It’s June and the beginning of the “summer selling season” for real estate in Valmonte. Instead of a bunch of flowery talk about how great everything is about the market, I’m going to go out on a limb and dare to be more realistic than perpetually optimistic. The local real estate market is setting up for a price correction. The bigger question, and one I don’t have an immediate answer to, is for how long?
Let me explain. Annualized average sales prices in Valmonte have risen steadily since January of 2015 and are up nearly 50% since March 2010. In that same period, inventory has declined to our current supply levels of approximately 2.5 months supply of homes. (The chart on the following page illustrates this over the last 10 years). At the same time, the sales price compared to original list price is hovering around 99-100% of list, but that’s where the change is about to happen. As the message of tight inventory has been spread around in newsletters like this and other media outlets, sellers have increasingly overpriced their homes. I don’t need to name specific homes, but any recent look at the MLS or Zillow, and you will see what I mean. In the meantime, mortgage rates have risen significantly over the past year and maybe headed to the 5% range for a 30 year mortgage – the highest level in 7 years. Finally, add into the mix a slate of new homes lined up to hit the market in Valmonte, and we are setting the table for what may quickly shift from a sellers market to a buyers market. If not a full blown buyers market, then I do think, at the very least, there will be good buying opportunities in late summer and early fall.
This exact scenario has taken place on several occasions over the last 4 years. After inventory spikes in the summers of 2014, 2016, and 2017, buyers were able to buy homes on average less than 95% of the asking price as the result of a short term supply glut. In all these cases, the market returned to a seller’s market shortly after, but the short term price correction provided excellent buying opportunities for those in the market for a new home. Challenges to this model would be a sudden drop in interest rates, or a bevy of new buyers coming to the market, but both are unlikely given the recent economic growth and already inflated house prices.
What I am suggesting is that, like the stock market recently experienced, it would not be unusual for a short term price correction in local housing prices. I don’t expect all neighborhoods to be affected the same. In areas like Redondo Beach and Torrance, prices are still relatively affordable compared to other beach cities, and inventory is still trending below 2 months supply in these markets. But in higher priced areas like Palos Verdes Estates, Hermosa Beach, and Manhattan Beach, prices are already showing signs of weakening.
In the long run, we’ll still see general price growth for the next two years, as long as there aren’t major shocks to the overall economy. Limited supply is still an issue in most areas throughout Southern California, and until significant building takes place or job growth drastically slows, the market will remain out of balance. To give you further peace of mind, economists at Fannie Mae predict a 4-6% price appreciation in 2018 and 2019, with 30 year mortgage rates hovering in the upper 4% range.
So for now, if you are a seller, you need to be very realistic with your pricing if you hope to sell your home in a reasonable amount of time. If you are a buyer, I don’t know that sitting back and waiting for a crash is a good idea, but instead, be ready to pounce on some good deals when they come around.
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See you in the neighborhood, Kyle