By Teresa Konopka
SAN DIEGO — The San Diego real estate scene has yet again taken residents by surprise. In January 2020, the median sale price was $600,000. A year later in January 2021, that rose to $650,000. In January 2022, the price rose yet again to just under $800,000 and leveled out just under $900,000 in April 2022. Going into Summer 2022, prices have started to plateau and even drop [1]. Whereas rapid fire home sales would involve bidding wars tens of thousands of dollars over asking with prospective buyers more than happy to waive contingencies such as appraisals / inspections, it appears those days are over. More and more homes are sitting longer on the market with price cuts. A recent search on Redfin shows there are 350+ homes in the San Diego area that have been on the market more than 2 weeks with price cuts in the past month. This sort of slowdown would have been unheard of just a few months ago.
But how did we get here and why is the tide turning? To understand that, we need to look back. Heralded as the wisest man on earth at the time, King Solomon noted the importance of learning from history.
“History merely repeats itself. It has all been done before. Nothing under the sun is truly new” (Ecclesiastes 1:9).
The mortgage rate of 2% seen in 2020 was historically the lowest seen in decades—yes, decades. The 30 year fixed interest rate mortgage average in the United States went from 7% in the 1970s to 18% in the 1980s. It has been steadily lowering ever since and hit its rock bottom in 2020 [2]. When mortgage rates are low, the average buyer has more purchasing power. Mortgage payments are a mathematical mashup of home price and interest rate. Lower interest rates mean people can afford more expensive homes. Conversely, higher interest rates man people can afford less expensive homes.
Mortgage rates are tied to federal interest rates, which are set by the Federal Reserve (often referred to as “the Fed”). Monetary policy is tied to these rates and the government tends to tweak these in an effort to either stimulate or suppress the economy. When the lockdowns of 2020 hit and millions were unemployed, the Fed lowered interest rates to encourage economic growth. When interest rates are lower, it costs less to borrow money and therefore people have more confidence to make purchases (think lower interest on credit cards). However, with the excess printing of money (stimulus checks) and skyrocketing cost of gasoline, inflation soared. In an effort to combat inflation, the Fed raised interest rates. The logic is that if it is more expensive to borrow money, people will purchase less. Given the simple economics of supply and demand, less purchases equate to less demand, which naturally drives prices down. The Fed’s goal is to slow inflation and is willing to hike interest rates to accomplish that.
It should be noted that federal interest rates are not the same as mortgage rates. Yet why do they correlate? Any mortgage company that lends money to homeowners to purchase homes typically borrows money elsewhere to outright purchase the home. Or, as the saying goes, they are robbing Peter to pay Paul. In order to recoup their losses and make out ahead, there needs to be an upcharge. This is so mortgage lenders make profit and do not simply break even. Simply put, this tends to be a 3%-4% “cushion” on top of the federal interest rate.
“Just as the rich rule the poor, so the borrower is servant to the lender” (Proverbs 22:7).
This is why mortgage rates jumped to ~5% when the federal interest rate hiked to ~2%. According to the Fed’s own projections [3], the interest is likely to push up to 4%, which would in turn push mortgage rates up to 7%. With higher mortgage rates, fewer buyers can afford San Diego’s expensive homes, which would decrease demand and thereby price.
Another factor in the housing market madness that deserves attention is the impact of investors. While there have always been investors—individual and corporate—who purchased homes to either rent or flip, that number soared in Fall 2021. Specifically, real estate investors bought nearly 20% of all United States homes during that time [4]. Why is this? Though lucrative for many, real estate investing involves much work and risk. While a traditional investor can make money at a computer buying / selling funds, real estate investors have to deal with tenants (if they rent out the property). There is also the added cost of escrow, real estate fees, maintenance, property tax, HOA dues, and home insurance. If the investor does not live close to the home(s) they are purchasing, there is the added cost of hiring a property management company and the risk that the company does not oversee the property well. For instance, say a tenant is smoking in the unit. The property management company may not want to deal with the hassle of confronting the tenant and just not care (it doesn’t impact them). When the tenant finally moves out and the property reeks of smoke, the property management company can claim ignorance and hold no legal responsibility for costly treatments needed to get rid of the smell.
Typically stocks and bonds perform in an inverse fashion. Investors buy stocks when bonds are doing poorly and buy bonds when stocks are doing poorly. However, during the mayhem of 2020 that shook the global economy, both stocks and bonds performed poorly. With no stable place to place their money, investors saw an opportunity in real estate. Due to historically low mortgage rates driving up buyer demand (remember, buyers were able to afford more expensive homes due to the lower mortgage rates), home prices began to soar. Investors took note of this trend and entered the market. Many greedily raked in profits as they bought, held, and sold homes like stocks. Focused solely on financial gain, many investors left homes vacant and worsened the already difficult housing affordability crisis in San Diego.
“You must not follow the crowd in doing wrong” (Exodus 23:2).
In late 2021 and early 2022, it was not uncommon to look at Redfin property history to see homes purchased and shortly resold for upwards of $100,000. However, as interest rates—and therefore mortgage rates—increase, home buyer demand is slowing. At the same time, bond values are starting to pick up. In fact, I-bonds hits a historic high of 9.62% [5]. Investors who expected to ride the wave of rising real estate and easy profits are starting to feel the burn of property costs in a slowing market. Many investors are exiting the market, cutting their losses, and putting their money in more stable bonds. Keep in mind that bonds are often guaranteed, exempt from taxes, carry no fees, and do not involve dealing with tenants, physical assets, maintenance, etc.
A few recent examples from San Diego highlight this. 4300 Netwon Ave #34 was sold in March 2022 for $641,000 and quickly relisted in April 2022 for $740,000. With no offers in a slowing market, the price has dropped to $688,000 in June 2022. Similarly, 4511 G St was sold in May 2022 for $725,000 and went back on the market in June 2022 for $635,888. 9804 Caminito Bolsa sold in March 2021 for $400,000 and was relisted in May 2022 for $580,000. Come June 2022, the price had dropped to $520,000. Many more homes are advertising price cuts, a trend that is expected to continue as the year progresses. The panicking investors looking to sell the properties will only increase the housing supply which, coupled with decreasing demand, will exacerbate the issue.
“Suddenly, a powerful wind swept in from the wilderness and hit the house on all sides. The house collapsed” (Job 1:19).
So what is a San Diegan to do? Is now a good time to buy or sell? For investors, they need to decide if they can wait what may be years for property values to rebound…all the while paying the expenses that come along with owning a home and potentially dealing with evictions in a tenant-friendly legal environment. When it comes to delinquent tenants, it should be noted that evictions can take months and thousands of dollars in legal fees with no guarantee of ever recouping lost rent. Delinquent tenants can not show up to court or lose in court but not pay. For those that have the legal funds and mental stamina to pursue wage garnishment, delinquent tenants can dodge this bullet by simply quitting their current job, moving on to a new employer, and not notifying the previous landlord of their new employment (plaintiffs need to know where a person is physically working in order to garnish wages). For regular sellers, those looking to move from one comparable home to another will be just fine. They won’t walk away with huge piles of cash like investors in 2021 did, but they will find a suitable place to live. For regular buyers, I personally would wait. With rising mortgage rates on the horizon and regretful investors exiting the market, it is likely prices will continue to fall. This is especially true if the United States enters a recession, which 85% of Americans think is coming [6].
Uncertainty in the housing market is nothing new. Aside from the infamous crash of 2007-2008, our ancestors dealt with their own housing worries in biblical times. As was true back then and is true in modern times, even the worst housing markets do eventually rebound. It may take a few years or a few decades, but it will rebound. While this may not be very reassuring to investors, it is comforting to ordinary people who live in their only purchased home.
“Then, just as HaShem had said He would, my (Jeremiah) cousin Hanamel came and visited me in the prison. He said, ‘Please buy my field at Anathoth in the land of Benjamin. By law you have the right to buy it before it is offered to anyone else, so buy it for yourself.’ Then I knew that the message I had heard was from HaShem.
“So I (Jeremiah) bought the field at Anathoth, paying Hanamel seventeen pieces of silver for it. I signed and sealed the deed of purchase before witnesses, weighed out the silver, and paid him. Then I took the sealed deed and an unsealed copy of the deed, which contained the terms and conditions of the purchase, and I handed them to Baruch son of Neriah and grandson of Mahseiah. I did all this in the presence of my cousin Hanamel, the witnesses who had signed the deed, and all the men of Judah who were there in the courtyard of the guardhouse.
Then I said to Baruch as they all listened, ‘This is what HaShem of Heaven’s Armies, the G-d of Israel, says: ‘Take both this sealed deed and the unsealed copy, and put them into a pottery jar to preserve them for a long time.’ For this is what HaShem of Heaven’s Armies, the G-d of Israel, says: ‘Someday people will again own property here in this land and will buy and sell houses and vineyards and fields’” (from Jeremiah 32:8-15).
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References
“San Diego County Housing Market”. Redfin. 24 Jun 2022. https://www.redfin.com/county/339/CA/San-Diego-County/housing-market
“30-Year Fixed Rate Mortgage Average in the United States”. FRED. 23 June 2022. https://fred.stlouisfed.org/series/MORTGAGE30US
“Federal Reserve Board and Federal Open Market Committee release economic projections from the June 14-15 FOMC meeting”. The Federal Reserve. 15 June 2022. https://www.federalreserve.gov/newsevents/pressreleases/monetary20220615b.htm
Katz, Lily and Sheharyar, Bokhari. “Real-Estate Investors Bought a Record 18% of the U.S. Homes That Sold in the Third Quarter”. Redfin. 6 Apr 2022. https://www.redfin.com/news/investor-home-purchases-q3-2021
Berger, Rob. “I Bonds Set To Deliver Historic 9.62% Interest Rate”. Forbes. 21 Apr 2022. https://www.forbes.com/sites/robertberger/2022/04/21/i-bonds-set-to-deliver-historic-962-interest-rate
Howell, Tom. “Majority of Americans think a recession is coming, says poll”. The Washington Times. 19 May 2022. https://www.washingtontimes.com/news/2022/may/19/over-8-10-americans-think-recession-coming-poll/
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Teresa Konopka is a freelance writer based in San Diego. She may be contacted via teresa.konopka@sdjewishworld.com