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When it comes to real estate investing in Southern California, there are two main options: long-term and short-term rentals.  Both have their own pros and cons, and it’s important for investors to understand the differences and determine which type of rental is the best fit for their specific situation.

For those looking for a more passive investment option with steady income, a long-term rental can be a great choice.  Long-term tenants are more likely to stay put for longer periods of time, which helps ensure a consistent cash flow and substantially reduce vacancy rates.  Long-term tenants also tend to take better care of the property, as they have a vested interest in keeping it in good condition.

On the other hand, short-term rentals offer higher potential returns with less risk.  Short-term rental income can often be much higher than long-term rentals, as investors can charge a premium for a short-term stay.  Additionally, short-term rentals can be a great option for those who are looking to take advantage of seasonal spikes in demand, such as during the holidays or summer months.

Overall, investing in a short-term rental in Southern California can be a great way to maximize returns with minimal risk.  With the right location, amenities, and marketing strategy, investors can quickly start to reap the rewards of a successful short-term rental.

See Current & Historical Average Days on Market for SoCal Top Short-Term Rental Markets

What does “days on market” mean?

Days on market literally refers to the number of days a home has been on the market, i.e., officially for sale.  However, it technically measures only how long the home has been listed for sale by a particular agent.

The total time a home has been for sale, regardless of agent, is known as “cumulative days on market.”  On many websites, buyers can view this cumulative listing history of the property if the seller previously used a different agent or listed the property as for sale by owner.

Days on market is one of the best indicators of whether you’re in a buyer’s market or a seller’s market.  If most properties in an area are on the market for a short period, that means you’re in a seller’s market. Demand is high, inventory is low and buyers must move quickly to make their decision.  This scenario likely sounds familiar to anyone currently shopping for a new home.

On the other hand, if the time on market is longer, that can indicate a buyer’s market.  When houses take longer to sell, it can be a reflection of lower demand.  Buyers may be able to be a bit choosier — and sellers might need to be more accommodating, including recognizing that their home might not be worth what they think it is.

What days on market means for sellers

If you’re on the listing side of things, days on market can help inform your selling strategy.

Generally speaking, if your property has been on the market for too long, compared to other listings in your area, you may need to make a price reduction or offer concessions.

What days on market means for buyers

If you’re a buyer, it can be challenging to score a deal when homes in your area are moving quickly.  You can benefit, however, if a listing has been languishing for longer than average.  Especially if the home is vacant — if the seller has already moved and is paying two mortgages, they could be particularly motivated, and you could get lucky.

You may have room to negotiate if the home’s been sitting.  But it could also simply mean you’re dealing with an unmotivated seller.  Or one who is stubbornly unwilling to lower their price.

Bottom line

Real estate demand may be starting to cool due to inflation and rising mortgage rates, but the time it takes to sell a house right now is still relatively short.  The average days on market in your area is crucial to take note of, whether you’re buying or selling.  If a home hasn’t attracted the kind of offers the seller wants in that amount of time, buyers take note — the price may soon be lowered.

The last two years caught many of us off guard—and not just because of the pandemic.  They also ushered in the hottest housing market on record, with home prices rising nationally by nearly 19% in 2021, driven primarily by low mortgage rates and a major supply shortage.

But while some had hoped 2022 would bring a return to normalcy, the U.S. real estate market continues to boom, despite rising interest rates and decreasing affordability.

So what’s driving this persistent demand?  And is there an end in sight?

Here are three factors impacting the real estate market right now.  Find out how they could affect you if you’re a current homeowner or plan to buy or sell a home this year.

MORTGAGE RATES ARE RISING FASTER THAN EXPECTED

Over the past couple of years, homebuyers have faced intense competition for new homes—in part due to historically low mortgage rates that were a result of the Federal Reserve’s efforts to keep the economy afloat during the COVID-19 pandemic.

However, in response to a concerning level of inflation, the Fed is now reversing those efforts by raising the federal funds rate.  And as a result, mortgage rates are rising, as well.  Few experts predicted, though, that mortgage rates would go up as quickly as they have.

In January 2022, the Mortgage Bankers Association projected that rates would reach 4% by the end of this year.  By mid-April, however, the average 30-year fixed mortgage rate had already hit 5%, up from around 3% just one year prior.  On a $400,000 mortgage, that 2% difference could translate into an additional $461 per monthly payment.

Since then, mortgage rates have continued on an upward trend.  So what impact are these rising rates having on demand?  While many buyers had hoped for a cooling effect, experts warn that may not be the case.

Ali Wolf, chief economist at housing market research firm Zanda, told Fortune magazine, “Rising mortgage rates are having a counterintuitive effect on the housing market. Home shoppers are actually sprung into action in an attempt to buy a home before mortgage rates rise any higher.”

Since inventory remains low, the resulting “race” has kept the homebuying market highly competitive–at least for now.

What does it mean for you?

While current 30-year fixed mortgage rates represent an increase over previous months, they remain well below the historical average of 8%.  As inflation across the economy continues, the Fed is likely to raise rates further this year.  Buyers should act fast to secure a good mortgage rate.  We’d be happy to refer you to a lender who can help.

For sellers, speed is also of the essence.  The pool of potential buyers may shrink as mortgages become more expensive.  And if you plan to finance your next home, you’ll want to act quickly to secure a favorable rate for yourself.  Contact us today to discuss your options.

HOME PRICES KEEP CLIMBING

History shows that higher interest rates don’t necessarily translate to lower home prices.  In fact, home prices rose 5% between 1980 and 1982, a period of significantly higher mortgage rates and inflation.

Forecasters expect that home prices will continue to go up throughout 2022, though likely at a slower pace than the 18.8% increase of the last 12 months.  Bank of America predicts that prices will be up approximately 10% by the end of this year, while Fannie Mae estimates 11.2%.

In addition to limited supply and a race to beat rising mortgage rates, home values are also climbing because of positive economic indicators, like low unemployment.  Plus, rents are soaring–up 17% from a year ago–which is prompting more first-time homebuyers to enter the market.  Add to that the continued popularity of remote work, and it’s easy to see why property prices continue to surge.

However, it’s not all bad news for prospective homebuyers.  Economists expect that as mortgage rates rise, the rate of appreciation will continue to taper, though the effect may be gradual.

“Eventually mortgage rates will slow down home prices,” according to Ken Johnson, an economist at Florida Atlantic University interviewed by Marketwatch.  “We should not see rapid upticks in prices as mortgage rates rise.”  Forecasters agree—Fannie Mae expects price increases to slow to 4.2% in 2023.

What does it mean for you?

While the pace of appreciation is likely to decrease next year, home prices show no signs of going down. However, current labor shortages are leading to higher salaries and better job opportunities for many workers.  You may find that your income growth outpaces home prices, making homeownership more affordable for you in the future.

For homeowners, the outlook’s even brighter.  You could find yourself sitting on a nice pile of equity. 

INVENTORY REMAINS EXTREMELY LOW 

As noted, one of the largest hurdles to homeownership is a lack of inventory.  According to a February 2022 report by Realtor.com, there’s an expanding gap between household formation and home construction, which has resulted in a nationwide shortage of 5.8 million housing units.

The origins of this shortage date back to the 2008 housing crisis, during which crashing home values led contractors to stop building new properties—a trend that has not been fully reversed.

That decline in home construction also resulted in a decrease in the number of home building professionals, a trend that was exacerbated by job losses during the COVID-19 pandemic.  Now, many builders are limited by their ability to find qualified labor.

Another major challenge is a staggering increase in the cost of materials. Pandemic-related supply chain shortages have been a significant driver, with home building material costs rising on average 20% on a year-over-year basis.  The price of framing lumber alone has tripled since August 2021.

These trends add tens of thousands of dollars to the cost of a typical home. Factors like a lack of buildable land in many areas, restrictive zoning, and a shortage of developers are also contributing to the issue.

Most homebuying experts agree that the lack of inventory is the primary factor driving rising housing prices and unprecedented competition for homes.  With available housing units near four-decade lows, the end of the current housing boom is not yet in sight.

What does it mean for you?

Prospective buyers should be prepared to compete for a home, since low inventory can lead to multiple offers. Y ou may also need to expand your search parameters.

For sellers, the picture is rosier.  In this strong market, your home may be worth more than you realize. 

This desert community marches to the beat of its own mystical drum circle, trading in midcentury-modern glitz for a funky homesteader feel.  You’re just as likely to strike up a conversation about aliens or the healing properties of sound baths here as you are to trade tips on the best hiking trails in Joshua Tree National Park.  At 1,235 square miles, the park is slightly larger than the state of Rhode Island, encompassing the nexus of the Mojave and the Colorado Desert ecosystems, with its colorfully named rock formations, petroglyphs, and forests of spindly Joshua trees.

During a visit, you can reserve a National Park Service campsite or choose from among one of the area’s many lodging options, including a new Airstream glamping site.  But to truly capture the spirit of the place, live like a temporary local in a Joshua Tree Airbnb, where you’ll often find eclectic desert-inspired decor, “cowboy pools” (aka galvanized steel livestock troughs) for cooling off, and fire pits for late-night conversations under the stars.

Best neighborhoods near Joshua Tree to stay in

• Joshua Tree features a walkable business district centered around California State Route 62, with an assortment of weekender-friendly spots such as a coffee shop, a brewery, a weekly farmers’ market, and art galleries, including the decidedly quirky World Famous Crochet Museum.
• Yucca Valley sits east of Joshua Tree along Highway 62 and is home to attractions like the Hi-Desert Nature Museum, plus conveniences including grocery and sporting goods stores if you need to stock up before hiking, camping, or cooking at your Airbnb.
• Other nearby communities include Twentynine Palms, which sits near the national park’s North Entrance Station and offers nearly two dozen restaurants, and Pioneertown, a kitschy Old West community built in the 1940s, where dozens of westerns were filmed and which is still home to Pappy & Harriet’s Pioneertown Palace, a landmark honky-tonk and barbecue restaurant.