An increase in the number of price reductions is a leading indicator of the forthcoming price decline. In the state of California, during the month of April 2022, according to the Property Records of California, the following percentages of properties on the market had price reductions:
- 30 % in Sacramento, which is an increase from twenty percent a year ago;
- 25 % in San Diego, which is an increase from 16 percent the previous year;
- 20 % in San Francisco, which is an increase from 14 percent the previous year;
- 20 % in Riverside, which is an increase from 9 percent the previous year; and
- 18 % in Los Angeles, which is an increase from 11 percent a year earlier, as reported by Redfin.
The discount on prices has remained the same, at 16 percent, in San Jose, but it has decreased in Fresno and Bakersfield. According to Redfin’s data, the national median average number of days a home spends on the market dropped to a record-low 15 days in May 2022, from 19 days in the same month a year earlier. This marks a significant decrease from the previous record of 18 days in May 2021.
Homebuyer demand continues to outstrip supply, which is a consequence of the low inventory; nevertheless, this disparity is no longer sufficient to fuel continued price increases.
However, people should anticipate a swift shift in this day-on-market figure. The market is rapidly responding to the increased borrowing rates and less buyer enthusiasm that has been introduced. In point of fact, despite the fact that the current percentage of price reduction being offered is the greatest it has been since late 2019, price cuts typically reach their highest point in the second half of the year. The fact that there was such a sharp increase in price reductions in April, which is still considered to be the beginning of the spring buying season, indicates that the roller coaster ride for real estate professionals has just begun.
Price Reductions Serve as a Warning Signal for Future Housing Prices
Although home prices continue to go up, the primary driver of the housing market is employment levels, followed by interest rates, the number of homes sold, and finally property prices themselves.
As of April 2022, there were still 300,000 people without jobs in the state of California, which indicates that the state’s labor market has not yet recovered from the recession that began in 2020 and cost the state 2.8 million jobs. In addition, mortgage interest rates started to climb in January 2022 and continued to climb steadily until they reached an astounding 5.78 percent in the third week of June 2022. These rates had previously been hovering close to 3.00 percent. The huge decrease in buyer purchasing power that has come about as a direct result of today’s increased interest rates has had a disastrous effect on mortgaged homebuyers’ capacity to compete in today’s still-tight market.
Inflation is Causing a Domino Effect in Real Estate
The volume of home sales has consequently decreased in 2022 as a consequence of a decrease in the number of qualified homebuyers and a decrease in the number of properties being listed for sale by would-be sellers. Would-be sellers are opting to remain in their current homes rather than take the chance of being unable to find a suitable replacement property or qualify for a new mortgage.
Because of pricing that is “sticky,” real estate values are typically the last to fall. However, the dominoes are beginning to fall, and the next domino is to fall in property prices.
As of March 2022, the annual increase in housing prices in California ranged from 20 percent in the low tier, 25 percent in the middle tier, and 28 percent in the high tier. This excessive rate of increase will lose all momentum in a matter of months due to each of these variables, and more: the recession of 2020 is about to release its sequel on the economy, and this time around, the housing market won’t get away untouched.
In the second part of the year 2022, housing prices are projected to start falling, with a bottoming out occurring around 2025. The next predicted buy phase will arrive around 2024-2025 once prices have bottomed out, jobs have fully recovered, and house sales volume begins to build up. At that point, investors who are eager to capitalize on future price declines will be able to take advantage of this period.