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 to 5 month mark.  February 2024 California unsold inventory was still only 3 months. The California year over year median price rose 9.7% in February 2024 to $806,490. This is in spite of a very low traditional affordability index of 15% and high 30-year rates just under 7%.

The Fed Funds rate showed a reasonable spread between the 5% to 5.25% level and the August 2023 inflation rate. However, inflation is slowly rising so we don’t expect any Fed rate cuts this year. It is clear to us that low supply is the only reason prices maintain their general upward momentum. 

The data below shows the Fed Funds Rate being historically at or above the inflation rate. As you can see below, as of March 2024, the Fed Funds Rate (5.25%% to 5.5%) is  at 200 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 March 2024 (year over year) was reported at 3.5%.   As of March 2024, the 30-year fixed rate was about 130 basis points higher than the Fed Funds rate and about 200 basis points above the inflation rate. Hence, we’re not expecting any significant rate drop over the short term.  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:

If inflation continues its upward trend, 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 1st quarter 2024  affordability index was reported at 15% .  If you read our charts, you’ll know that under normal circumstances this would imply price declines are likely. However, low supply is not a normal circumstance with high interest rates. We believe supply has a way to go before  median prices trends change course . Unlike the last time the traditional affordability index was at this level, we now have some mitigating factors (in addition to supply levels) 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 (April 2024). 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. to 5