Happy New Year everyone, this is Jack Ma with Jack Ma Real Estate Group in Diamond Bar. Welcome to my new video. 2022 has come and gone. It was another memorable year. Click Below to watch the new Real Estate Market Update video:
We thought the COVID years were historic, but 2022 has brought new challenges too. The supply chain issue has continued, causing the price of goods and services to increase… including the price of houses. Then, came the Russia – Ukraine War. This amplified the shortage on food and fuel. Inflation became real.
In January, the housing market was sizzling hot because of the historic low interest rates, lack of inventory, and supply chain issues. We saw 20, 30, or even 40 offers on homes. Home prices were bidded up by 5, 10, 15, or even 20%. It was tough for buyers. In March, as inflation continued, the Fed stepped in. They raised the interest rate for the first time since 2018, by 0.25%. That did not help much. Then, they raised the rate by 0.75% in June, July, September, and November. This was the first time in history that the interest rate went up by 0.75% for 4 consecutive months. And they raised another 0.5% in December. So, the interest rate surpassed 7% for the first time in 40 years. This meant that the demand for homes plummeted to a historic low. First time home buyers struggled to qualify for a mortgage. The monthly payments nearly doubled compared to teh beginning of 2022. And Millenials just stopped buying.
To make matters worse, 85% of current homeowners have interest rates well below 6%, creating a hunkering down effect. These homeowners may not be in love with their house, but they are in love with their interest rate. It doesn’t make sense for them to sell their low interest rate home and exchange it for one with a rate that is almost twice as much. Most homeowners stopped buying and selling.
So, now what? As of January 1st, 2023, the median home price was down about 2.5% compared to January 1st of 2022. And, down about 12.5% compared to the peak of the market in April. Here’s the question, if buyer demand has dropped so low, why didn’t the price drop further, like we saw in 2008? The answer is, supply. In January of 2008, when the market crashed, there were around 100,000 homes listed on the market for sale in LA, Orange, and San Bernardino County. Today? Only 17,000. That’s 1/5th of what it was in 2008. The hunkering down effect reduced both demand and supply. Homeowners no longer have a reason to sell, causing supply to stay low, while holding the price somewhat steady. So, what will happen in 2023?
We probably won’t see an increase in supply until the interest rate drops below 5.5%… most likely sometime around mid 2023. Don’t get me wrong, we still saw 3,400 homes go into escrow in December, but they are extremely motivated buyers. With the Fed likely to raise the rate at least once, we will likely not see the pending sales surge. Now, buyers have less competition and less pressure, so even if they are motivated, they will be extremely cautious and unwilling to stretch above the asking price. They will be looking very carefully at prices, so expect the home prices to drop another 5% or so.
When the interest rate drops below 5.5%, due to recession and falling inflation, demand will increase and properties will become more affordable. If you are a seller, homes are still selling. The buyers that are on the market are extremely motivated, but they do have more leverage.
Pricing your property strategically is more important than ever. Market prices are changing, so prices that worked in the past may need to be adjusted. This year, we will probably see 4.5 million home sales. In 2022 we saw 4.8 million sales, and in 2021 we saw 6.3 million sales.
Regardless, we are back in a normal, balanced real estate market for the first time since 2018. It looks like the end of the tunnel is near and the worst part is behind us.
