It?s been a while since I posted the monthly Irvine data but since I?ve been able to close most of my listings I?ve had some time to pull together the numbers and really take a close look at what the data is telling me. First off, we are slowing down in the market. How do I know this? Well my listing open house traffic and agent showing traffic is down from what it used to be in the Spring time but I see that listings are not going into escrow as fast as they were before. The homes that aren?t selling now are the ones that are overpriced or non-desirable ones (bad location, bad floor plan, near a busy street, etc) but the turnkey homes are still moving fairly quickly into escrow.
As of the end of May 2022, the median price per SF is now at $729 or up about 35% from the end of May 2021. The May 2022 data represents homes that mostly went into escrow in April 2022 so it doesn?t quite reflect what is currently happening. It?s also taking builders a little longer to sell all of their new phase releases even though they are only dribbling out 2-3 homes per phase release for the most part. As sales slowdown we?ll see builders offering design center credits to move homes followed by offering broker co-ops or increasing them. Now that the market is coming more into balance we?ll get to see who the good listing agents are and who the ones that had the strong market make them look like rockstars. I?m sensing that we?ll experience who happened in 2018 when we have a moderate pullback in pricing due to rates having gone from the low 3% to low 5% since we?ve seen a similar increase in rates in the past 4-5 months.
May 2022 sales volume is down about 31% from May 2021 and is primarily due to the low level of inventory as inventory levels have been down 20-50% YOY in the first 4 months of 2022. That being said, as the bid/ask spread between what sellers are looking to sell their homes for and what buyers are willing to offer we?ll see sales volume come down as we are approaching the same level of inventory from this time last year. We are currently at around 1.5 months of inventory which is still a seller?s market so it?ll be important to keep an eye on what inventory levels are doing as we have now entered the summer selling season. There are some headwinds for buyers currently besides today?s higher interest rates and those include lower stock option values from lower stock prices along with lower crypto prices along with gas prices that have doubled in the past year. As of today (June 5th), there are 242 properties in escrow so we are not dropping off a cliff in terms of sales volume and should see June 2022 sales volume close to May 2022 sales volume.
I?m sure I?m not alone but I?ve had several buyers who?ve gone to the sidelines because they have been priced out due to increasing prices and higher interest rates. My other buyers are more passive and waiting patiently until they see something pop up that they really like. The market is definitely feeling that it will be more balanced as we get into the summer so buyer agents should have a better opportunity to negotiate a better price for their buyers so I don?t think I?ll have to use my trusty escalation clause strategy like I had to for the past 18 months.
As everyone knows, interest rates have increased from the high 2% to the low-to-mid 5% for conforming loans and from the high 2% to the low-to-mid 4% for jumbo loans. Investment property rates are now around 6% so that?s taken a lot of investment property buyers out of the market but there?s still 1031 exchange cash buyer investors out there. The FED will continue to increase rates throughout 2022 and we?ll probably see the FED funds rates around 3% by the end of year. They also started quantitative tightening at the beginning of June so it?ll be interesting to see what happens with interest rates. If the FED gets too aggressive we?ll most likely get a recession next year and we?ll see the yield curve invert this year. That may cause longer term rates to fall as the market will believe that the FED will decline inflation back to their 2% mandate. I believe the more aggressive the FED gets the higher likelihood that mortgage rates will come down and not go up because ultimately the main driver of longer term interest rates is inflation expectations. Obviously if rates go materially higher we?ll see more pressure on real estate prices. Areas like the Inland Empire will see higher price declines than Orange County as we?ve seen before in other downturns.
Overall, the market is getting more into balance now which overall is a good thing for everyone. No longer will ?lazy? listing agents benefit from a hot market, they?ll have to earn their keep. Good buyer agents will be able to negotiate better prices for their buyers but special desirable properties will still see multiple offers. Like I mentioned below, this feels a lot like 2018 and not 2008 as all of the buyers in the past few years have been very strong and the ones that have financed their homes were fully underwritten. I can see us having a pull back on pricing similar to what we saw in late 2018 where prices declined in Irvine 3-5% assuming that rates don?t materially go up or down and the stock market doesn?t crash.