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Where are we in the current real estate cycle?

 Our experience here at Wiest Realty, Inc. (CA DRE 01183800) has taught us that many “investors” have little or no understanding of real estate cycles.  We can’t count how many times investors have asked us  -“when will the next recession start?”  Most of us are concerned about the bottom line which is price movement. When will prices drop (or when to sell) and when will price increase (when to buy).  Median price trends don’t necessarily correspond with recession cycles. It’s just as important to know what’s happening as well as why it’s happening.

We don’t expect major median price declines until supply starts pushing the 4.5 month mark  August 2023 California unsold inventory is still only 2.4 months. California year over year median price declines have been happening since November 2022, however, that changed in March 2023 with only July 2023 showing a year-over-year median price decline.

The Fed Funds rate showed a reasonable spread between the 5% to 5.25% level and the August 2023 inflation rate. However, Inflation is on the rise again thereby suggesting more Fed increases and corresponding increases in mortgage rates. 

The data below shows the Fed Funds Rate being historically at or above the inflation rate. As you can see below, as of September 2023, the Fed Funds Rate (5.0%% to 5.25%) is finally at 150 basis points over the inflation rate. The 30-year fixed rate APR has historically been above the Fed Funds Rate and the inflation rate. Inflation for August 2023 (year over year) was reported at 3.75%.   As of September 2023, the 30-year fixed rate was about 200 basis points higher than the Fed Funds rate. Hence, there remains a little more upside for mortgage rates.  If you’re thinking of holding off on selling – remember it took 16+- years (adjusted for inflation) for the 2022 median price peak to equal the 2008 price peak. Do you want to wait that long to sell? 

Here’s a close up view of the gaps between rates:

 We think more rate hikes will be necessary before the Fed’s 2% inflation target will be met.    

What’s worse is the California single family 2nd quarter 2023  affordability index was reported at 16% . If you read our charts, you’ll know that there is a way to go before  median prices trends show a sustained and strong increase. Unlike the last time the traditional affordability index was at this level, we now have some mitigating factors that may lessen the impact on median prices. 

Momentum data indicates that year-over-year median prices crossed the zero line in March 2023. This is generally considered a buy signal. However, it’s too early to tell if the upward momentum will be sustained. Check out momentum charts on our web site.  

Data suggests the wealth building stage in California could be recovering in spite of high interest rates. 

  Factors that were not present during the last crash include:

1. Home owners are sitting on much more equity now. Thus, a greater buffer exists before negative equity develops. Owners have not used their homes as ATM’s this time. However, savings rates are decreasing rapidly. Between December 2021 and December 2022 the personal savings rate dropped over 54%. Savings rates are still below 5% of disposable income. 

2. Owner FICO scores are generally higher now than they were during the last crash. Consumers are more financially responsible this time.  However, consumer revolving debt hit a new high of just over a trillion dollars. That’s not a good sign.

3. Slightly over 80% of primary residential mortgage loans in this country carry an interest rate below 4%. This suggests that homeowners will not be willing to enter their move-up market where 30-year fixed rates are now in the 7%+- area (Septmeber 2023). Hence, this lack of upward move-ups would suggest downward pressure on supply will continue. Adjustable loans may help the move-up market and thereby increase supply, however, at this point, it’s too early to tell.

4. Homeowners are in a good position when it comes to debt service as a percent of personal disposable income.  As of Q2 2023, debt service payments relatively low.  This should mitigate supply increases.

If you’re thinking of selling, you’ve missed the peak in our market area. However, the good news is, media prices are now generally increasing. Note how year-over-year median price momentum has risen above the 0% line. Low supply is keeping prices high in spite of low affordability and high interest rates.  

Don’t try to arbitrarily time the market with preset dates or time frames. Look for economic events before making your decisions.  We’re here to help. Feel free to call us for our take on the important economic events that we use for our own investment decisions. Check out our “Leading Indicators” page (and drop downs and “buy-sell” indicators) for information and our observations on key indicators. Or, fill out the “Contact Us” page with your questions or suggestions.

We decided to develop this website as your real estate EKG. We believe any prediction of a recession should be based on events; not on an arbitrary guess at a time frame. 

The intent of this site is to provide you with timely information  regarding macro/California trends as well as local High Desert trends.  Basing your real estate decisions on hard data is preferable to pulling the trigger based on gut feelings.

What are your objectives?

This website is designed for the small or first-time real estate investor. As such, we find that many investors don’t have clear objectives.  They simply put one foot in front of the other either” buying and flipping” or doing the typical  “buy & hold” scenario.  One way  to start is to set a goal, put a plan in place and then follow it.  

Do you know:

▪ What your yields would be  on your individual properties  if you sold today, next month, next year? 

▪ What annualized yield you need on your assets to achieve a monetary goal by the time you retire?

▪ Where will your yield come from or how it will be divided; cash flow or when you sell?

▪ Is it better to sell high prior to an anticipated recession and buy low when prices rebound?

▪ What property type is best to meet your life style, management skills, and time constraints?

▪ Should you invest locally or out of state?

Historic data like that presented on this website is intended to help you answer the questions above.  Making intelligent buy/sell decisions will help to achieve your goals.

So many investors wait until it’s too late to sell and end up chasing a declining market with lagging price reductions. Remember the old saying ” pigs get fed, hogs get slaughtered”?  We believe the tendency for sellers to get that last dollar before a down-trend leads to their demise.  Isn’t it  better to sell a little early and leave something on the table for the next investor than to try to time your sale to the exact moment of an anticipated price peak?