Supply and Demand Impacts Home Prices

Supply and Demand Impacts Home Prices

  • Renee Grubb
  • 11/9/22

Real Estate Update

Having been in the real estate business since 1984, I’ve seen numerous cycles come and go, and I have always embraced a long-term time horizon. The real estate market, like all markets, ebbs and flows, it’s fluid and ever-changing. How we, as professionals, interpret and navigate market conditions to deliver the best outcomes for our clients, in any market, reveals who the true professionals are. 

Success in brokerage is a craft of commitment, learned and honed over time. Needless to say, the local market has changed dramatically over the past few years, and consistent adaptation was and is necessary to excel. As a broker, or as a consumer, it is imperative to pay attention to local market fundamentals, and as best you can, ignore some of the more fear-inducing, armageddon-like headlines.

To understand what is happening now in the Santa Barbara real estate market, we need to provide some context.

In 1990, the annual median price for South Santa Barbara County was $272,000. The annual median price in 2021 was just under $1.5 million, meaning, the average annual appreciation from 1990 to 2021 was approximately 6.3%. 

In 2020, median price rose 16.6% year-over-year, and in 2021 median price rose 24.4% year-over-year, well above historical norms. During this 32-year time period, prices declined annually eight times, and only three of those years declined by more than double digits (1992, 2008, 2009).

While we’ve seen a slight retrenchment in price over the past few months from a peak in April/May, median price remains markedly higher in 2022 than in ’21. Median price in the third quarter of 2022 was $1.6 million, up 13% from the third quarter of 2021. 

With notable weakness in the equity and bond markets, and interest rates’ meteoric rise from the beginning of the year, why have prices in Santa Barbara continued to rise? 

Unsurprisingly, the answer lies in a sustained undersupply of inventory. 

At present, we have 1.4 months supply, which means, at the recent sales pace, it would take between one and two months to sell every home and condo on the market (typically three-six months equals market equilibrium). Earlier this year, we had less than one month’s supply, meaning for every home on the market, there were more than 12 buyers. For reference, in 2018 and 2019, months supply averaged around 4.5 months. 

Whereas early this year and last year there might be 10 or more offers on a subject property, extreme competition has since faded. In April, the Sold-to-List Ratio (measuring how far above/below the asking price a property cleared) was 106%, meaning on average, homes closed 6% above the list price. For the first time in a while, August and September show that on average, homes are closing at 99% of list price.

Even though it has been and remains a seller’s market, sellers are reluctant to sell unless they really want or need to: be it down-sizing, needing more space or moving out-of-area to be closer to family. It’s difficult to find a replacement property, and they may not want to finance the purchase at current interest rates, likely much higher than their underlying mortgage. 

So with an undersupplied market, and limited new construction of any scale, it’s reasonable to assume we find ourselves in this market for some time. Even if rates continue to rise and if pricing softens off the highs, it seems there are still plenty of qualified purchasers seeking to own property in our slice of paradise. 

While we love long-term price appreciation, it may be a good sign for the market in the long run to take a breath and normalize after the craze of the past few years.

But, while these are general comments, every neighborhood and submarket is different.

And to any of you builders out there, if it’s not clear already, we need more inventory!

Over the coming months, this column will feature market commentary and insights from me as well as from several of our experienced agents, so stay tuned!

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