Welcome to San Diego Blog | April 13, 2020
San Diego County Housing Report | The Showdown
Supply & Demand: A low supply is confronted with low demand.
There are a lot of people that assume the worst. Because COVID-19 and the “stay at home” order across the United States. The economy has come to a complete halt and it has been thrown into an instant recession (better described as “pandession”). As a result, the minds of so many immediately gravitate to the last recession, the Great Recession. That is when housing took a giant hit, and in San Diego County, values dropped 40%. Everyone was either impacted by the freefall of values or knew someone that was hurt by the unprecedented real estate slump. Since this is another recession, values will certainly drop, correct? Not necessarily, it all boils down to supply and demand.
In March 2007, the subprime lending industry collapsed. Demand instantly dropped to levels that we much like today. Yet, there were over 4X the number of homes on the market compared to today, reaching nearly 20,000 homes. With very low demand and the huge supply of homes, the housing market ground to a halt and home values plunged. The presence of so many risky subprime loans, pick-a-payment loans, and zero down payment loans in the system, the collapse in the credit and the housing market was followed by a tsunami of distressed properties. The overly abundant supply and unstable credit foundation of the housing stock led to the tumble in values.
That’s just not where housing is today. Yes, there is now a “demand problem” where buyers’ activity has substantially slowed to Great Recession levels. It’s unbelievable how demand shifted so quickly from humming on all cylinders one month ago to a snail’s pace today. Yet, the “demand problem” is starkly contrasted with the “supply problem,” there simply are not enough homes listed for sale. The showdown between both supply and demand are two countering forces that are moving housing into a Balanced Market, a market that does not favor buyers or sellers and values do not change much at all. Low demand pushed the market in the buyer’s favor, however, the low supply pushes it in the seller’s favor. As a result, a balance occurs.
Demand, the last 30-days of pending sales activity, dropped by 27% in the past two weeks. It is currently at levels not seen since the start of the year, a snapshot of the lowest demand of the year, the holidays. There are still buyers in the marketplace, especially below $1 million, just not nearly the pace that anybody is used to in the middle of the Spring Market. Demand was 42% higher last year. Just a month ago, demand was at levels last seen in 2017. In comparing today’s demand to 2017, it was 62% higher than today. COVID-19 has impacted demand significantly and has resulted in a “demand problem”
Another way to track the demand is by looking at the number of property showings that are scheduled, compared to a normal market that was not affected a pandemic. Property showings in California have remained under -50% since March 23 compared to last year, with the low occurring on March 28th at -68.8% compared to the same time in 2019. Property showings in the USA have remained under -40% since March 27 compared to last year, with the low occurring on April 12th at -49% compared to the same time in 2019.
Today’s housing making is impacted by a “supply problem” as well. Buyers can relate to not enough available homes to purchase. In fact, there are 26% fewer homes today compared to last year. Typically, the active inventory is growing during this time of the year. The past five years, on average, inventory has grown by 4%. This year is no different. It grew by 210 homes in the past two weeks, up 4%. With demand slumping, the inventory should climb sharply, yet that is not the case. Instead, fewer homeowners are placing their homes on the market compared to what they typically do during the Spring, which is notoriously the busiest time of the year for housing. In the past five years, there was an average of 5,012 homes place on the market in March. This year, there are only 3,956, a dramatic 21% fewer, or 1,056 less. With not as many homes entering the market, the inventory stays at anemic levels.
Weak demand has been pitted against a very low supply of homes to purchase. This is precisely why the market is moving towards a Balanced Market and not a Buyer’s Market. The good news for buyers is that they no longer need to rush to purchase. Multiple offers and buyers tripping over each other is no longer the norm. But, that does not mean that buyers are going to get “a deal” nor does it mean they won’t be able to find “a deal.” As we move forward and see how COVID affects homeowners, we may start to see sellers that need to sell willing to take less than Market Value or owners of second homes that are no longer getting their expected returns on short-term rental properties willing to take a hair cut on price. It is worth noting that even though these may catch some eyes, we are still listing and closing homes every week. Not everyone is sitting on the sidelines and that may come as a surprise when you get to the negotiation table.
COVID-19 Update: Real estate is now an essential service.
On March 28th, the U.S. Department of Homeland Security issued an “Advisory Memorandum” that identified essential, critical infrastructure workers during the COVID-19 response, which included the real estate industry. The order does not mean that open houses and house showings, as usual, are back. Thus, the California Association of REALTORS® has issued “Guidelines for Real Estate Best Practices During COVID-19.” Homes in escrow can now conduct professional inspections and on-site appraisals can take place. Virtual tours and professional pictures are strongly recommended and encouraged. Showing properties by virtual tour advised. The bottom line: while real estate is now an essential service, everyone needs to be mindful of social distancing
and taking all of the necessary precautions in keeping everybody safe and stopping the spread of the virus.
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Robert Gmur | Robert@WelcomeToSanDiego.com | 949-310-5195 | www.RobertGmur.com