Happy New Year! It is officially the first blog post of 2024.
For me, I love a good new year’s resolution. A fresh start is a great personal way to fire up new, productive habits.
With that said, it is tradition for me to write my annual South Bay Fearless Predictions blog post in the first week of January. I am excited to share my forecasts with you.
Please remember these predictions are educated guesses and are more for fun than anything else. Do NOT take this as investment advice and as always, be sure to do your own research.
Market Recap of 2023
If you missed my December blogs, I want to first share a recap of how local markets performed. In short…it was ugly.
To recap, below are the November rolling-12 median price movements by zip code. Spoiler alert…they are all down.
- 90266 – Down 11.8% (Manhattan Beach)
- 90274 – Down 5.9% (Palos Verdes Estates, Rolling Hills, Rolling Hills Estates, and Palos Verdes Peninsula)
- 90275 – Down 2.3% (Rancho Palos Verdes)
- 90254 – Down 3.3% (Hermosa Beach)
- 90277 – Down 5.3% (South Redondo, some Hollywood Riviera)
- 90278 – Down 4.4% (North Redondo)
While you will hear many South Bay residents talk about the homes for sale supply squeeze (which is correct), that squeeze still was not enough to push prices higher.
In fact, this is one of the more disappointing price performances ever when it comes to South Bay home prices. And while home prices falling locally is not a good thing in the long term, I do believe this step back in prices is a healthy result for our market that has enjoyed a breathtaking surge in prices over the past three years.
Now that you are caught up on 2023 home appreciation (ending November), let’s finally jump to my fearless predictions.
My 2024 Fearless Predictions
Below is bullet point list of my 2024 fearless predictions with more details further down the blog:
- South Bay Home Prices Rise Insignificantly
- Mortgage Rates Fall but Remain Elevated
- Home Inventory Remains Painfully Low
- New Construction Homes Outperform
- Long-Term Bet: Higher Rates – Forever
See the detailed description of each prediction below.
South Bay Home Prices Rise Insignificantly
Contrary to popular belief, the South Bay had a rough 2023 when it came to home prices with all markets declining. I think 2024 will produce price growth, but uninspiring appreciation to say the least.
The major headwind facing South Bay home values is record unaffordability.
According to J.P. Morgan, traditional affordability across the country reached its lowest levels in 41 years when conforming loan rates hit 8%. It was near a 20-year low when rates were in the 7% range.
If you track C.A.R.’s Housing Affordability Index like I do each quarter (click my most recent blog post on it), then you know that statewide housing prices are painfully unaffordable.
If one needs close to $221,000 annually to afford the median price home in California, then most buyers need to earn $300,000 to $500,000 annually to afford the median home in Palos Verdes to Manhattan Beach with 20% down. That is a tall order.
While a drop in mortgage rates will help, it will not be enough to reignite the South Bay home market.
As a result, I believe South home price appreciation will range between 0% – 5% growth 2024 – truly uninspiring considering inflation is still above 2%.
Mortgage Rates Fall but Remain Elevated
I believe mortgage rates will fall in 2024 – God willing!
While interest rates will fall in 2024, mortgage rates will remain elevated compared to the ultra-low rates of 2020 and 2021. What do I mean by this?
This means that conforming rates will not be in the 7% range. My best guess is that conforming loan rates will range between 6% and 6.5% in 2024.
Even better for the expensive South Bay home market, I am optimistic that jumbo mortgage rates will fall between 5.5% to 5.9% if you move some of your savings or investments to the bank lending you money.
By no means are these incredible mortgage rates, but it is better than 2023’s tough lending environment. So, rates go lower, but they still feel high relative to what we had become accustomed to the past few years.
Home Inventory Remains Painfully Low
On the local CRMLS platform, homes for sale hit a record low in 2021. It then hit another record low in 2022. And in 2023, it beat those two previous records to set all-time low inventory levels yet again.
I do expect 2024 to continue the trend of low, low inventory of homes for sale throughout the South Bay.
- Low housing affordability
- Locked-in ultra-low interest rates
- Lack of distressed sellers (essentially none)
- The Fed managing rates masterfully
The above four reasons will keep housing supply low here in our local markets.
While there is a massive amount of pent-up Millennial buyers, the lack of affordability will keep a lid on prices and not inspire more sellers.
Current long-time property owners will continue to hold their ultra-low rates which are now an incredible asset that cannot be traded when sold. Furthermore, unlike commercial office space with many office landlords handing their keys back to the bank, there are essentially zero distressed sellers in the residential market.
And lastly, in my opinion, The Fed is doing a masterful job when it comes to working interest rates to engineer a soft landing in real estate and the economy.
All these factors will keep housing inventory low. So more of the same in 2024.
New Construction Homes Outperform
New construction homes will outperform the broader market!
This is a little bit of a contrarian call and will be hard to measure at the conclusion of 2024, but this is one of those gut instinct calls as a full-time real estate professional.
In 2023, our clients had a heck of a time finding brand new or newer homes to acquire. And clients selling or planning to sell were not unloading new homes. This constrained the new construction home market for well off buyers unaffected by low affordability and high mortgage rates.
Fast forward to 2024, acquiring land in 2021/2022 was tough business to land a reasonable deal. What’s more, cities have been slow to recover employees and approval timelines when it comes to efficiently getting new homes permitted and inspected during the building process.
As a result, new construction and newer home inventory will be tough to come by, as well as inflation scaring away many buyers from building themselves thanks to nosebleed level building costs.
Wealthy buyers will still demand beautiful, new homes that bring ease to their lives and due to incredibly strained inventory, new construction homes will outperform existing resale homes when it comes to the price they ultimately capture.
Long-Term Bet: Higher Rates – Forever
I stole this “Higher Rates – Forever” quote from stockbroker and financial commentator, Peter Schiff.
To me, it makes sense.
If you believe that we will avoid a Great Recession/Great Depression event, or a pandemic, then it is unlikely we will see rates much lower than 4%.
To give credit to Schiff, let me share his quote via X (formerly Twitter): “What’s missing from the ‘higher, for longer’ interest rate narrative is that it’s actually ‘much higher, forever.’ The days of ZIRP are over…”
And I agree with him.
The real estate market of present day with Millennial family formation just beginning (albeit late) looks a lot like Boomers in the late 70s through the 80s. Everything these generations touch in their prime money-making years will grow.
As Millennials finally build families, the demand for homes will continue to grow.
So where am I going with this?
The demand for homes is going to be here in a big way and the government does not need to drop interest rates to historic lows to spur demand. In fact, higher interest rates forever (or at least over the longer term) are probably the best move for a stable and healthy housing market.
It’s a long-term bet so we will not know for some time; I just do not believe we will see 30-year fixed interest rates lower than 4% for a long time, if not forever, without a catastrophic economic event.
There it is! Another year of South Bay Real Estate Fearless Predictions.
I hope I am wrong about low supply, elevated interest rates, and uninspiring price growth. But you know that I’ll always keep it real on the blog.
2024 will go down as the year that the South Bay home market returns to normalcy.
That is not without the challenges of low affordability and sticky high interest rates, but 0% to 5% appreciation for the year is a nice way to see the market slide back into slow and steady growth – truly what real estate is all about.
Here’s to another fabulous year. Our team at Haynes Real Estate is wishing you all the best!