San Diego Housing Market Expected to Cool in 2023: Report Analysis
A recent nationwide report by housing website Redfin predicts that the San Diego housing market, along with several other West Coast markets, is poised to cool down in 2023. This analysis delves into the key findings of the report, highlighting the factors behind the anticipated cooling effect, potential consequences for homebuyers and sellers, and how these trends may impact the broader real estate landscape.
Factors Influencing Cooling in San Diego's Housing Market:
- West Coast Markets and Pandemic Gains: Redfin's analysis suggests that West Coast markets and metropolitan areas that experienced significant price gains during the COVID-19 pandemic are expected to slow the most in 2023. This conclusion is based on a comprehensive examination of data from February to November, considering metrics such as price declines, inventory reductions, and the number of homes available for sale.
- San Diego's Ranking: San Diego finds itself at No. 9 on the list of markets that are expected to cool the most in 2023. While not the most affected, the city still faces the prospect of a housing market slowdown.
- Markets Expected to Cool the Most: The report identifies Seattle, San Jose, Las Vegas, and Salt Lake City as the top markets likely to experience the most significant cooling effects. Conversely, regions less likely to face declines include Lake County, Ill., Chicago, Milwaukee, and Albany, N.Y.
- Redfin's Approach: Rather than projecting specific price declines in metro areas, Redfin relies on recent trends to forecast which markets might experience the most cooling. It's essential to note that San Diego County's home prices had been decreasing for five consecutive months as of October. The report predicts that nationwide prices will decrease by approximately 3 percent by the end of 2023.
Impact on Home Sales:
- Expected Decline in Home Sales: Redfin anticipates a 16 percent decrease in home sales in 2023 compared to the previous year. This projection is based on two primary factors:
- Rising Mortgage Rates: As mortgage rates continue to rise, some potential buyers may be priced out of the market, reducing demand.
- Reluctance to Sell: Potential sellers may be hesitant to list their homes as interest rates are likely to be higher than their current mortgage rates, making it less attractive to move.
- Redfin's Perspective: Taylor Marr, Redfin's Deputy Chief Economist, notes that people are more likely to move only when necessary under these conditions.
Impact on San Diego's Home Sales: San Diego County recently recorded its lowest monthly sales figure in years, with 2,354 sales in October, reflecting the challenges faced by buyers and sellers in the current market.
Predictions on Mortgage Rates:
- Mortgage Rate Decline: Redfin expects gradual declines in mortgage rates by the end of 2023, reaching approximately 5.8 percent. While this provides some optimism, as of December 2023, the interest rate for a 30-year fixed-rate mortgage stands at 6.28 percent, according to Mortgage News Daily.
- The Role of Inflation and Interest Rates: The report acknowledges that its forecast is influenced by various factors, including inflation and interest rates, which can impact affordability. The hope is that inflation will continue to decline, relieving pressure on the Federal Reserve to raise rates that drive borrowing costs.
Impact on Different Markets:
- Cooling of Hottest-Priced Markets: Redfin's analysis suggests that relatively affordable Midwest and East Coast metropolitan areas, which did not experience the explosive home price growth seen in San Diego, are expected to fare better in the coming year.
- Insulation from Pricing Corrections: Markets that did not participate in the pandemic-driven homebuying frenzy are considered more insulated from potential pricing corrections.
- Vulnerable "Pandemic Boom Towns": Conversely, areas that experienced significant price growth during the pandemic, such as Austin, Texas; Boise, Idaho; and Phoenix, may see larger declines.
San Diego's Real Estate Trends:
- San Diego's Notable Price Appreciation: The San Diego metro area consistently ranked among the three fastest-appreciating markets in the S&P Case-Shiller Indices during the pandemic. In March, the 20-city index reported a 30 percent annual price increase for the San Diego area, but this growth had decreased to a 9.5 percent increase by September.
Impact on Rental Market:
- Expected Rent Decreases: Redfin predicts a decline in rents due to rising vacancy rates and an increase in rental supply. Multifamily construction reached a 50-year high as of September, resulting in more rental options for tenants.
- San Diego's Rental Market: In San Diego County, the apartment vacancy rate increased from 2.3 percent to 3.4 percent within a year. The average asking rent decreased from $2,352 to $2,321 per month in the third quarter of the year.
- Influence of Generational Trends: Redfin suggests that rents might have fallen even further, but millennials and Generation Z are increasingly likely to rent rather than become first-time homebuyers. Higher mortgage rates and limited housing inventory make renting a more viable long-term option for many.
Impact on Migration Trends:
- Shift Towards Affordability: The report anticipates a slowdown in migration to costly metro areas. People, particularly members of Generation Z, may prioritize moving to more affordable places, driven by the growth of remote work.
- Examples of Programs: Several areas, such as Tucson, Ariz., northwest Arkansas, Savannah, Ga., and Topeka, Kan., are actively enticing remote workers with economic incentives to relocate. While San Diego promotes its attractions, it does not currently offer direct economic incentives to attract workers.
Conclusion:
The Redfin report paints a picture of San Diego's housing market cooling down in 2023, along with other West Coast regions that experienced significant gains during the pandemic. Factors like rising mortgage rates, hesitant sellers, and reduced affordability are expected to contribute to this cooling effect. While San Diego's housing market may not experience the most substantial cooling, it is essential for both buyers and sellers to be aware of the changing landscape and adapt to the new market conditions.
