Realtors explain SLO County’s 2022 housing market struggle

Realtors Hal Sweasey called 2022’s market “bipolar,” pointing to an “incredibly strong” first quarter performance before increases in interest rates by the Federal Reserve threw “a wet blanket on demand.”

There were factors that kept demand high locally, however, Sweasey said, including remote work.

“This was huge and was one of the factors in the massive increase in home sales and prices increased in SLO County in the last 2.5 years,Sweasey said.

That swing was not unique to SLO County.

According to the California Association of Realtors’ 2023 Housing Market Forecast, in 2022, two thirds of California home buyers worked remotely — 47% full-time and 20% part-time.

That same market forecast found that remote work influenced 64% of all buyer decisions in California, as high-paying, flexible jobs that could be conducted from any location drove thousands of buyers to choose their ideal destination.

However, most Realtors agreed that the critically low housing stock ruled the 2022 housing market.

Realtor Graham Updegrove said the early seller’s market of 2022 cooled because there was no local inventory available. Even though demand was high, when mortgage rates soared, sellers suddenly had no reason to sell their homes.

“Low inventory is the new normal, and there are a lot of homeowners who are ‘rate-locked’ staying in their existing homes,” Updegrove said. “These are the owners who bought or refinanced at 3% mortgages and have minimal to no motivation to trade in that mortgage for 6% plus.”

Going into 2022, unsold inventory already was at its lowest ever in California, the CAR report found, bottoming out in September 2021, at 1.2 months of inventory ready to sell.

That left a tight, immutable, cool market toward the end of the year, said Realtor Barry Brown, even though there was a silver lining.

“Although some thought the loss of jobs during the pandemic would cause foreclosure inventory as it did in 2008 to 2012, that was prevented by allowing those in trouble to postpone making payments until the pandemic eased,” said Brown. “This relief has allowed those possible forecloses to be avoided and there (isn’t) any kind of ‘shadow inventory’ that is coming.”

The construction industry still feels the cost of inflation

Realtors and leaders in the construction industry agreed decisively on one thing: There are not enough homes to go around in California, and even fewer in SLO County.

Jim Moresco, chief operating officer at Midland Pacific Building Corp., said the supply shortages that tamped down home sales similarly limited the construction industry’s efforts to meet demand.

“It was a constant struggle,” Moresco said. “Almost every day we were hit with new cost increases. We would inevitably have to pass those costs onto the buyer. And inflation made it impossible to budget for new projects. We know what construction costs are today, but with inflation like it was, how do you budget for a project you won’t actually start building homes on for years down the road?”

Anything wood-based, Moresco said — including lumber, trusses, doors, cabinets, siding and trim — saw their prices skyrocket when inflation began climbing.

“The easier question is, ‘What materials or parts of the supply chain do not pose problems?’ ” Moresco said. “And the answer to that is ‘paint.’ ”

Challenges with wood running up and down the supply chain, as sawmills failed to run at full capacity and met the always-high demand, but the challenges did not end there, Moresco said.

The computer chip shortages throughout the year also dramatically slowed the production of homes, Moresco said.

“Nothing gets made these days without microchips,” Moresco said. “So when the world had a chip shortage, so did we.”

Microwaves, refrigerators, water heaters, garage doors, electronic locks and any appliance that comes in a fully furnished home, Moresco said, suddenly added several months to the construction time of a home.

None of that helped alleviate the shortage of inventory. Moresco said it was keeping SLO County homes hard to come by.

According to data aggregated by the Federal Reserve Bank of St. Louis, at its peak, the San Luis Obispo-Paso Robles-Arroyo Grande metro area topped out at 480 available listings on the market in August 2022. In December, that fell to 402.

In order to meet current demand, 180,000 housing units a year must be built in California, Moresco said, but the construction industry averages 100,000 units a year, and has not reached 180,000 units since 2005.

“We would need to double the amount of homes we build a year just to meet demand,” Moresco said. “And that doesn’t take into account the 18 years or so of pent-up demand we have.”

Remaining inventory left in a tight spot

So, who got the remaining inventory, which ended the year higher in price than ever at $921,500 on the Central Coast and in low supply, all while being pursued by buyers with more money and flexibility than ever?

According to Brown, the buyers with the highest chance of getting into housing are people with high financial security.

“Some people think that housing prices will see a significant decrease,” Brown said. “Again, I don’t see this occurring due to a lack of supply. I hope buyers will understand the economics of supply and demand and realize a home, if purchased and held, has historical performance in increasing wealth and strong families.”

Housing affordability — which the National Association of Realtors defines as “whether or not a typical family earns enough income to qualify for a 30-year fixed mortgage loan on a typical single-family home without spending more than 25% of the income on payment for principals and interests” — cratered in 2022.

Housing affordability hits its lowest point — 16% in the second quarter of 2022 — since hitting 12% in the second quarter of 2006.

The homes that can be resold, CAR’s 2023 Housing Market Forecast said, faces an interesting dilemma when they are purchased by investors.

Since 2014, what investors choose to do with purchased homes has varied drastically, between flipping the property for further resale and profit or operating the property as a rental.

Though the percentage of California homes flipped for profit had begun to trend upwards as recently as 2021, in 2022, that figure plunged to its lowest level.

In 2022, just 18% of properties purchased by investors in the state were flipped, compared to 82% of properties being operated as rentals, and down from 29% flipped in 2021.

Updegrove attributed this trend to strong rental performance by investors, and said the trend toward rental investments is expected to continue in 2023.

Additionally, Updegrove said the stability of real estate as a form of investment has provided an enticing way to diversify investor portfolios.

“Cheap money, strong appreciation and the emergence of HGTV fueled the house flipping trend, as many investors and DIY’ers saw this as an easy way to make money especially in a trending up market,” Updegrove said. “With strong rental growth and the ability to leverage, real estate makes a great asset that builds wealth over time.”

Although the SLO County and California housing markets are entering a more stable period than the previous year, Updegrove warned that local supply would likely not meet demand for the foreseeable future.

Fissori was slightly more optimistic about the future of the housing market, and said the coming year may be the only window to get into a buyer’s market.

“As the Federal Reserve data shows, home prices only go up and always recover from recessions no matter how mild or severe,” Fissori said. “Long-term homeowners should view this market as a unique buyer opportunity. Much like in 2012 when people were saying it was crazy to buy real estate, those who did are experiencing the most gains in recent history.”

this story was originally published January 24, 2023 5:30 AM.