MARKET: Fed focusing on inflation

per square foot in 2021 to $504 per square foot in 2022 — a nearly 10 percent increase, according to statistics provided by Kim Eichorn of Lyon Real Estate.

But as the Federal Reserve repeatedly nudged interest rates higher and nigher — making total of seven increases to interest rates from March through December — the market began to cool.

By the end of 2022, mortgage interest rates, which had hovered in the 3 percent range from 2020 into 2021, gave way to mortgage rates a bit over 6 percent. The competition among buyers became less frantic during fall 2022, as the higher mortgage interest rates deterred some prospective buyers. In many cases, homes started selling for less than the seller’s asking price, rather than more. As the year ended, some prospective sellers reduced their asking prices, in an effort to sell their property before 2022 turned into 2023.

Sales down

When all was said and done, the number of existing homes sold in Davis actually declined in 2022 as compared to the three previous years. During 2022, some 425 homes sold in Davis ... roughly 20 percent fewer homes than had sold during 2021 (530 sales). In 2020, 471 homes sold; in 2019; 502 homes); and 2018 , 489 homes.

Many observers say that home prices softened a bit during the last six months of 2022. Currently, average Davis home prices appear to be running in the $890,000 range, which (if the trend were to continue through the year) could lead to a drop in the average home price for 2023 as compared to the $913,953 average price during 2022.

And what about those mortgage interest rates? On Feb. 1, the Federal Reserve Bank raised interest rates yet again ... the eighth consecutive increase since March 2022. But this time, the increase was just 0.25 percent, rather than the 0.50 and 0.75 percent interest rate increases that the Fed announced at intervals during 2022.

Financial forecasters are now predicting that the Fed will increase rates a few more times during 2023, probably by about 0.25 percent each time, and there may sometimes be a month or two between those rate increases ... the Fed won’t say for sure at this point.

“Inflation has eased somewhat,” according to the Fed’s February 1 announcement, but “ongoing increases (in interest rates) will be appropriate” during the months ahead as the Fed seeks to reduce inflation to a roughly 2 percent level. Asked by reporters, Fed chairman Jody Powell confirmed “I just don’t see us cutting (interest) rates this year.”

At the same time, it is unlikely that a significant number of newly built homes in Davis will be ready to go on the market during 2023. There is pre-construction activity at Bretton Woods (a 500-home development located on West Covell Bloulevard just west of Sutter Davis Hospital ... many of those homes are earmarked for residents age 55-plus). But actual home construction hasn’t yet gotten underway at Bretton Woods. Much the same can be said of the Chiles Ranch property on East Eighth Street (a 96-home development that, like Bretton Woods, was approved several years ago, but has yet to begin construction).

The 2023 market for existing homes in Davis could also be swayed by other factors. In the San Francisco Bay Area, which has been the most expensive part of the country in terms of home prices during recent years, home prices have dipped in recent months, and this might (or might not) influence home prices in Davis to a degree. Some economists worry that the Federal Reserve might raise interest rates too aggressively in 2023, and tip the nation’s economy into a deep recession, triggering a rise in the unemployment rate, which could prove a drag on home sales.

What next?

The Enterprise turned to two veteran real estate agents — who have each worked with local home buyers and home sellers for decades — and invited them to “read the tea leaves” in terms of upcoming trends in 2023.

Steve Boschken, of Coldwell Banker Select Real Estate, took a long view of recent changes in mortgage interest rates. “Some people got used to the 3-percent mortgage interest rates” that prevailed in 2020 and 2021, and hoped the low interest rates might continue a bit longer, Boschken said. “Those days are gone.

But 6 to 7 percent is still a pretty good rate by historical standards,” noting that “my first mortgage was at 13 percent.” (In the early 1980s, mortgage interest rates topped 15 percent for a time, and the Fed raised interest rates repeatedly to tame stubborn high inflation.)

Boschken observed that “there people who have a mortgage between 2 percent and 4 percent that are not quite ready to give that up,” even if they recognize that they’d kind of like to get a different-sized house due to their changing needs.

“They tend to live with their current house a little longer,” Boschken said. “There are families with kids that are outgrowing the house they currently have. But they hate to give up that 3-percent mortgage.”

Kim Eichorn of Lyon Real Estate said that while prospective buyers can be skittish at the prospect of high mortgage interest rates, many of them also realize that “rents are going up” and “want to stabilize their housing cost” by buying a house, rather than renting. She added that the current inflation rate of around 7 percent gradually dilutes the buying power of money that stays in a bank account, being saved toward an eventual down payment on a house.

“We are hearing from the lenders that a lot of prospective buyers are coming in to get pre-approved” for a mortgage, Eichorn said. She also feels there is still some “post-Covid pentup demand” among prospective buyers who held off on purchasing a home during the pandemic, and are now ready to enter the market.

Eichorn and Boschken both mentioned that some current Davis homeowners are looking into whether they are eligible to take advantage of 2020’s Proposition 19, which allows certain homeowners (who are over 55 years of age, disabled, or victims of a wildfire or natural disaster) to transfer their lower assessed property value of their current primary home to a newly purchased or newly constructed replacement principal residence in California, under certain circumstances.

Qualifying longtime homeowners may be able to move some of the tax advantages of their current property to a new primary residence in-state, which could make “buying up” or “downsizing” more financially advantageous under certain circumstances.