Inflection Point in The Market
New built home sales had a very big miss this week. The sales of newly built homes sank to the lowest rate since the start of the Covid pandemic. A decline of 16.6% in April from March, was far more than expected (signaling weakness amongst homebuilders) and were down 26.9% from April 2021, according to the U.S. Census. Annualized rate of new homes coming onto the market was reported at 591,000 units vs. 750,000 expected. Adding insult to injury, March’s reading was also revised lower. This revision was not as significant compared to the main headliners of this news, but post-announcement revisions lower often telegraph and confirm what the newest data is corroborating: New home sales have been weakening for longer than admitted.
Here’s our take.
It’s important to remember this new built home sales report is a national figure; however, the impact if still felt here locally. San Diego has benefitted greatly from the low cost of borrowing money over the last 2 years, which has aided home price appreciation hand in hand with buyer demand. Even as droves leave California for other states, that did not cause price pressure downward in the local San Diego real estate market. Even home builders have been fortunate to benefit from more buyers than homes, more demand than supply.
Nationally the median price of a new home sold in April was $450,600, an increase of nearly 20% from the year before. Locally in San Diego the median home price was $975,000 and 25% higher than one year prior. Additionally, San Diego has also remained in the Top 3 highest appreciating Metros across the nation for more than a year. San Diego has claiming the #2 spot to Phoenix until last month landing at #3 to Las Vegas.
Some local experts are confident the increasing cost of money will have little to no impact on the overall price of homes. Looking at a decades long home price appreciation chart will confirm this notion. Others are cautiously advising their clients to consider the idea that prices may level off – as some buyers are pushed out the market entirely and others are more particular about which home they will purchase in this type of market. In earnest, both are true, but on different timeframes.
In the short term, we expect to see less buyer demand. There are 2 primary reasons for this:
- Supply: Anyone who sells now, needs to find a replacement home. For this homeowner, they will be selling at the top which is great to get the most net proceeds from the sale of a home. They are also immediately on the flip side of the next deal, whereby seeking to buy a home at the perceived “top of the market” at a higher cost of borrowing than just a few months ago.
- Mortgage Rates: There is no denying that the cost of borrowing money is directly putting pressure on affordability. While this does not cause a complete stoppage of homebuying, this does cause people to become much more discerning in their selectiveness of home, location, and time intended to stay put.
In the longer term, we expect to continue seeing buyers buy homes, even in this market. There are 2 primary reasons for this:
- Young families: Young families who plan on being here a long time (more than 10+ years) are looking at the long chart of home price appreciation, concluding that what they pay today will pale in comparison to what the value will be in the future 10, 15, 20 years from now. And they’re right. Again, decades of housing data supports the long view of appreciation, they can’t be faulted for aligning with this outcome.
- Retirees or soon to be retirees: People who are on the cusp of their “forever home” are thinking better now that never. This might be contrary to younger adults who envision a more nomadic lifestyle and don’t want to be stuck in one place for the rest of their life; however, aging populations are less likely to pick up all their things and start over somewhere new. The majority retirees and soon to be retirees already did this in 2020 and 2021, and for a variety of reasons.
What we need.
We need more new building in San Diego. Which means we need more land to develop, more builders breaking ground, an ease in supply costs, a slow down in appreciation, and a return to fervent homebuyer demand. The right set of circumstances coming together can make all this happen, it will just take time. The Fed cannot and will not raise rates forever, and they are already signaling they expect to have a renewed perspective on the markets by the end of the year. We need inflation to return to normal levels. We also need wages to keep up with inflation and preferably outpace inflation over the long term. This can bring some affordability back to those who were in the market 6 months ago and find themselves on the outside looking in, while also reinvigorating the appetite to buy again.
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Rates & Fees Disclosure:
‡ The payment on a $300,000 30-year fixed-rate VA loan at 3.000% with a 80% loan-to-value ratio is $1,292.01 with 0 (zero) origination points due at closing. The annual percentage rate (APR) is 3.235%. Payment does not include tax and insurance premium impounds. The actual payment amount will be greater. By refinancing your existing loan, the total finance charges may be higher over the life of the loan. Some state and county maximum loan amount restrictions may apply. Appraisal fee of $600, Processing Fee of $895, Underwriting Fee of $795 included in APR calculations with borrower paying 0 (zero) loan origination points.
‡ Based on Mortgage Heroes internal data.
