A Correction…Not a Crash

The Market is Changing, But That’s Okay

In the coming months you will be hearing more and more about changes in the real estate market. Some of these voices will claim the sky is falling, that we are around the corner from the next market crash like we experienced in 2008. I anticipate, however, that we are in the early stage of market correction and not a crash. Here’s why.

The San Diego real estate market has increased 40% since 2014. These gains were brought on by a perfect storm of low inventory, limited new construction, increasing population and high buyer demand. Consistent year-over-year gains in home values were the result, pushing many potential buyers out of the market. The affordability rate, the percentage of the county that can afford the median priced home, is now at the lowest level in decades. Being in the midst of a “good market” has come at great cost to many.

Rising interest rates, it would seem, has finally put the breaks on rising home values. For the first time in six years, we are starting to see values decline in some areas as well as rising inventory. An increasing number of buyers have become priced out of the market. As inventory increases, prices will necessarily decrease. I would make the case that this decrease is actually quite healthy for our economy and should be a welcome change. With additional inventory, many home owners will enter the market, feeling more confident in finding their next home. Affordability will increase over time as well, perhaps even helping first-time home buyers who have struggled in recent years.

I believe we are entering a period of a real estate market correction, not a crash. With GDP growth over 4%, the economy is strong. Our market has simply reached the peak of what buyers can afford. As the economist Herbert Stein famously said; “If something cannot go on forever, it will stop.” A move from a strong seller’s market to perhaps one that is a bit more balanced, is nothing to fear. Far from causing panic, we should welcome the change.