It seems that California’s real estate market has swung back to a balanced market where buyers and sellers are actually negotiating over price a bit and contingencies. No longer are buyers being forced to come in with all cash offers above asking price to secure a property in the residential markets (not true for multifamily income properties that are still in incredible demand.). The crazy appreciation rates of single-family homes in the past bull run are coming back down to normal levels as well. We all knew that 10%+ annual increases in our home values wasn’t sustainable in the long run. We welcome the return to normalcy as it promotes a healthy, long-term market.

It is no secret that the driver of this cooling off is rising interest rates pushing up the cost of monthly mortgage payments. 30-year fixed mortgages are at a 14-year high Nationwide coming in at 6.29% up from 6.02% the previous week according to Freddie Mac, but still well below their long-term historical averages of 7.76%. Average buyer mortgage (excluding all refis) is $900 per month higher than a year ago crushing the lower end of the market (under $700K) that is hyper payment sensitive according to Realtor.com. Here in California with an average price home value of $860,000 we don’t really have much a lower end market since only the affluent can afford to buy. As of August 2022, only 25% of Californians could qualify for an average mortgage.

Skimming recent headlines, you might think the housing market is crashing. We all know headlines sell newspapers (at least they used to) and now get lots of clicks. Now those headlines do carry weight in the rest of the Nation where some markets are seeing some price deprecation. The average median housing price in the US is up 7.7% from a year ago. Sales volume for homes priced under $750,000 fell 13% in August 2022, versus 2021; for homes above that the decline was just 3%. If we dive specifically into our California market, we see that:

1. August sales pace was up 6.1% from July
2. Median price was up 0.7% in just a month in August from July
3. Most California local markets have less than a 2.5-months of inventory (4 to 6 months supply is considered normal)

Now a headline that we are shocked didn’t make the headlines is that the Federal Reserve stopped buying Mortgage-Backed Securities (MBS) this month to fight inflation. The Fed used it as a tool in late 2008 to repress mortgage rates and inflate home prices as part of the cure for the Mortgage Crisis. From its infancy till April 2022 the Fed’s balance sheet ballooned to over $2.74 Trillion (a truly mind-boggling number) in MBS. For this reason, it would surprise us if rate are North of 7% by year’s end (keep in mind that the historic average of mortgage rates is 7.7%.)