Third-Quarter Real Estate Market Update

Presented by the SBAOR Statistical Review Committee

In the third quarter of 2023, the local real estate market continued to reflect trends that have been with us all year: relatively few homes for sale, higher mortgage interest rates, and a gradual cooling from the very hot market we experienced during the height of the pandemic.

Median prices and numbers of sales often flatten or decline in late summer into January compared to spring and early summer months. The market seems to have moved into this pattern. At the same time, continued interest rate increases and other factors are putting pressure on prices, offset to a large degree by a low supply of available homes for sale (inventory). 

It’s hard to be certain where this dynamic is heading. Some economists feel that low inventory will continue to define the market and home values could keep appreciating, but less rapidly than in the last two years. For now, median prices in our area are slightly down compared to one year ago.

Local Median Prices Have Dipped Slightly

The South Coast’s median home price year-to-date (Sept. 30) was $2.1 million this year, down from last year’s $2.2 million by about 4.5 percent. Except for Hope Ranch, every sector of our market had a lower year-to-date median price than a year ago: Carpinteria and Summerland, -3.5 percent; Montecito, -2.1 percent; Santa Barbara, -6.4 percent; Goleta, -6.6 percent; and condominiums, -3.9 percent.

These lower median prices do not mean that all properties have the same change in value: It means that the midpoint between the highest and lowest sale price for these sectors and the South Coast as a whole has shifted down a bit. If we remove sales in the luxury neighborhoods of Montecito and Hope Ranch from the overall South Coast data, the combined median price for Santa Barbara, Goleta, and Carpinteria/Summerland is less notable, with declines of only 2.7 percent for homes and 2.2 percent for condos.

Inventory Is Still Very Low, but Increasing

Housing inventory has been creeping up most of the year, but slowly. Last year at the end of September, there were 132 active listings for sale in the MLS database. This year, there are 160, but that’s still low compared to 400-plus active listings, which is more of the norm.

Why the low inventory? Sellers need somewhere to go when they sell their homes, and it is hard to find another property. Also, if they still have a mortgage, they won’t be able to match their current interest rate on another home. Most of the properties that come up for sale are due to “life events” — the death of the owner, moving into assisted living, divorces, job transfers, and moving out of area to retire or be near family, particularly grandchildren. Sellers who do not have a pressing need to sell are mostly on the sidelines.

Mortgage Rates and Creative Financing

In January, many economists predicted mortgage rates would go down this fall and winter, even to below 6 percent. So far, what we’ve seen instead is a slight dip and then another climb to more than 8 percent in mid-October. Many buyers will pay all cash or increase their down payments if they are able to do so. We are seeing more creative financing and instances where sellers “buy down” the interest rate as a credit to buyers, which makes the mortgage payments more palatable.

Still a Seller’s Market, but Not as Much

“Months of Inventory” (MOI — see chart) is a theoretical number of months it would take to sell every property listed for sale at the current pace that homes are selling. MOI numbers below three months are considered to be a seller’s market, and an MOI above four is a buyer’s market, when buyers have the edge in negotiations. MOIs of three to four favor neither buyers nor sellers.

On the South Coast, the MOI is 2.4 for houses, which is seller’s-market territory but much less “hot” than the MOI of 1.6 last year. You can see on the chart that some local areas still have a strong sellers’ market: Goleta has 1.4 MOI and condos have 1.5. On the other hand, Santa Barbara now has the most balanced market it has seen in years, with a current MOI of 3.0, up from a record low of 1.1 MOI a year ago. 

Hot Properties Sell Immediately; Others Not So Fast

Buyers will still pay a premium for homes that have been tastefully remodeled, are particularly charming, and have flexible floor plans, great amenities, or fabulous views. In early October, a number of hot properties received three to six offers over the asking price. Homes with less appeal are approached with more caution and take longer to sell. Buyers want to be sure they aren’t getting a bigger project than they bargained for, and they are less shy about asking for seller concessions. Escrow companies are reporting 25 percent to 30 percent of their transactions were getting canceled in September. Since inventory was tight, many of these homes went right back into escrow with a backup buyer.

Opportunities and Challenges 

Today’s buyers are running into fewer multiple-offer situations, and they are seeing more opportunity to negotiate price and terms with sellers compared to a year ago. The challenges for many buyers are the interest rate, price points, and finding reasonable home insurance. But home ownership has historically been a ticket to building long-term wealth, and many buyers are aware of this. Besides, where better to live than the American Riviera?

Sellers hold the best hand in this market if they are careful not to overprice their properties. Deep-cleaning, doing strategic updates, and staging to showcase a home’s most attractive features go a long way to help sellers get their best price. 

Moving Forward

The trends we have seen all year will remain in play for the near future. The low inventory gridlock, while loosening a bit, looks to be with us for the time being. We might as well get used to higher interest rates for now too.

Just because the pace of sales is no longer in overdrive doesn’t mean serious buyers can sit back and take their time. About half of the new listings sell very quickly, so the fast-paced market is still with us, but only for the best properties.

Every home on the South Coast has a unique set of conditions that determine its value. Your Realtor is an invaluable resource who can provide important information and help you negotiate and close a successful transaction. 

Data for this article was compiled by the Santa Barbara Multiple Listing Service and analyzed by members of the Statistical Review Committee of the Santa Barbara Association of Realtors®. Writer Sue Irwin is in her 20th year as a full-time Realtor, and is an associate of Berkshire Hathaway HomeServices California Properties.