If you are a home buyer today, the real estate market can best be described as exasperating.  The inventory of available homes is at levels last seen in 2021 when home prices were rising exponentially fueled by a tail wind of sub 4% interest rates.   This begs the following questions:  Why is this still happening when rates have gone up?  Shouldn’t that have dried up demand?  Are all the buyers cash buyers?  Aren’t people leaving California and shouldn’t that be increasing the number of available homes for sale? How long will this go on or is this just seasonal real estate behavior?

763 Camino Dos Rios – For Sale!

To answer these questions, we first must recognize that the Great Recession is largely responsible for today’s low inventory.  Remember, we built very few homes between 2008-2013.  This meant we needed to build twice as many homes from 2013-2018 to make up those lost years of next-to-zero single family home construction.  Not only did we not build twice as many, but we never even built as many as we did in 2006.  This has created a massive shortage of homes.  Perhaps you’re asking, “Weren’t there too many homes during the Great Recession and that’s why prices dropped?”  Yes and no.  The majority of foreclosed homes were at one time occupied, but the reason prices dropped as far as they did was more a lending issue than a supply and demand issue.  Many people walked away from homes they purchased with no money down.  As rates dropped, they couldn’t refinance because they were upside down (Find out what your home is worth here).  This caused many sellers to ask, “If I can’t refi to a lower rate, my home is worth less than what I paid and I have negative equity, why should I keep paying?”  So, people walked away from their home and the rest is history.

OK, we are in general short of housing units, but that’s not the only issue causing the low supply.  By now you’re undoubtedly aware that in an effort by the Federal Reserve to slow inflation, interest rates have more than doubled since early 2022.  This has had a number of unforeseen consequences.  Most significant is the effect on would be sellers.  With 70% of homeowners carrying mortgages with rates 4% or lower, many sellers are reluctant to part with those rates knowing that to sell means to pay a lot more for financing.  This makes selling and buying almost cost prohibitive so many would be sellers are not selling.   Not enough newly built homes plus fewer existing home sellers equals very low supply.

Another problem contributing to so few homes for sale is that homeowners who want to move, usually must sell first before they can buy.  And if there’s very little to buy, the fear is that “I’ll sell quickly and have nowhere to go.”  On this front, I actually have a great solution (Contact Tim here), but most people either aren’t aware of their options or just too afraid they won’t find anything to buy so they’re reluctant to sell.

10600 Wheatland Ave – For Sale!

There is a common misconception that the majority of buyers today are paying in cash.  This is patently false.  Cash buyers represent just 26% of all sales nationally.  There has however been a shift in who is buying in 2023.  Millennials represented the majority of 2022 home buyers at 42%, but the higher cost of financing is pinching affordability for those same Millennials today.  As such, Baby Boomers are once again the largest demographic of home buyers.  And while it is true that as a result of California’s net decline in population many sellers are moving out of state, the dearth of new construction over the past several decades means even with the move out of state, there’s still not enough sellers for the number of buyers even if there are fewer buyers.  Fewer listings coupled with fewer buyers equals stable to rising prices.

2023 saw the vibrant spring housing market come a little late, but it did come, and we saw prices rise as they usually do this time of year.  However, with summer now upon us, the market may be showing signs of normal seasonal trends and that means the market might be slowing.  With school today generally starting in early rather than late August, the demand for housing should ebb as families take their last vacation and begin back to school activities instead of house hunting.  This may help improve housing inventory from current historic lows and this in turn should be good for buyers.