Homebuyers are continuing to press the pause button on California’s housing market.

Though home prices are now in full retreat — encouraging news for homebuyers previously shut out by high home prices — this downward slide comes with a major catch.

Californians have seen their buyer purchasing power slashed alongside rising mortgage interest rates in 2022. A prospective homebuyer with the same income in Q3 2022 as a year earlier will acquire 31.3% less purchase-assist mortgage money due to higher interest rates alone.

Where homebuyers are limited by their set income and by the bond market’s influence on mortgage rates, one party remains flexible in this three-legged dance between buyers, sellers, and lenders — sellers.

Thus, sellers need to address the underlying issue of elevated listing prices in order for a levelling to occur — and sellers are just beginning to catch on.

High interest rates and a growing awareness of the undeclared recessions are combining to push prices down. This is reflected in the portion of homes sold above the final listing price. In October 2022, the rate of homes sold above listing dropped to just 33%, down from 59% a year earlier.

Sellers are struggling to attract buyers and price cuts are the natural response for a seller who sets the list price too high. In October 2022, the share of seller price cuts rose to 36%, double from 18% a year earlier, according to Redfin.

While price cuts present a promising incentive to buy, homebuyers need to stamp the pause button once again. Home prices are continuing to tumble. Reasonable homebuyers are best served waiting until it is clear prices have bottomed before approaching the housing market.

Follow the real estate road

California’s tightening housing market will tighten further.

The best option for prospective homebuyers — wait out the ongoing decline.

At the rate home prices are plummeting, by the time any homebuyer purchasing with a low down payment mortgage reaches a purchase agreement and closes escrow, their property’s value will be underwater.

Underwater homeowners are more likely to default on mortgage payments, sending them straight toward a foreclosure sale — unless they are able to negotiate a modification of payments, a short sale, or a deed in lieu of foreclosure with the lender.

With the undeclared recession pushing the housing market over the edge into a buyers’ market, plenty of opportunities await the patient homebuyer in the coming years. The firsttuesday forecast sees home prices subsiding over the next couple years, bottoming in 2025.

By deferring to purchase a home until then, prospective homebuyers will be able to find a home at rock-bottom prices.

For prospective sellers, a tough choice lies ahead. Nosediving home values mean sellers will not receive a higher or matching value for their homes until the housing market is well into its next upward trend. Sellers who foresee themselves selling in the next couple years best list today before prices drop too much. Otherwise, they will be waiting a long time for the next pricing peak.

Real estate professionals can survive the downturn by turning their focus to seeking out the few homebuyers willing to take the plunge during the housing recession.

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