Winter Housing Market
Mixing a chronically low inventory with rising demand has always resulted in a much hotter housing market as winter progresses.
Laguna Beach is renowned for its beaches, coves, coastal parks, art galleries, trollies, and spectacular ocean views. Tourists flock there year-round, but it becomes exceptionally crowded during the summer after the kids get out of school. To beat the crowds, many arrive for vacation in May or early June only to be greeted with a thick layer of coastal fog that has trouble burning off during the day. At times, it can be pretty chilly. May and June are typically the cloudiest days of the year, often referred to as “May Gray” and “June Gloom.” Vacationers during these months have preconceived expectations of bathing on sun-soaked beaches and admiring picturesque sunsets, yet the gloomy cloud cover can last a week without sunshine.
Similarly, buyers who start their home search have preconceived expectations. Many expect plenty of choices, less buyer competition, and a slow pace that enables them to take their time isolating a home. Yet, in Southern California during the Winter Market, from mid-January to mid-March, buyers find that the pace of housing is a lot hotter than they initially anticipated, with fewer choices and plenty of buyer competition. In addition, as winter rolls along, the market grows stronger and stronger.
Regardless of the year or economic situation, the housing market always revs its engine starting in mid-January. It continues to accelerate weekly, like a hot rod in a drag race. The inventory of available homes to start the Winter market last year was at 8,189, the third lowest mid-January reading since tracking began in 2012, only behind 2021 and 2022. By mid-March, the start of the Spring Market, the inventory had dropped to 7,229, a small drop of 960 homes or 12%. Demand, a snapshot of the number of new escrows over the prior month, soared higher from January to March, increasing from its lowest levels since tracking, 2,269 pending sales to 3,622 in March, up 59%, or an additional 1,353. The Expected Market Time, the time between coming on the market and opening escrow, decreased from 102 days to a much hotter 60 days by spring, an eye-opening difference of 48 days.
Demand was still at its lowest levels since tracking began throughout last year’s Winter Market, but it was paired up against an ultra-low supply of available homes. Despite the low demand readings and fewer closed sales, the market was hot, and home values rose again after falling from July to December 2022. Due to the high mortgage rate environment, homes were not skyrocketing higher as they did from 2020 through the first half of 2022, but they were on the rise, and negotiations favored sellers. It was a seller’s market. Multiple offers had returned, especially in the entry-level price ranges.
In looking at the 3-year average before COVID, (2017 to 2019) when markets were more normal, the inventory grew during the Winter Market from 10,633 to 10,983 homes, up 3%, or 350 additional homes. Demand shot up from 3,663 to 5,461 pending sales, up a considerable 49%, or 1,798 additional pending sales. The 3-year average Expected Market Time dropped from 86 to 63 days, shedding 23 days. The inventory does not always rise during the season. Instead, it has fallen in six of the last 12 years, 50% of the time. Demand has consistently increased, and the Expected Market Time has plunged without exception.
In November and December, the fewest homes are placed on the market. A lot more enter the fray starting in January, double December’s readings. Still, the numbers pick up even more substantially during the Spring Market, from mid-March through the end of May, and remain elevated through the summer. Even with lower demand levels due to the higher interest rate environment, this year's inventory will only slowly grow during the Winter Market. Yet, if rates drop from where they sit today at 6.87%, the supply could remain flat or even fall like last year. Contributing to the supply crunch is the fact that homeowners are “Hunkering Down,” unwilling to move due to their current underlying, locked-in, low fixed-rate mortgage. 85% of all Californians with a mortgage have a rate at or below 5%. There were 34% fewer new sellers in 2023 compared to the 3-year pre-pandemic average, or 30,530 missing FOR-SALE signs. Today’s inventory is at 7,436 homes, astonishingly lower than the pre-COVID average of 10,633 homes, 30% lower.
Demand will increase substantially from now through mid-March. Today’s 2,442 demand reading is the second lowest since tracking, only behind last year’s 2,269 pending sales. The pre-pandemic average was 3,663, a sizable 50% more. Nonetheless, there will be a lot more activity. An increasing number of buyers will start the process of searching for a home. The number of new prospective buyers will outpace the number of homes coming on the market, even at these muted levels.
With the inventory not changing much and demand surging higher, the Expected Market Time, the pace of the market, will fall, and it will be a red-hot winter this year for housing.
