Two months ago, in our 2017 San Diego County Real Estate Housing Market Outlook, we suggested three things might lead to a slight decline in housing prices:
The three reasons we loved San Diego single-family homes, as an investment in 2012, are the same reasons we don't love them today: median price and median income, price-to-rent-ratio, and mortgage rates direction. We still like single-family homes for owner occupants but we just don't love them as investments.
The last reason kicked into high gear after the election--mortgage rates are almost a full percentage point above where they were in October 2016. When we published the outlook, mortgage rates were around 3.5%. Today, mortgage rates are approaching 4.5% and the direction or mortgage rates, after the Fed signaled that it intends to raise short-term rates more in 2017, isn't rosy.
What does that mean for a San Diego home buyer? The same $500,000 home, with a $400,000 mortgage, is about $230/month more expensive today. That translates to an almost $700 month, in monthly income, needed to qualify for the same home. How many first-time home buyers are expecting an $8400 pay increase in 2017? The answer is, not too many.
The disconnect comes on the seller's side. Home sellers start thinking about selling their home as much as six months before they list it. They perform some routine repairs and maintenance, follow comparable sales, interview real estate agents, and list the home months after they decide to sell it. What that means is that sellers MAY be stuck in summer of 2016 thinking in a January of 2017 market. The reality of the situation is that the buyers can afford 10% less today then they could in the summer of 2016.
There may be a growing gap between sellers' reasonable expectations and buyers' ability to purchase at that price level. Rent increases are expected to slow and incomes aren't rising. We have a stand off.
What should San Diego home sellers do?
As always, that depends. If you have to sell your home to buy another one locally, you are in the enviable position of removing it from the market and hunkering down to see how this develops. If you are relocating, don't get caught chasing the market down:
They asked a price too high for a period of time, but when they finally reduced their price, it was to no avail. Home values had been falling, so their price reduction was an ineffective step as it simply kept their home priced above the market. Sellers who chased the market from 2006 through 2012 either never sold, or they lost a large amount of money.
Practice a leapfrogging pricing strategy today if you intend to sell your home quickly. In World War Two, american forces in the South Pacific intentionally ignored heavily Japanese-fortified islands and concentrated on strategically important islands with little or no enemy opposition, American forces eventually bypassed the Japanese forces and moved closer to Japan.
The same principle can be applied when selling a property. If everyone is stuck in the summer of 2016 pricing strategy (at say $500,000), and the properties aren't selling, there will be reductions to $490, 000, then $480,000, then $470,000 then, maybe as low as $460,000 where it sells in April of 2017. Price your property at $480,000 today (below the average listing price) and find a buyer before they will only pay $460,000.
What should San Diego home buyers do?
Know that the tide is turning. Some homes will still sell above list price and be in competitive bid situations. Look for listings which have been on the market for more than 30 days and make reasonable offers below list price. I have no idea exactly WHERE this market will settle and it is impossible to predict that. You might not get the LOWEST price in 2017 but you can still negotiate a pretty good deal with sellers by making offers with secured financing in place.
It will be frustrating because sellers may be stuck in the summer mind set but, if the seller has to sell, you might get a pretty good deal. It looks like mortgage rates could go higher in 2017 so don't get too hung up on pricing but know that you have some power back in the negotiation process.
If you are reading this, I am not your agent and I have no idea about your personal situation so keep in mind that these recommendations are general in nature. Call me at 858-777-9751 to discuss this.