The Lech Report

by Chuck Lech CalBRE#01100007

There Are Competing Forces at Work

When you study Econ 101 in school, they list only three variables, interdependent on one another.  Supply, Demand, and Price.

We always talk about those three.

But the real estate market is not that simple.

Let’s begin by discussing some of the other influencers.

First, Mortgage Rates.  According to the chart below, rates are way below the 50-year average of 7.8%. Mortgage rates are around 5%, almost three percentage points below the average.  That’s very good news.

But mortgage rates at the start of this year were only 3%.  And now they are 5%.  That’s not good news. Home affordability just took a major hit because mortgage rates took a giant leap, and more increases are in the FED forecast.  Also, the FED is selling off their inventory of mortgage-backed-securities, and not buying new securities.  The FED previously helped push mortgage rates lower, now they are pushing them higher.

But the FED is not in total control of the economy.  One of the most influential factors is consumer confidence.  When consumers feel things will continue to go well, they spend.  When they are concerned about the future, they start holding back on spending.  The recent readings on consumer confidence do not forecast a bright future.

These factors would lead us to assume that home prices will be falling.  That would increase the inventory, and reduce demand.  But we have to balance the fact that people need a place to live and California has not seen the number of homes built that are needed.  This factor balances a price-based reduction in demand because we don’t have enough houses.  That pushes buyers to bid up the price of homes.

Let’s include another group of factors.  Why do people sell their homes?  There are many reasons.  Life happens, and the death of a homeowner brings their home to the market.  Job transfers happen, and owners list their homes to buy another miles or states away.  Divorce means a breakup of the two homeowners, and usually results in a sale.  Younger couples want a home with more room for their growing families.  Older couples don’t need all the room they previously needed.  Some want a new home because they want one, they can afford one, and they want to improve.  And many more reasons, each one a personal reason.

Are these reasons to sell still occurring?  Of course, but some not as often as previously.  Homeowners wanting to move up really like the looks of their new home, but they don’t like the looks of their new 5% mortgage as compared to their current 3% mortgage.

All of these factors point to a slowdown in price appreciation, an increase in inventory, and a lower number of sales.  Add this influence to the strict rules of supply and demand, and these factors also act as moderators.  Too few homes on the market have caused prices to grow strongly.  Too many homes on the market could reduce prices.  But we may not see too many homes on the market because homeowners will not list their home in order to buy another due to mortgage rates.  Will higher mortgage rates cause sales to slow down?  Yes.  But too few homes are available because not enough homes were built.  The chart below shows the annual increase in households (demand) versus the annual increase in housing units (supply).  An overall lack of housing will cause demand to continue to be a strong force.

Have you noticed the market changing in our areas?  Some changes we can see quickly ( inventory ) while some changes take a while to be felt.  For example, we track closed escrows, but those sales took place 45-60 days ago.  As you see inventory rise now, you will see sales begin to decline about two months from now.

In 2021, inventory was basically flat, even during the summer months when inventories historically rise.  However, 2022 is beginning to behave a lot like a “normal” year.  Normal years do not have 70% of homes selling for above asking, and prices increasing in double digits.   But a normal growth in inventory is the first indication that “normal” is coming.

In Simi Valley/Moorpark, the same is holding true.  The last two weeks showed a dip, but  I believe that will return to a “normal” pattern.  Mortgage rates have a lot to do with that.  Buyers have seen mortgage rates increase significantly with the promise of more to come, so many decided to stretch and buy now while they feel they still can, and that increased weekly sales for a short period of time.

What about closed escrows?  Remember, these figures show what was happening two months ago.  In the Conejo chart below, if I removed the red 2021 line and the blue 2020 line, 2022 seems to be behaving a lot like the 5-year average.  That is good.  Sales still continue to be strong, but not too strong, a goldilocks chart.

SImi Valley/Moorpark is similarly behaving like the 5-year average.  In the chart below, look past the red 2021 line and the blue 2020 line, and 2022 sales are beginning to act a lot like what we would expect.

The cumulative sales chart perhaps shows this better.  Cumulative sales, represented by the heavy dark blue line, are following the normal pattern we have seen in past years.  Not as strong as 2021, but normal strong.

Simi Valley/Moorpark shows the same “normal” pattern.

What about prices There is nothing about prices being normal, or slowing their climb.  But remember, prices are based on closed escrows, and therefore are two months “behind”.  I believe price increases are beginning to level out.  At least that is what I expect based on the analysis at the beginning of this blog.

Prices are leveling out in Simi Valley and Moorpark also.

And finally, I will finish with the statistical charts.  Remember, the period of time covered in these charts are generally for a three-month period.  As things slow down, and we consider three months of data, it will take a little time to show the slowdown.

For Conejo, inventory has finally climbed and surpassed the same period in 2021.  (Up 24%)  Why?  Because prices were up between 16% and  21% year to year.  Not as many homes are being sold (down 16%)  As I look at previous blogs, price increases are experiencing  a slight slowdown.  Attractive inventory is still flying off the market, in approximately two weeks.  Some price deductions are taking place. With the number of sales in the current 3-month period compared to last year being down 16%, the computed months of inventory figure has climbed.  Inventory now represents almost one month of sales.  The numerator (inventory) is higher while the denominator (sales) is lower.  This measure is changing quickly.

For Simi Valley and Moorpark, a similar situation.  Compared to last year, a whopping 51% increase in inventory, is coupled with a 17% decrease in number of sales.  This has also caused the “months of inventory” computation to rise significantly.  No bubble needs bursting, but the initial signs of a slowdown from the frantic pace of sales of the last year is becoming apparent.

So this is what I think is going on.  Lots of pressures, some keeping prices high, some pushing sales down.  Eventually they will settle down, balance out, and achieve equilibrium.  I think the wild ride is over.  But I also feel there are enough forces present to keep prices at or near these recently elevated levels.  Homes will still be sold, for a variety of reasons.  Homes will still be bought, for a variety of reasons.  One thing I do not see in our near term is a lot of new construction.  Building was stifled by shortages of material including lumber and appliances and changes being legislated to move away from natural gas, but was buoyed by recent legislation that hopefully makes construction a little easier.  We need more of that.  New constructions is strongly occurring in the rental unit market.  Maybe that is where it needs to be.  The other need is in the affordable market, homes that can be bought by working class families.  A good start, but we have more to do.

Stay safe, stay healthy, and let me know what YOU think.

 

Chuck

 

 

 

 

 

2 Comments

  1. Once again, an excellent analysis. Can’t find anything to disagree with here. Still seeing multiple offers but we are also seeing savvy agents listing below market comps in an effort to generate those multiple offers. Heard mentality at work. More than one way to skin a cat I suppose. Keep up the stellar work!

  2. Joanne MacDonald

    June 7, 2022 at 1:15 pm

    As always, really appreciate your in-depth local analysis which is always very balanced and informative ! Thank you!!

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