South Bay are expected to also experience price declines as the market adjusts to the new reality of higher prices, steeper interest rates and the shrinking impact of Covid.
The Covid Connection
Covid wreaked havoc with social lives, business practices and just about every other aspect of society. When the pandemic struck in 2020 the real estate world was already heated because of low interest rates. Unfortunately, protecting society from Covid meant slowing down much of the business world, including real estate transactions. For months agents were dealing with masks, alcohol gel and the task of wiping every surface touched by potential buyers. And the buyers kept coming because the interest rates made buying a home affordable for many.
By the time 2021 started, the industry had found ways to show property and ways to consummate paperwork with relative safety from Covid. Keeping one eye on the mortgage interest rate, the buying public responded promptly. It was one of the busiest years ever for brokers and agents. As the year ended and lenders continued raising the cost of purchase loans, buyers started showing signs of stress.
January appears to have been the fulcrum point for a shift in market dynamics. The people involved are more than ready for relief from Covid. Bidding wars have all but ended. Price reductions are coming after only a few weeks on the market. The State has declared Covid “endemic.” Essentially we’re ready for normal business.
The first month of the year has pointed in the direction of a slowing market, with some pricing shifts to compensate for over-exuberant purchases in the close out of 2021. We anticipate February to show more of the same. We’ll be back soon with charts comparing the monthly progress. (You’ll find the beginning charts for 2022 at the bottom. Not real exciting without data to compare.)
The High Sale and the Low Sale
We’ve had requests for a little “human interest” added to the dry statistics we throw out here every month. We’re going to try to do that while still maintaining privacy for the people involved. Let us know how we’re doing.
For example, an observation we made this past month was the highest sale versus the lowest sale as reported by TheMLS for January. Those of you who follow us know the Beach areas are invariably at the top of the chart, so you won’t be surprised to find that the highest sale in January was in the Manhattan Beach hill section. New in 2021, this expansive 6 bed, 6.5 bath home sold for $6.5M. At nearly 6500 square feet, that’s over $1,000 per sq ft.
It’s far from the highest price we’ve seen there, but that piqued our curiousity. So we looked to the other end and found the lowest January sale in our part of the South Bay. Down from 6500 sq ft to 400 sq ft, and from $6.5M to $255K, this studio condo in Long Beach calculates out to a hair over $600 per sq ft. In other words, about 60% of the cost to build new construction in Manhattan Beach.
2022 Charts – The Beginning Point
The first chart of the year is less than exciting. We’ve included them here for reference. In March, when we can compare January to February and we can be confident we are past the bulk of the pandemic, these should be much more interesting and informative.
April 2021 was one of the most fiercely competitive months for real estate in history, in no small part due to the pandemic frenzy. But spring is always one of the more active seasons in the real estate market, being right after the holidays. And this year is not going to be an exception.
What sparked so many bidding wars last year is high demand and low inventory, and neither of those things has changed. Inventory is still 43% below pre-pandemic levels, and there are still plenty of Millennials, as well as some Gen Z, aging into first-time homeownership. Where there is some difference is the current state of interest rates, but it’s still going to result in the same type of market. Last year, interest rates were staying low, so buyers knew it was a good time to buy. Now, interest rates are expected to increase throughout 2022. In the long term, this will reduce demand, but as long as the increases are expected and not already here, demand will go up as buyers want to take advantage of the rates before they increase.
There’s a statistic that you may not have ever heard of, but it’s definitely being tracked, and that is the number of homes a buyer views before purchasing. The average has been decreasing, and sits at 8 — a record low — as of last year, compared to a peak of 12 a decade ago. It was holding steady around 10 between 2014 and 2019. As far as length of search time, it’s only ever been lower in the early 2000s.
Part of the recent dropoff is due to low inventory and the heavy competition that followed lockdowns. After all, you can’t look at many homes if there aren’t many to look at and you’re being encouraged to make quick decisions. That’s not the entire story, though. What has enabled buyers to make such quick decisions is technology. Internet-based methods of home viewing are becoming increasingly popular, such as virtual tours and highly detailed photography and videography.
Utilities generally cost around $2200 annually, but energy efficiency improvements can reduce this number by approximately 25%. This comes with a high up-front cost, but it definitely pays for itself over time. What’s more, even simply assessing the energy efficiency of your home can improve the sales value — homes with an energy efficiency rating sell for 2.7% more on average, even if the rating isn’t great. All this requires is ordering an energy audit, regardless of the results. If you are improving your home, consider solar panels, which can increase the sales price by about 2-4% depending on the area.
If you’re worried about the up-front cost, there are a few financing options. The FHA has an Energy Efficient Mortgage that allows you to exceed your loan limit by an amount dependent on your energy efficiency. This program requires an energy assessment, unlike the simple program version of Fannie Mae’s HomeStyle Energy Mortgage. This program allows you to borrow up to $3500 to pay for either energy improvements or an existing Property Assessed Clean Energy (PACE) loan, though PACE loans have had mixed results against more traditional forms of financing.
The primary obstacle to homeownership has always been the large up-front cost and necessity to get a loan. But the monthly cost of homeownership has generally been lower than rent prices, making homeownership significantly cheaper in the long term. And in 58% of counties right now, homeownership is actually more affordable than renting for the median priced home.
That’s still the case now, but things are trending in the other direction. While home prices, rent prices, and wages are all going up, rent prices are increasing the slowest of the three. There may come a time when home prices have outpaced rent prices enough that renting is a more affordable option, even if you have the up-front cost of homeownership covered. However, it’s important to note that changes in rent prices can sometimes lag behind changes in home prices. Renters usually aren’t able to capitalize on swiftly changing markets because they need to wait for their lease to expire, and in rent controlled areas, landlords can’t raise rents directly to market value for tenant-occupied homes.
Most Millennials know how to unclog their toilet without calling a plumber, but there are still a lot of things they simply don’t know how to fix themselves. Three-fifths of them wouldn’t have any idea how to fix a leaky faucet. Roughly half don’t know how to caulk tile, fix a garbage disposal, or clean the dishwasher filter.
Part of this is because of the advent of self-cleaning appliances. When the self-cleaning fails, or their replacement model doesn’t have it, Millennials simply never learned how to deal with it. It’s also the case that the Millennial generation has taken longer to move out on their own, which means they’ve had the help of parents or roommates to cover their gaps in knowledge. In other cases, they simply don’t bother. 36% don’t feel the need to clean the showerhead, even though only 29% don’t know how.
It’s not necessarily even a problem of the proper equipment. The vast majority own some of the most common tools, though a tenth don’t know the difference between a Phillips and flat-head screwdriver, even if they own both. Still, 27% don’t own a level, 30% don’t own a ladder, and 54% don’t own a stud finder.
With government support having ended, this may prompt people to think the economy has stabilized and recovery is imminent. But this is just the precursor to a stable market. The market needs time to adapt under normal conditions, and probably won’t become stable again until 2024. The main factor in overall recovery is the job market, which has yet to fully recover, and a stable real estate market requires construction to catch up to demand.
Some policies remain from government actions during the recession, though. Three laws — SB 10, AB 345, and AB 571 — will help out in construction efforts. SB 10 allows more areas to be zoned for up to 10 units, AB 345 allows ADUs to be sold separately from the primary residence, and AB 571 prohibits impact fees on affordable housing. Two more laws, SB 263 and AB 948, reformed bias training for real estate professionals. This legislation should have lasting impact in making the recovery more comfortable.
The percent of income put into savings on average fluctuates rapidly, but for the most part tends not to be subject to sudden large shifts. There have been a few notable spikes or dips across the decades, but nothing like the pandemic spike. April 2020 saw a record-breaking 34% savings rate, attributed to lower spending during lockdowns in tandem with stimulus payments. There was a second less major spike after the second round of stimulus payments.
The 34% rate was approximately double the record in prior years, which was back in the 1970s. That prior record was still only a 2% difference from the prior year. By contrast, in October of 2019, the personal savings rate was 7.2%, a 26.8% difference. The most recently calculated rate, in October 2021, was nearly identical to the pre-pandemic rate, at 7.3%. The savings rate has still been trending upward in the past couple of decades, though, after a relatively steady decline since the 70s, bottoming out in 2005.
Increased demand following the lockdowns meant that many people were eager to buy in 2021, especially first-time homebuyers, 85% of whom were renting at the time. Unfortunately, many of them weren’t able to because of heavy competition, with over 25% making an unsuccessful attempt. That hasn’t deterred most of them, though, with 72% of prospective first-time homebuyers expecting 2022 to be their year.
However, it’s important to note that less than 15% of those now looking to buy in 2022 were already looking in the beginning of 2021. That means it’s unclear whether they’re only recently planning a move to homeownership, or they deliberately avoided the highly competitive phase. It’s possible that they’ve only recently acquired the means to purchase, but it’s also possible they’ve had the money lined up and held off for a better time. In any case, optimism is strong among the current group of prospective first-time homebuyers.
