With historically low inventory, climbing prices, and no end in sight to current market conditions, the coastal Southern California markets, spanning from San Diego to Orange County, are in for another interesting year. Overall, indicators from 2017 show the right balance to create lasting market conditions, with strong dips in inventory across all markets, steady growth in average closed sale prices, and dwindling average days on market, in most cases hovering around a month. According to data supplied by the MLS, here is how both San Diego and Orange County Markets stacked up last year:

SAN DIEGO COUNTY 2017 MARKET RECAP

Single Family, Detached Homes

• Unit Sales DOWN8% (23,844 vs. 24,273 units sold)
• Average Closed Sale Price UP0% ($763,400 vs. $713,300)
• Inventory DOWN5% (2,704 vs. 3,317 units)
• Average Days on Market DOWN8% (30 vs. 34)
• Sold vs. List Price UP5% (97.6% vs. 97.1%)
• Average Price Per Square Foot UP98% ($361.90 vs. $342.00)

Multi-Family, Attached Homes

• Unit Sales DOWN9% (12,208 vs. 12,709 units sold)
• Average Closed Sale Price UP6% ($467,100 vs. $438,300)
• Inventory UP4% (1,060 vs. 1,045 units)
• Average Days on Market DOWN9% (23 vs. 28)
• Sold vs. List Price UP7% (98.7% vs. 98.0%)
• Average Price Per Square Foot UP6% ($393.50 vs. $369.10)

ORANGE COUNTY 2017 MARKET RECAP

Single Family, Detached Homes

• Unit Sales UP2% (19,739 vs. 19,510 units sold)
• Average Closed Sale Price UP9% ($1,027,000 vs. $960,300)
• Inventory DOWN0% (2,522 vs. 3,003 units)
• Average Days on Market DOWN8% (45 vs. 65)
• Sold vs. List Price UP3% (97.5% vs. 97.2%)
• Average Price Per Square Foot UP1% ($457.60 vs. $435.40)

Multi-Family, Attached Homes

• Unit Sales DOWN0% (10,625 vs. 10,736 units sold)
• Average Closed Sale Price UP5% ($540,100 vs. $502,400)
• Inventory DOWN6% (876 vs. 1,038 units)
• Average Days on Market DOWN7% (35 vs. 58)
• Sold vs. List Price UP4% (98.9% vs. 98.5%)
• Average Price Per Square Foot UP2% ($409.40 vs. $381.80)

Beyond the 2017 numbers and the conclusions one can draw from them, here are a few additional trends we are keeping an eye on in 2018:

Changes to Interest Rates

Recent talk predicts interest rates going as high as 5 – 5.5%. Should this happen, it may kick some buyers out of the market, which in turn will reduce the number of buyers competing for homes, and in some instances, level off price gains. However, this may actually cause listings to be more accurately priced to market value as demand lessens, staving off any talk of a real estate bubble and speculation of overinflated prices. We will be keeping a close watch on what the Fed does to interest rates over the course of the year as any changes will have significant impact to the real estate industry.

The Potential Impact of the New Tax Laws

Speculation of interest rates aside, the 2018 tax laws are in full effect, with major legislation passing in December of 2017. Although it’s still too early to completely understand how these wholesale changes to the tax code will affect the real estate market, the final bill was not as potentially detrimental to the industry as initially thought. Interest deductions can be counted for the first $750,000 borrowed for new mortgages, as compared to $1 Million under previous guidelines. In addition, the second home mortgage interest deduction survived the bill’s final cut, which should mitigate tax concerns for anyone looking at a vacation home in gorgeous Southern California.

In addition to changes to mortgage deduction limits, the new bill imposes a $10,000 cap for deductions to property, state, and local taxes. This may be the most impactful of the new rules, depending on taxed property values and personal finances. As a result, many rushed to pay future taxes prior to January 1 to avoid losing out on these deductions in 2018.

New Construction Helping to Ease Low Inventory

According to Dodge Data and Analytics, new home construction starts are expected to increase 3% across the nation this year. There are still many new home construction options throughout San Diego and Orange County, with Downtown San Diego abuzz with new mid- and high-rise buildings, build-outs in master planned communities, and many infill projects throughout the county hitting on the market. In addition, Orange County still has many master planned communities building out phases and selling inventory, with an influx of units hitting the market throughout the county.

The sprouting of new home construction throughout Southern California is helping to fulfill market demand, however, we are still a long way away from building enough homes to keep up with the current demand. Look for this new home inventory to sell quickly and for top dollar.