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August 2022: The SLO Down

“It can’t go on forever!” If I had a nickel (or maybe a dime, for inflation) every time I heard another Realtor® say those five words over the past couple years… It’s been a wild ride in the real estate market. The roil and boil of our market has made some rich, but it’s also burned out many, many more.

It may surprise you to hear that many of the agents I’ve talked to during this super-heated market were looking forward to a return to normalcy in the housing market. We all love helping our sellers succeed, but it ain’t so fun when it’s at the cost of breaking many buyers’ hearts.

Balance is a good thing. And we’re on our way towards a more balanced market.

Sales slipping and demand dipping

SLO County saw record-breaking sales during the pandemic—which is remarkable, considering what a dearth of supply we had—but we’re reading a change in the weather now.

It’s not totally bulletproof for predicting the exact number of sales that will close in the weeks or months ahead, but pending sales is a fairly reliable leading indicator of what’s coming. As of July of this year, our County’s pending sales slipped 38% from July 2021 and 28% from a typical non-pandemic July. Sales activity is descending its pandemic peak.

Another metric signaling change is months-supply, which quantifies the rate at which buyers are scooping up properties. A lower months-supply number signals higher demand and therefore a stronger sellers’ market, meaning more intense price gains. A balanced housing market with modest price appreciation will show between four to six months-supply.

SLO County had been hovering pretty steadily just south of the 4-month mark leading up to 2020.

Beginning in May 2020, our months-supply started to nose-dive. Home prices were making roughly 20% annual gains from 2020 into 2022, and months-supply tanked to a record low of one month.

But turn up the dial on interest rates and that months-supply goes up too. Mortgage rates nearly doubled in the last six months, and the result was that a lot of homebuyers felt the affordability pinch and decided to take a break from the market. Demand hasn’t vanished, but it’s certainly diminished, at 2.3 months-supply.

The new cost of homeownership

Throughout 2020 and 2021, home prices were rising rapidly, but lenders were continuously chumming the waters by offering absurdly low mortgage rates.

Today, the landscape for what it costs to buy a home on the Central Coast has changed dramatically and the frenzy is petering off. As rates returned to their pre-pandemic levels, buyers were suddenly hit with the reality of the new home prices—mortgage payments about $800 higher than before the pandemic started. But rates didn’t stop there.

The following table shows the change in the monthly payment for the median home in both SLO County and San Luis Obispo City over the course of the pandemic. The rate shown is the average 30-year fixed conventional rate for the month, and the monthly payment assumes a 20% downpayment.

Even though home prices were making significant gains in the early part of the pandemic, falling mortgage rates kept the monthly cost from rising.

Fast-forward to 2022—rates shot up to nearly 6%, and with home prices about 45% higher, SLO County homebuyers were faced with mortgage payments nearly double what they would have paid in early 2020.

What’s happening with our home prices now

Naturally you’re wondering where home prices are going now. Higher mortgage rates spells less demand, and less demand makes for cooling home prices. But how cool? Well, we also have to look at the other end of the economic relationship—supply—and we still have a massive issue there to contend with.

SLO County’s housing inventory increased 12% since last July: 632 listings today compared to 566 last July. That’s a modest, but welcome change after a fairly steady free-fall in supply the last couple years. But we’ve got a long way to go yet. A pre-pandemic July would typically show around 1,350 listings!

The market’s a mixed bag at the moment. Multiple offers are still going on, as are price reductions. Some homes and areas are still seeing high demand, but the general temperature has dropped. There’s been a marginal drop in home values since the end of the first quarter of the year, but home values are still holding pretty steadily as inventory remains woefully low.

Adjusting expectations

From a boots-on-the-ground perspective, I can tell you that homebuyers have gotten a bit more picky recently and have more negotiating power as competition has lessened.

Is it a bad market to sell in? Not at all. Even though the sales pace has slowed, as I mentioned, homebuyers have half as many options as they would have had before the pandemic. If you’ve got a house on the market right now, you’re a star.

And to the discouraged buyers out there, I say, the large swaths of buyers who left the market at 6% rates don’t realize that rates have since backed off. Don’t bank on sub-3% rates again, and we’re not in the knife-fight of 2021 anymore. So if you’re able, get back out there!

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