FALSE ALARM!

If you read last week’s email you’ll probably remember the weirdness in the data.

I finally heard back from SDAR on Wednesday last week. They confirmed the reported inventory number was a typo (for two weeks in a row) and inventory is in fact in the 3,500s, NOT the 5,300s.

So, for my part in perpetuating the confusion, I’m sorry. I didn’t want to make assumptions without confirmation from the source…in the end, it’s another lesson in the “follow your gut” camp.

P.S. Did you see the US sneak past China in the final hour over the weekend to take home the most gold medals AND top the total medal count chart? ?? ? ?

This week: it’s time for our usual deep dive into the monthly numbers ?

July 2021 Round-up

Week over week inventory took a plunge. I verified this using live MLS stats, not just the SDAR release (lesson learned). The data below and the averages is correct.

This drop is a result of new listings ticking lower while new sales ticked higher and pending sales kept on pace with previous weeks.

This isn’t unexpected. It’s about that time when the market slows down a little as parents start shifting focus towards school and buyers and sellers of all ages and family make-ups try to squeeze in last-minute summer trips before it’s too late.

Mortgage rates dropped again as bond investors continue to find more things that worry them (primarily COVID Delta variant related) than they do that excites them. This rally in rates is truly impressive and a Godsend to prospective buyers.

The July data displays more signs that the real estate market is, in fact, cooling off.

The percent original list price dropped for the first time in months, a signal that the bidding wars are finally starting to curb. This metric was 105% for detached homes and 104% for attached homes last month.

I pointed to this data point 6 months ago as the one to watch as a precursor to the rest of the data. As this number drops, other metrics will likely start moving in the future as well (median price appreciation will slow, DOM will increase, and inventory will increase).

Month-over-month median price actually took a small step back in July. It dropped $4,000 for detached homes and $3,500 for attached homes from June’s data.

I expect this is a short-term blip, not the start of a new trendline. It does point to the fact that appreciation has definitely slowed down A LOT from the craziness we experienced a couple of months ago.

Inventory is up just about 400 month-over-month (a 13.5% increase from June). That’s a welcome relief to homebuyers.

That said, we’re still listing WAY fewer homes than we were at this time last year and we’re going into a time of year when sellers typically are less inclined to want to move, so it’s likely this inventory climb will start to slow down if not reverse altogether.

Detached and attached home data are following similar trend lines, but attached homes are slightly out-performing detached homes which is a reversal from just 3 months ago. IMO, this has everything to do with affordability.

The Week Ahead

Another inflation update is dropping this week. Actually two. The consumer inflation data (CPI) drops Wednesday and the producer data (PPI) drops Thursday.

CPI will provide a concrete number to something we already know – prices are higher. PPI is more impactful at this point as it will tell us what increases businesses are feeling which usually correlates to future consumer inflation.

The PPI has been high the last several releases but analysts are expecting this rise to start to slow and then reverse as supply constraints get figured out. Check it out…

A really high PPI number (above the expectation of 7.5%) could be the kick in the pants the Fed needs to see to consider winding down some of its pandemic-era stimulus measures.Keep reading below for this month’s Looking Ahead take.

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Looking Ahead

The San Diego real estate market is influenced primarily by three variables right now:

1. Housing supply
2. Mortgage rates
3. Local job market (employment and wages)

Every month I touch on each one to see how we’re doing using labels. GREEN means upward pressure on prices, YELLOW means even pressure, and RED means downward pressure.

Housing Supply – GREEN
Inventory is up just about 400 month over month (a 13.5% increase from June). That said, we’re still listing less homes than we were at this time last year and we’re going into a time of year when sellers typically are less inclined to want to move, so it’s likely this inventory climb will start to slow down.

Mortgage Rates – GREEN
The recent drop in rates continues to surprise and delight everyone.

Jobs – GREEN
The July jobs report showed the country added 943,000 jobs, beating analyst expectations. The San Diego data hasn’t been released yet but we’ve been tracking the national data pretty well to this point and there’s no reason to think we won’t again.

Conclusion
At the risk of looking lazy, I’m just going to copy what I wrote in my June update with only a couple of additional comments in blue text. I’m not seeing anything I didn’t expect that is driving me to change my take…

Over the next 3-6 months:
Home prices will keep increasing but the rate at which that happens will continue to slow.

With interest rates staying low and even going lower, this increase could continue even longer. Only time (and interest rate data) will tell.

Within the next 6-18 months:
Assuming no new variable or government intervention is thrown into the equation, I wholeheartedly expect prices to hit some sort of ceiling, marketing times to increase, and prices to bounce lower for a period until we find equilibrium.

That doesn’t mean a crash, it just means a slight pullback that is normal when the tides of the market shift from sellers to buyers (just like any other asset class).

This graph from Black Knight does a good job showcasing what’s typical. The red circle is my addition

This period in 2018 wasn’t a crash. It was a softening and pullback driven by a slowing of demand as interest rates rose.

San Diego inventory of available homes for sale during that period climbed to over 15,000 – we’re still less than 1/4 of that so we have a ways to go.

That said, my hunch tells me with prices as high as they are, there are fewer buyers that qualify to purchase now compared to then, so I think we’ll start to feel the pullback well before we get to 15,000 inventory.

I’ll be watching the data closely. I’m already penciling in longer hold times for properties we are buying now. I’m also expecting to factor in minimal price depreciation into our proformas if inventory levels creep above 7,000 AND mortgage rates start going up again. The keyword here = AND.

Word of caution to buyers out there waiting for prices to pull back. Don’t.

If that happens, it’s only because interest rates increased. If interest rates increase it’s likely your monthly mortgage payment will be higher even after a 5%-10% price correction in prices. Payment matters more than price.

Disclosure: My niche in the residential space (value-add short-term flips) is susceptible to these short-term changes. I have to make sure we start adjusting for this early. Consequently, I may be more conservative than others.

I can live with that. I’d rather be too early than too late.