Article published on December 26, 2022.
The bustling streets of Los Angeles, the thrilling nightlife in San Diego, and the scenic views in Orange undoubtedly makes Southern California a preferred place to settle.
Americans dream to live in this beautiful region, which ultimately accelerates the real estate value of South California.
Indeed, the housing market of South California holds magnificent rewards for real estate investors.
But with the recent downturn in the housing market, is it even worthwhile to invest here?
Well, you’re just at the right place to find your answers.
Read along to learn about the 2023 forecast of the South California real estate market and identify the investment potential it holds!
Market Conditions in 2022
The raging hot housing market of California cooled down in 2022. Here are several facts that corroborate that the market is pacing at a slow rate.
Only 38,356 homes were sold in the third quarter, which is 31.8% less than last year. Similarly, listing activity rose 41.6% compared with the previous quarter, showing inventory buildup.
The home prices in Southern California also rose at a decelerating rate. For example, the prices were 4.6% higher this quarter compared to last year but were 7.1% lower compared to the previous quarter. According to CAR’s recent release, the following is the change in price growth in top counties:
- 0.6% increase in Los Angeles
- 4% increase in Orange
- 1.2% increase in San Diego
- 4.6% increase in San Bernardino
It took 25 days to sell a property in the third quarter, which is 7 and 9 days more compared to last year and quarter, respectively.
Projected Outlook of Real Estate in South California 2023
If we consider the 2022 housing data, the mortgage rates in Southern California will stay elevated at 6.6%. However, some reports, such as the Mortgage Banker Association, suggest that rates might fall to 5.4% by 2023.
This is a great sign, which can improve the home affordability index for buyers.
Secondly, let’s talk about the home prices. With mortgage rates rising, it was expected for the home prices to fall to offset the increase effect. However, this hasn’t been manifested yet in the South California housing market. Fortunately for the buyer, one positive proponent is that the home prices are increasing at a decelerating rate, meaning that the prices are rising but at low rates as compared with the past.
For 2023, some analysts are of the opinion that development will be slow, while some firmly believe that prices will rise but at slow snail-trailing rates. However, the recession continues to grow stronger, and some analysts even predict that home prices in Southern and National California might fall in 2023.
This hasn’t happened in a decade, but the sellers have no choice. The demand continues to fall, and sellers have to lower prices to make the sale. However, one noteworthy aspect is that inventory is still tight, so price decline isn’t expected as of now. But, who knows? After all, the rates are rising and it’s possible that sellers will slightly decrease prices to make the sale.
Plus, the statistics from the California Association of Realtors also confirm this prediction. The statewide and Southern California prices may also decline by approximately 7%, while the median home price will reduce by 8.8% to $758,600 in 2023.
Even though the prices might decline, it’s a great sign since the investors might find it affordable to purchase real estate. In addition to this, the real estate value in absolute terms along with the effect of mortgage rates will appreciate in 2023.
So, what does it all mean?
Summing it up, it seems that FY2023 will be favourable for real estate investors. The sustenance of mortgage rates plus the tight home inventory levels will continue to appreciate home’s value, which can ultimately increase capital returns for the investors. A jackpot!
Multi-Family vs Single Family Homes
Both multifamily and single-family homes experienced a decline in sales in 2022. In South California especially, the sale of single-family real estate dropped by 40%. Why is that?
The rising mortgage rates along with increase in home prices is responsible for causing this decline. Even the figure below confirms the stance that price rose for both real estates in South California.
For 2023, Redfin predicts that rents will fall because there’s a high supply of rentals, especially in the San Diego region. Plus, multifamily construction is at 50-year high, meaning that there are several buildings available for rentals.
Therefore, the second opportunity for real estate investors is to purchase properties and rent them out. People always need a home and with individuals delaying their purchases, the demand for rental properties will surely rise.
The Primary Drivers
The 2023 forecast outlook for the real estate market of Southern California is based on the following essential factors.
The CPI will be slightly higher than in previous years. As per September reports, it increased by 8.2% over the last twelve months. This trend is likely to continue in 2023 due to rising wages and an increase in consumer expenditure.
Furthermore, the FED’s attempt to combat the inflation effect will keep the interest rates in a similar position.
Mortgage rates practically determine the cost of house loans. Since inflation is expected to be higher, rates will likely follow a similar pattern. Following are the rates for different loans as of September 2021:
- FHA: 8.75% for a 30-year loan while 8.25% for a 15-year loan
- USDA: 3.25% for single-family direct home loans
- VA: 6.74% APR for an average 20-year loan
Furthermore, the rates for 30-year conventional loans were lurking at 6.11% compared to 2.9% in September 2021.
However, for 2023, it’s projected that rates may drop to 5.8% or 6%.
High Cost in Southern California
Settling in Southern California is a dream of many families. After all, the beautiful weather, lifestyle, career opportunities, and scenery makes it an irresistible place.
However, this is one of the reasons that property prices are quite high in this region. For example, CAR data reveals that the average home price for single-family homes is $743,000, which is 2% higher than last year but still down by 8% from May.
But that’s just the cost of an average county!
The typical home cost in Orange is a whopping 1.2 million. So, if someone who puts a 20% down payment sets aside one-third income for housing costs, they must have a disposable income of $278,000. Now, that’s massive, and as a result, only 13% of households living in LA or Orange can afford a reasonably-priced home in these counties.
Even though listings have increased compared to the second quarter, the time taken to sell a home is rising. For example, it took an average of 47 days to sell a home in Orange and LA.
First-time homebuyers face a tough time purchasing a home because existing homeowners can use their equity to make purchases. The millennials are expected to drive the market, but with the recent job losses, it seems that they need time to settle and get mentally prepared to purchase their home.
With the rising rates and expected fall in home prices, most individuals will wait and delay their purchasing decision till the rates drop. Hence, more and more households will prefer to live in rental properties.
The 2023 housing market outlook shows that Southern California might be a little favourable for the buyers. But let me remind you: the entire forecast is based on historical data and analyst opinions. In this market, any new policy, announcement, geopolitical news, or government decision has the power to shift the outlook completely.
For example, the suspension of the Ukraine war can ease global inflation tension. Similarly, the midyear election results may also impact the housing industry. So it all depends on numerous factors – which are outside the control and scope of anyone.
However, as per current analysis and opinions, the housing industry will progress slowly and bring rewards for real estate investors in 2023.
Do you want to sell or acquire property?
JLM Real Estate in San Diego can help you today and provide you with a free property valuation.
Check out our team page and check which one of our advisors best fit your needs.