2025 So Cal Housing Market Forecast

Sales Down Seasonally but Fundamentals are Healthy for 2025

Sales at new home projects slowed in Q4, driven primarily by seasonal trends along with some price fatigue among buyers. The hope of lower mortgage rates failed to materialize, preventing any improvement in affordability and keeping some buyers on the sidelines. However, new home demand remains relatively strong, supported by limited new and resale home supply and a healthy job market. Although price appreciation will likely be muted due to affordability challenges, we expect strong new home sales in 2025.

• New home sales in Southern CA averaged 2.5/project/mo in Q4 which was slightly below 2023 (2.7) and slightly above the 2016 – 2019 pre-COVID average (2.3/mo/project) for the same quarter.  Sales were strongest in Orange County and San Diego County, both averaging 2.7/project/mo in the quarter. It is important to note that Q4 is typically the slowest quarter of the year due in part to the holidays and the onset of colder weather

• Corresponding with the uptick in mortgage rates, cancellations rose to an average of 17% in November, falling back down to 13% in December. The average for all of Q4 was 15%, up from 12% in Q3. A cancellation rate in the 10 – 15% range is considered typical. The 2016 – 2019 average for Q4 was 18%. San Diego County had by far the lowest cancellation rate in Q4, averaging just 11%, and the Inland Empire and Los Angeles County recorded the highest average rates (18%).
  
  

2025 FORECAST

New home projects continue to benefit from mortgage rate buydowns not available in the resale market, allowing buyers to access sub-6% fixed rates. Although Incentives rose in Q4 and will likely be sticky in the near term, overall prices should remain steady. There were just 455 active new home projects in the SoCA region as of Q4, which is 47% below the historical average over the last 30 years and well below the nearly 600 projects in 2017 – 2019. The lack of new home supply in the region, while contributing to poor affordability, will support strong new home sales in 2025.

Clarity Real Estate Advisors provides real estate decision-makers with research-based insights into market dynamics and product trends. 

CA Economic Powerhouse

California is the Nation’s Economic Leader

California remains the economic powerhouse of the nation, with a GDP of $3.2 trillion in 2023—far surpassing Texas ($2.0T) and New York ($1.8T). With 18.4M employed workers as of October 2024, California’s workforce is nearly 4 million stronger than any other state. 

If California were its own country, it would rank as the fifth-largest economy globally—just behind Japan and ahead of India—despite its smaller population.

 Los Angeles County leads the U.S. with the highest GDP by county, contributing $802 billion. Four of the top 10 counties by GDP are in California, highlighting the state’s unmatched economic vitality.

This economic strength significantly impacts job creation and housing demand. Our team specializes in helping clients like you assess market feasibility for new real estate developments and supporting planning departments in forecasting housing needs.

Ready to plan for your housing market goals? Let us help you align your strategy with California’s dynamic economy. 

The Un-Baby Boom - Americans Aren't Having Babies

We often work with our homebuilder and apartment developer clients in helping to identify the highest and best residential use for a particular property, culminating in recommendations as to whether to offer for-sale vs for-rent homes, attached vs detached product, optimum bed/bath counts, number of stories and parking. Our recommendations are market-based, derived from a combination of inputs including attributes of the site itself, the performance of market comps, interviews with sales and leasing agents, and economic and demographic trends. A recent demographic trend is having major implications regarding near-term housing market demand and what housing products are best suited to address this trend.

Rachel Wolfe of the Wall St. Journal (WSJ) recently authored an insightful article titled “Why Americans Aren’t Having Babies.” According to Wolfe, “Americans aren’t just waiting longer to have kids and having fewer once they start—they’re less likely to have any at all.”



According to the U.S. Census, there were only 3.596M babies born in the U.S. in 2023. That’s a lot of newborns; however, that is the lowest number of births in one year since 1979—a stretch of 45 years. During the decade of the 2000s, there was never a year with less than 4.0M births.

The prevailing wisdom ten years ago was that Millennials (born 1981 to 1996, now 28 to 43 years old), who were delaying marriage and childbirth, would behave as generations had before them, and eventually start reaching those milestones, just a bit later in life. To an extent, this has largely been the case, and first-time buyer Millennials with young children now represent a sizable chunk of the new home market. However, what comes next with the youngest Millennials and with upcoming Gen Z (born 1997 to 2012, the oldest of which are already 27 years old) may be quite different.

More telling, the “crude birth rate” (the number of births per 1,000 women) was just 10.7 in 2023 – the lowest in the entire history of the U.S. Yes, the lowest since the founding of the country.

Increasing numbers of households are like Beth Davis and Jacob Edenfield, a married Millennial couple who aren’t having children. Davis told WSJ reporter Wolfe, “People told me when I was younger, ‘Oh, you’ll grow into it…you’ll want to start a family,’ and that just did not happen.” The couple, who earn a combined $280K/year, rent a townhome. They dine out at upscale restaurants, work-out at a high-end wellness center and recently paid cash for a BMW.

So, what does this mean for the housing market? At a high level, it means LESS demand for large family-oriented homes, less demand for extra bedrooms, and less demand for conventional single family detached homes. On the flip side, it means MORE demand for homes geared to childless households, more demand for homes with fewer bedrooms, and the opportunity for homebuilders to push densities. This could all be a good thing.

Going forward, particularly in high-cost states like California, where housing affordability is near record lows, we are recommending that our clients consider developing more product geared towards households without children, meaning more attached product (both for-sale and for rent), including not just side-by-side townhomes, but stacked flats as well, and smaller size units in both the rental and for-sale markets. For rentals, we’re looking at studios in the 400 and 500 sf range, up to two-bedrooms in the 700 to 900 sf range. For for-sale homes, the “sweet spot” for townhomes is typically in the 1,200 to 1,600 sf range, while stacked flats is more typically 600 to 1,400 sf. We are exploring other new concepts as well.

Clarity Real Estate Advisors provides answers to all of your real estate market feasibility questions. Our clients include public and private homebuilders, apartment developers and operators, private equity investors, land bankers, pension funds, bond issuing agencies, and the public sector. Our goal is to help you make the best market-based decisions. We provide Clarity

SoCal New Construction Way Behind other Metros

We know new home construction is undersupplied in SoCal, but how does it stack up with other major metros? There were just 453 active new home projects in the SoCal region as of Q3, which is 47% below the historical average over the last 30 years. Remarkably, the entire region currently has fewer active projects than the far smaller individual metros of Atlanta, Phoenix, Houston, Dallas/Fort Worth, and Atlanta. The Los Angeles/Orange County metro area, considered the most undersupplied metro in the country, has just 11 – 13% of the number of projects as Houston or Dallas. 

When comparing the metro’s population per project, the contrast is even more striking. San Diego has nearly 7 times and Los Angeles/Orange County has nearly 10 times the average number of people per project in other major markets. Relatively limited new construction in SoCal is primarily the result of a lack of buildable land/lots, along with significant entitlement hurdles not present to the same extent in other metros. The lack of new home supply in the region has contributed to poor affordability but provides underlying support for home values that will likely preclude any possibility of a mid-2000s type of price correction in the future. 

Clarity Real Estate Advisors provides answers to all of your real estate market feasibility questions. Our clients include public and private homebuilders, apartment developers and operators, private equity investors, land bankers, pension funds, bond issuing agencies, and the public sector. Our goal is to help you make the best market-based decisions. We provide Clarity

3 Innovative Attainably Priced Housing Products

In our market feasibility work throughout the western U.S., we frequently collaborate with apartment developers and for-sale new homebuilders. They aim to introduce attainably priced workforce housing to the market catering to what's known as “the missing middle.” These households don't qualify for subsidized low-income affordable housing units but find today’s high new single family detached home prices unaffordable. Here are three quite different approaches, all successful in addressing this critical housing need.

Product 1

Urban Townhome (UTH) -5-4-3-2-1 by Urban Pacific -Shopoff

Urban Pacific Group has pioneered what they call their Urban Townhome Workforce Housing program, which they describe as 5-4-3-2-1 row townhomes. The side-by-side 3-story townhomes are designed for multi-generational living, creating a welcoming environment where grandparents, adult children and grandchildren can live together under the same roof. The idea is that mom and/or dad are working full-time, while grandma and grandpa contribute full or part-time earnings to the household income (possibly fixed income) or might contribute by watching the little ones.

5-4-3-2-1 describes the homes: 5-bedrooms, 4-bathrooms, 3-stories, 2-car direct-access garages and all family members living under 1-roof. Most of the homes are in the 1,700 to 1,800 square foot range. The product is designed for urban infill locations where multifamily rental units are mostly only studios and one and two-bedroom units, with little suitable housing for families. Several UTH properties have been built in the greater Los Angeles area, generally with from 5 to 15 units, and densities of 25 to 30 du/acre. The units have extremely low turnover.

Product 2

Build-to-Rent SFD with ADUs by Ravello Holdings, Inc.

While build-to-rent (BTR) single family detached (SFD) homes are nothing new, the twist here is that every lot was built with two homes, a main house and an Accessory Dwelling Unit (ADU). The units are rented separately. Four homes are plotted in an area of about 120’ x 110’ (2 main homes and 2 ADUs), yielding a density of about 8 du/ac.

Located in the high desert community of Lancaster, California, Vello Valley offers 172 homes – 86 SFD and 86 ADUs. The ADUs are 977 square feet, 2-bedrooms, 2-baths, with private enclosed yard space. The main homes are 1,246 to 1,437 square feet offering 3-bedrooms and 2 or 2-and-a-half baths. The ADUs lease just as well as the main homes due to greater affordability. The ADUs rent for $2,800 to $2,900/mo compared to about $3,200 to $3,900/mo for the larger homes.

The ADU is a nice alternative for households who are price conscious, but don’t necessarily want to live in a dense multi-family rental community. The community includes a central recreation center with a clubhouse, swimming pool, tot lot, fitness room and on-site leasing office. The community leased up at a pace of about 10 to 12 units/month when brand new back in 2021.

Product 3

"Endcap" 3-Story Row Townhomes by Various Builders

This is a concept that started coming to market in earnest several years ago and many new homebuilders now swear by it. This is a 3-story side-by-side row townhome program, but instead of having one unit at the end of each building, there are two end units, which we refer to as endcaps.

To plot efficiently, the endcaps are typically much smaller than the other units. This creates a double-win for a prospective buyer; the units are lower in price than the larger offerings in the same community, and they are desirable corner / end units with lots of natural light. Providing endcap units is also a win for the homebuilder, as the smaller footprint of the endcaps typically allows for an increase in the number of units plotted per acre (typically 20+ du/ac).

The example shown is Boulevard Park (Warmington Residential) in Escondido, CA. The endcaps (Plans 1 & 2) are 1,102 and 1,191 square feet, offer 2-bedrooms and 2-and-a-half baths and are priced in the $660Ks. The other plans range from 1,468 to 1,818 square feet with prices from about $725K to $825K. The community has been averaging a strong pace of five home sales per month.

Clarity Real Estate Advisors provides answers to all of your real estate market questions. We are happy to chat with you about how we can work together. Our goal is to help you make the best market-based decisions utilizing the most accurate and timely market data and trends, evaluated through our lens of decades of experience in multiple market areas and across multiple product types. We provide Clarity.

Buyers Flock to New Home Projects to Start 2024

The new home market started the year hot, driven by a slight decline in mortgage rates, limited supply, a decline in cancellation rates and renewed buyer optimism. New home builders’ ability to offer below market mortgage rates also continues to play a role in making new homes more attractive than resales.  January new home sales in all of the major Southern CA markets, which averaged 3.8/mo/project, topped the average from 2016 to 2023 for the same month (3.0/mo). Orange County is leading the pack with an average of 4.5 sales/mo/project in January (vs. 3.0/mo average).

Partially driving the higher net new home sales, cancellations in the first month of the year came in well below the average over the prior seven years (for the same month). Cancellations can be seen as a barometer of home buyer confidence in the market, along with current supply conditions (both new and resale). Cancellations in Los Angeles and Orange County were particularly low in January (6% vs. 11 – 14% avg).

The most successful projects offer attainably-priced higher-density attached product in core infill locations or affordably priced single-family homes in more tertiary submarkets. The following single-family detached neighborhoods stood out with 12+ home sales in January, all with price points in the high-$400Ks to high-$500Ks.

·        Marbella Pointe by DR Horton (Lancaster) – 13 sales

·        Baywood at Morgan Crossing by Pulte (Hemet) – 16 sales

·        Augusta at the Fairways by DR Horton (Beaumont) – 15 sales

·        Pradera Pointe by DR Horton (Winchester) – 12 sales

Elevated new home demand to start the year should be a prelude to a strong Spring selling season.

Clarity is the premier real estate market advisor on the West Coast. If you have any questions, please contact Pete Reeb (858) 774-7126, pete@ask-clarity.com, or Adam Artunian (949) 861-1876, adam@ask-clarity.com.

2024 So Cal Housing Market Forecast

2024 Southern CALifornia Housing Market Forecast

After weathering the storm of rising interest rates, the Southern California housing market found its footing in 2023. In fact, the first half of the year brought stronger sales than the years leading up to COVID and price growth erased much of the correction seen in the second half of 2022. Is there reason to believe the worst is in the rearview mirror? Will 2024 usher in a return to more “normal” market conditions? We think so based on the following trends:

• Low new home supply: Due to a dwindling lot/land supply and entitlement hurdles, the number of new home projects are well below historical norms. Just 474 new home projects are selling in the region, which is below the 871 average over the last 30 years and just a fraction of the 1,539 average in 2005 – 2007. There are many submarkets, particularly infill, with just a handful of new home projects selling. In addition to fewer projects, the average size of a typical subdivision has shrunk over the last few decades from about 120 homes to only about 75 today. 

• Tight resale inventory: As of November, there was just a 2.5-month supply of resale homes for sale in coastal markets and 3.5 months in the Inland Empire. A 4-month supply is considered typical when demand and supply conditions are balanced. Low supply has helped prevent any significant price declines in the second half of the year, despite elevated interest rates, and driven buyers to the new home market. 

• Interest rates have likely peaked: After rising to over 7% in recent months, rates are unlikely to go any higher. With inflation cooling, consensus is that the Federal Reserve will forgo any more interest rate hikes and may cut rates by Spring or Summer 2024. Lower rates will boost housing demand and ease affordability challenges. 

• Interest rate buy-downs: New home builders have benefited from buying down interest rates. This gives buyers access to lower interest rates, often below 6%, than available in the resale market. However, rate buy downs come with a cost to the builder, typically in the $20K - $30K range. 

• Job market still strong: Households with jobs buy homes and unemployment remains low. Although there are signs the economy may be slowing and consumer sentiment is somewhat gloomy, the proverbial “soft landing” is possible which would limit job losses. However, a recession would stifle demand and negatively impact prices and sales. 

• Foreclosures limited: An increase in distressed resale supply has historically put downward pressure on prices. The worry of a sharp increase in foreclosure activity associated with elevated interest rates has not materialized. Although up slightly over the last year, foreclosures remain near record lows.

Despite most trends being positive, there are some risks that shouldn’t be ignored:

• Poor affordability: As interest rates rose to 20-year highs and prices increasing 20 – 30% since 2020, affordability has dropped to the lowest levels since the mid-to-late 2000s. Per the C.A.R. affordability index as of the 3rd quarter, just 11% of households can afford the median priced home in coastal markets which is down from 23 – 28% in 2020. In the Inland Empire, 22% of households can afford the median priced home down from 46% in 2020. We regard poor affordability as a “red flag” with regards to future market health.

•  Election year: Historically election years have brought instability in the market. Uncertain of potential economic and political policy changes, buyers tend to sit on the sideline in the months leading up to the election. Expect a possible slowdown in sales activity starting mid-year.

The best opportunities will be in infill locations with limited direct competition, and affordable single-family homes in suburban and some tertiary markets. First time buyers coming out of rental apartments will look to attached infill communities where price points are more attainable. Other first-time buyers wanting a single-family home will be forced to move outside of core locations. Move-up buyer demand will likely remain somewhat constrained as most homeowners are locked in at sub-4% rates. However, the possibility of a significant drop in rates will unlock this buyer segment. Attached casitas and ADUs have become increasingly popular at communities throughout the region. These units help solve for affordability challenges by providing space for older children, parents, or extended family members. In some cases, ADUs can be rented out for additional income. 

We expect home prices to rise moderately in 2024, likely in the 2 – 4% range, assuming interest rates drift down slightly and the economy does not fall into recession. Although affordability continues to be a major concern, favorable demand and supply conditions should set the table for a stable housing market in 2024.

Clarity Real Estate Advisors provides real estate decision-makers with research-based insights into market dynamics and product trends. 

New Home Market Share Spiked in 2023

Despite little change in new home supply, the share of new home sales to total sales in 2023 rose to the highest level in years. Through October, 14% of total home sales in the major So CA markets were new homes. This is up from 9% in 2021 – 2022 and 7% in 2017 – 2018. Even more striking, new home project counts are actually below 2017 – 2020 levels.

Q2 Real Estate Analysis

Clarity Real Estate Advisors presents these key findings as part of their real estate analysis, to highlight the remarkable dynamic of Southern California’s New Home Market and showcasing a sustained rebound in Q2.

New Home Sales Remain Robust

Buyers have accepted the higher interest rate environment and have limited options in the resale market. New home sales in Southern CA have averaged 3.9/mo/project since January which is above the 2016 – 2019 average (3.3/mo/project). Strong sales are giving builders pricing power once again.

Cancellations are low

After spiking to over 30% in October and November of last year, cancellations have stabilized at below average levels (11 – 12%). A cancellation rate in the 10 – 15% range is considered typical historically. According to builders, most buyers are qualified at current interest rates and have limited options in the resale market.

new home projects near record lows

There are currently just 478 actively selling new home projects in southern California vs. 1,710 at the peak of the market in 2007. New supply is being curbed by a declining supply of land available for new home development, combined with rapid new home sales, and a lack of political will to approve new home communities. In addition, the average size of a typical subdivision has shrunk from about 120 homes a few decades ago to only about 75 today.

Fewer New Home Projects Coming to Market

The rise in interest rates in 2022 forced many new homebuilders to adjust home prices and introduced uncertainty regarding the viability of purchasing land for new projects. Many builders have pushed the pause button on new site acquisitions, and others who are currently in escrow are asking for extensions, waiting for signs of home price stabilization.

The slowdown in site acquisitions started in 2Q 2022 and accelerated into the second half of the year. With the typical lag time between site acquisition and the start of home sales, California experienced a big drop in new home project openings in 4Q 2022 correlating with the slowing of new site purchases. 4Q 2022 had by far the lowest number of new projects grand opening in a fourth quarter in at least the last five years—including 2020, when COVID first hit and builders last slammed the brakes on new deals. The 66 projects that opened in 4Q 2022 were 45% below the average of the prior five years (121).

We recently conducted a survey among our homebuilder and investor clients asking them for their outlook on their market areas in 2023. Although the overall sentiment was generally “cautious,” by far the highest number of positive responses was some variation on the theme of “low supply,” or “less competition,” in 2023.  This is a significant difference compared to the housing downturn of the mid-to-late 2000s, when supply levels were at record highs. Today, supply levels are near record lows. There are already some early signs that new home sales so far in 2023 are stabilizing and that the worst of downward home price adjustments may have already occurred. This could start giving more builders the confidence to start moving forward on new deals again.

To talk about the market viability of your next deal, please give us a call. Clarity Real Estate Advisors works with public and private homebuilders, real estate investors, land bankers, land developers, and land brokers throughout the western U.S. We decipher the nuances of real estate market trends, identify opportunities, provide market-based feasibility guidance, and help our clients make the best real estate investment decisions possible.

What Cancellation Rates Tell Us

A good early indicator for how the housing market is responding to the recent sharp rise in mortgage rates is new home sales cancellation rates.

The long-term average cancellation rate for Southern California as a whole is about 15% to 16%.

The last time interest rates spiked was in 2018 when mortgage rates rose 90 basis points (from 4.0% to 4.9%) over the first 11 months of the year.

Subsequently, new home cancellations steadily rose during this period, reaching 22% to 30% in all major Southern California markets.

During the first 5 months of 2022, mortgage rates have increased about 170 basis points (3.4% to 5.1%). In response, cancellation rates are up in most, but not all, Southern California markets.

In high-cost Orange County, cancellation rates are actually down and are currently at a historic low (1.0%).

Although trending upward, current cancellation rates in San Diego, Los Angeles, and the Inland Empire are now in the 12% to 19% range; generally, within the range or slightly above the long-term average.

Should interest rates rise further, we do anticipate cancellation rates rising to the range seen at the end of 2018; however, if rates stabilize or decline, cancellation rates likely will decline as well.

Reasons recent cancellation rates have not reached late-2018 levels include:

• Very low new and resale housing supply in all markets has resulted in a demand/supply imbalance; funneling demand into fewer projects and helping to keep per project sales rates high. The number of actively selling new home communities in Orange County and San Diego County are currently about half of the total in 2018.

• Buyers in the high-priced Orange County market are typically less interest rate sensitive, which could partially contribute to the very low cancellation rate. However, cancellation rates in Orange County spiked to 29% in late-2018 when rates were lower than they are currently.

• Fluctuating or rapidly rising interest rate environments can have a psychological effect on potential buyers and motivate “fence-sitters” to buy before rates move up any higher.

• Record-high inflation is motivating people to buy hard assets such as homes for personal use or investment.

• COVID-19 has increased the demand for new housing as many households are reassessing their current living situation. In addition, the work-from-home trend has increased demand from buyers coming out of more urban areas. Households who otherwise were not in the market for a new home are now deciding to move, increasing the demand for new construction homes.

So far, a high proportion of builders have been able to replace cancellations from long interest lists of buyers.

In a check with sales agents at Southern California new home projects over the past week, most indicated that they still have hundreds, if not thousands, of prospective homebuyers still on active interest lists.

Although we expect that the recent rise in interest rates will eventually moderate sales and price growth for the remainder of 2022, current cancellation trends are typical of periods in the past with rate increases and have not yet had a significant slowing impact on new home sales.

New Home Project Counts Near Record Low Levels

A declining supply of land available for new home development, combined with rapid new home sales, and a lack of political will to approve new home communities, has resulted in the number of active new home communities in Southern California plunging to one of the lowest levels in the past 30+ years. In addition to fewer projects, the average size of a typical subdivision has shrunk over the last few decades from about 120 homes to only about 75 today.

• Inland Empire: There are just 207 active projects in the Inland Empire compared to 808 at the mid-2000s peak, and an average of 374 from 1988 to 2021. Project counts have also declined from a recent peak of 246 in 2019.

• Los Angeles: The 76 active projects in the county are less than half of the average since 1988 (161). Outside of Santa Clarita/Valencia, supply consists primarily of small infill projects. Boasting a population of about 10 million, we consider Los Angeles to be the most undersupplied major new home market in the country.

• Orange County: Project counts are down sharply in Orange County’s largest MPCs, including no projects now selling in Rancho Mission Viejo, just 6 at Great Park, and 11 on the Irvine Ranch. There are currently just 65 active projects in the county, less than half of the average since 1988 (138) and the mid-2000s peak (141).

• San Diego: There are currently just 56 active projects – the second-lowest quarterly count on record. The current count is down 25% from 2020 (75), and 67% compared to the average since 1988 (170).

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Limited new home supply is driving strong new home sales despite affordability concerns.

Given the lack of available land and significant entitlement hurdles, new home supply is expected to become even tighter in the coming years.

Don't be Scared About the Recent Spike in Interest Rates

There is little doubt that interest rates can impact home prices. However, the relationship is not linear and can be counterintuitive. Movements in interest rates are influenced by many factors including, but not limited to, housing supply and demand conditions, the health of the economy, government policies and guidance, and other inherent risk factors.

Rising rates are often a sign of a booming housing market and economy as lenders capitalize on market strength and the Federal Reserve attempts to rein in inflation and housing appreciation. Some of the highest home sales volume and biggest home price increases actually occur during rising interest rate environments.

Conversely, declining interest rates are typically a means of stimulating a weak housing market or economy. As a result, some of the worst years for home sales occur when interest rates are low, and affordability is high. Rising rates can actually stimulate housing demand in the short-term by forcing fence-sitters to jump into the market before rates rise even more.

The first impact of rising rates often occurs in the form of slower home sales activity. Obviously, rising rates negatively impact purchasing power, and may push otherwise qualified home buyers out of the market. However, if the economy is strong and incomes are rising, the impact of rising interest rates is dampened.

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Interest rates increased over 100 basis points over the last six months, recently briefly touching 4.0% after bottoming around 2.9% in August of 2021. The last time the market saw that kind of spike was from 4Q of 2017 to 4Q 0f 2018, when rates increased about 100 basis points, peaking at around 4.9% in November of 2018.

Looking at what happened from 4Q 2017 to 4Q 2018 is informative. Average monthly sales rates in the new home market in southern California dropped about 20% in 4Q 2018 below what otherwise would have been expected and inventory levels more than doubled to over a 6-month supply in most areas (3-months is considered to be equilibrium). Prior to the interest rate increases the market had been quite strong, with rising prices, above-average sales rates and below-average inventory.

New home builders reacted to slowing sales in 4Q 2018 in a number of different ways. Some lowered their base asking prices by 1.0% to 2.0%; but the vast majority held asking prices steady. Some reduced the premiums that they charged for their better lots. Some builders doubled or tripled incentives, which in most cases increased incentives by only about $5K to $10K per home (about 1.0% to 2.0% of home prices). Other builders reduced prices on options and upgrades. Interest rate buy-downs returned. These slight tweaks in prices worked in enticing buyers back into the market and allowed builders to start reducing their inventory of homes. Interest rates eventually declined, sales picked up even more, and prices resumed an upward trajectory.

So, what can we expect over the next few months?

After flirting at 4.0% last week, rates have already dipped back into the 3.8%-3.9% range. Many competing factors today are both pushing and pulling on rates that will cause volatility including:

• Continued strong home sales

• Inflation

• Ukraine

• COVID

• Mid-term elections

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As the housing market was quite strong before the recent rise in rates, we expect that the market will perform similarly to the last spike.

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If rates remain elevated there will be some dampening of demand and moderate pressure on homebuilders to tweak prices downward, most likely in the form of higher incentives. Indeed, there have been scattered reports of homebuilders already offering interest rate buydowns. However, if rates settle back into the mid-to-low 3.0% range, expect the current undersupply of homes combined with strong demand to continue to put upward pressure on home prices.

We fully expect continued home price appreciation in 2022, albeit at lower levels than experienced in 2021.

Record Sales Rates to Start the Year

Despite the sharp increase in mortgage rates since the start of the year, new home project sales rates throughout California are at the highest levels in over 15 years.

Through the first 6 weeks of the year, sales rates in every major market are exceeding 4.0 sales per project per month, and San Diego and the Inland Empire are at 5.5 sales per project per month. The historical average in most markets at this time of year is typically in the 2.0 to 2.5 sales per month range.

Despite the rise in rates, most sales agents are telling us that their buyers are still pretty well qualified to buy. Between strong sales and qualified buyers, homebuilders still have pricing power.

Strong sales are a result of three key factors:

Lack of new and resale supply.

All markets have a historically low number of active new home communities and record low resale supply. Contact us for further information about how under-suppled each market is.

Rising mortgage rates.

The rise in mortgage rates have actually pushed “fence sitters” into the market, worried that rates could go up even higher in the coming year.

COVID has increased the demand for new housing.

More people are working from home, home-schooling, or housing extended family. Many households are reassessing their current living situation. In addition, the work-from-home trend has increased demand from buyers coming out of more urban areas. Households who otherwise were not in the market for a new home are now deciding to move, increasing the demand for new construction homes.

Clarity Turns One!

Thanks to all of our loyal and new clients, Clarity Real Estate Advisors is celebrating a successful first year. We appreciate having the opportunity to collaborate with property buyers and sellers; helping our clients optimize real estate opportunities. As we continue to grow, we are committed to providing you with the best market guidance and insights possible, grounded in timely and innovative market research and analysis.

Over the past year, we have worked with public and private homebuilders, land developers, property owners, private equity investors, land-bankers and the public sector. Thanks to the diversity of our clients, deals we have worked on have included infill residential, multi-family apartments, build-for-rent communities, master planned communities, mixed-use developments, retail, office, industrial, and large-scale multi-property builder acquisition portfolios.

Thanks again!

Pushing Density & Getting Results in Secondary & Tertiary Markets

Rapid price appreciation has opened up the opportunity for higher-density new home communities in secondary and tertiary Southern California markets.

Currently, some of the best performing new home projects in the more tertiary Inland Empire submarkets are non-conventional single-family detached and townhome communities.

More than ever, buyers are willing to sacrifice privacy, yard size, and driveways for new construction homes with private amenities at affordable price points.

Most Millennial and Gen Z households, many of which are forming families, simply cannot afford conventional single-family homes even in tertiary markets.

Below are some examples of successful non-conventional SFD and townhome communities in secondary (non-core) submarkets in the Inland Empire:

Non-Conventional Single-Family Detached:

Attached:

Key Factors for Higher-Density Communities

However, success is not guaranteed. Below are some key factors to consider when planning higher-density communities in outlying submarkets:

Keep price points below the FHA loan limit for attached homes

• Most first-time buyers will have limited resources for a down payment and will require an FHA loan.

Keep HOA dues under $300 for both SFD and Attached

• Buyers will be payment sensitive and keeping HOA dues as low as possible will boost pricing power. Larger communities can help reduce the per-home HOA cost.

Offer a robust amenity package

• Amenities such as a pool, park, tot lot, and dog park are essential. Buyers considering higher-density homes will expect amenities in tertiary markets.

Proximate to retail amenities and freeways

• Buyers are often willing to trade lot size for convenience. The Menifee Town Center master plan is a good example of higher density neighborhoods adjacent to a large shopping center and the I-215 freeway.

Include workspaces in floor plans to accommodate telecommuting

• Post-COVID, more people are working from home and the desire for an office or designated workspace has never been higher. Although this trend may subside somewhat as the economy continues to open, this trend is no going away.

Consider building value-oriented homes similar to D.R. Horton's Express product

• Buyers are often willing to accept a relatively low spec level in order to afford a new home.

Maximize bedroom counts

• Post-COVID, buyers are willing to pay a premium for higher bedroom counts, even if it means sacrificing some of the common area living space.

Work with housing advocates (BIA, etc.) to continue to educate municipalities about the need for high-density housing to solve emerging affordability challenges.

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