Market Has Noticeably Slowed Down. But Who's Selling? Who's Buying?

The headlines change daily, causing chaos, fear and uncertainty. But the effect is clear: Buyers and Sellers are afraid. It's understandable. We know there are going to be effects from tariffs, more inflation, and cost of goods rising. We also know that this affects real estate as the cost of materials and building go up. So while there may not be a flurry of buyers, the prices are not expected to crash. We still have way too many people locked in below 3%, and too many people who bought 10-15 years ago who have too much equity.

So Who's Buying Right Now?

- Pent up buyers who have been waiting over 12-18 months for interest rates to drop, and don't see that happening are just going for it.

- Renters in the $4000-$7000/mo bracket) who have seen their rents rise year over year are also starting to look at smaller homes and a hedge against inflation.

- 1031 Exchange Investors

- People who need to diversify while the stock market remains volatile

Who's Selling Right Now?

Sellers who bought in the past 18-24 months who are locked in at 6-7% and sellers who have a lot of equity--those who bought between 2009-2013, are starting to sell. The psychology is interesting since owners locked into <3% mortgage rates are not selling--it's like they don't want to let go of their unicorn rate. (Note: the average 30yr interest rate since the 1970s is 7.75%. Not vastly different from today's rate of 6.69%, so yes, rates under 3% is unheard of). 

The Mills Act Hack for High Interest Rates

There are basically only 2 things:

1. Get the Seller to pay for some of your loan points

2. Buy a Mills Act property

The first one is not as easy. A good lender will be able to do some juggling, switching, replacing and adding and subtracting to get you the best rate. But you have to assume the seller will pay for your points, give you closing credits, or some a shave in price to help offset your rate.

Or, you can simply buy a Mills Act property that will cut your annual property taxes by between 60-70% off. Here's the math:

$1M price

Annual property taxes w/o Mills Act: $12,500/year, or $1041/month. Yes, that's like a quarter of your mortage or more.

Annual property taxes w/ Mills Act (assuming 70% off): $3750/year or $312.50/month. Think of all you can do with the $728.50/mo you'll save. Or in a lump sum, that's $8742/year. That's a vacation. Or a new Viking stove. Or nearly all your HOA dues paid for. 

1 in 3 Buyers in Major US Cities Made All-Cash Purchases

7% interest rates? Not a thing for 1 in 3 buyers. According to Redfin, a large amount of homes were purchased with cash. No doubt many of these buyers will refinance once the rates drop.

https://www.redfin.com/news/all-cash-homebuyers-september-2023/

Mortgage Rates Drop for First Time This Year

Finally, a small drop in mortgage rates down to 7.5%. This will bring some buyers back to the market, and keep prices steady despite the holiday slowdown.

https://www.cnn.com/2023/11/09/homes/mortgage-rates-november-9/index.html

Interest Rates Set to Rise to 9% in 2023

To those who are waiting and waiting and waiting...Given 2023 projections are even higher, this week's rates around 6.8% seem low. And don't forget that is is pre 2007 interest rate levels. The 30-year fixed is around 6.8%, while a condo 30-year fixed is more like 7.2%. It's interesting with the rate of inflation around 8.5% currently (lots of economists say it's more like 12%), housing is still considered a hedge at the moment, particularly income housing since rents are NOT dropping.

And remember, you can always refinance! Oh yeah...

Getting Ready to Sell Before Winter--and Another Interest Rate Hike

The window to sell is closing, so you want to get the place listed asap if you want to cash out this year. The rule of thumb is to have the place listed now, so you have time to get offers and into escrow by August. That way, you close on the sale before activity really starts to die down.

What to do to prepare to sell, in order of priority

1. Declutter

2. Paint the entire place, including ceilings and cabinets, if needed

3. Change out simple and easy things like faucets, cabinet hardware

4. Refresh bathrooms with a nice new mirror

5. Stage an empty place

6. Replace vanity in bathroom

7. Replace kitchen cabinets if within budget

Prices Creeping Up in DTLA

While DTLA was pretty stagnant price-wise since the pandemic began, the end of 2021 showed more turnover and a pickup in sales. 2022 has started off strong for DTLA, with an increase in prices, which is great for sellers. Buyers will have some competition as more people are coming out of the woodwork to buy their first home and or invest in a second property. 

A lot of buyers who had bought their main home are now looking to buy a second property to take advantage of the low interest rates--before they increase even more. With the stock market a little unstable recently, and the increased projection of renters and rental prices, real estate is looking like an excellent hedge compared to other assets. 

Gas Prices Up, Home Mortgage Rates Down

The 30-Year Fixed is at 3.5%. Crazy. This is like back in 2004 or 2011. Prices have plateaued a bit, and interest rates are low, and that is the best time to buy.

The Market is Softening, But Inventory is Still Low

Several things have happened in the past few months. It's odd because it's a good time to sell, but it's also weirdly a good time to buy. Some of my thoughts and feedback from clients:

1. Interest rates have gone up. This has affected prices a tad. And yes, I mean only a tad. We're talking 1-3% price shavings from the summer. Meaning, prices are still very good if you're in the market to sell.

2. It's still a Seller's market, mainly because prices are still high and inventory is still low. So is it a good time to sell? Heck yes if you have equity or are needing to unleash.

3. While interest rates are hitting up to 5% depending the lender, I dare say it's still relatively cheap to borrow compared to 20 years ago. Interest rates are slated to go up a bit more in 2019, so that means if you are planning to buy in the next 6-12 months, now is probably a good time.

4. Rents are higher than ever. I can't believe the gorgeous 2+2 unit in a duplex I used to rent in Hancock Park 15 years ago for $1200/mo, is now renting for $4200/mo. That's about a 400% increase. What I mean to say, sadly, is that it's really hard to rent these days with prices so high. If your budget is under 3k, and you don't have a decent downpayment (10-20%) saved up, it's ok to keep renting. If your budget is about 4k, then it's probably better to think of buying something small in an up and coming area and holding on for 3-5 years, and then cashing out on the 100k+ equity you'll gain. Seriously, I believe the market will go up in certain areas while other areas will plateau.

5. Will the market keep going up 5-10% each year like it has since 2010? Likely no for the next 2-3 years. However, 5 years from now, some areas will. These are areas that are in transition, like West Adams, Glassell Park, Montecito Heights, Lincoln Heights, and the Fashion District & Art District in DTLA. There's just room to grow in these areas.

6. At the end of the day, real estate is about security, equity, and leverage, so whether you're selling to make a profit and trade up, or buying to build equity and peace of mind, if it's the right time for you, then that's all that matters.

Some Of Us Are Wishing For a Bubble

This is crazy, but I've heard more homeowners and renters wish for a bubble lately. Yes, even homeowners. (Note: these are the same folks who bought in the crash and will do it again every time--I know I would).

When things crashed, there were many jumping ship, and just as many were clamoring to scoop up one, two or more properties. It sounds like crazy speculation but really, it's logic. These same properties at the crash were selling for crazy low prices such as $200-400k. Previously they sold for double those numbers. When you know that demand for these homes were there at double the price, why wouldn't you buy that property when it's half the price?

That's the past, and with no real bubble in sight for the next 2-3 years, prices are high. Some say it's unsustainably high, but that's all relative. Our friends in NY and London and SF are laughing at LA prices because they are so "low." In fact, folks from these cities are buying a second home in LA.

So what hope is there when inventory is low and prices are high and you want an investment property or a first home because renting sucks?

Two things:

1. You have to take advantage of the still very low interest rates

2. You have to give up the fantasy of buying a 3+2 in Silverlake or a 2000sf loft in DTLA for $600k.

Hot areas that are half dumpy but cleaning up:

1. Frogtown
2. Atwater Village
3. Glassell Park
4. El Sereno
5. West Adams
6. Leimert Park
7. Lincoln Heights
8. Garvanza
9. Hermon

Areas that people say are hot but will probably take 10+ years to see ROI:

1. Boyle Heights
2. East LA
3. Inglewood
4. Compton
5. Cypress Park (Some parts)

Areas that are so hot, it's over:

1. Echo Park
2. Mt. Washington
3. Montecito Heights
4. Highland Park

Interest Rates Could Easily Rise to 5% in 2018

We knew the ultra low interest rates wouldn't last forever. But the time is coming for a nearly 5% 30-year fixed.

While still historically low, some surveys by C.A.R. are showing that a small portion of buyers will opt out if rates hit 5%.

Two comments:

1. Buyers who opt out are being very short sighted in my opinion. You're either going to get locked into still historic lows, or you can refinance if the interest rate ever drops again. No brainer.

2. Sellers can anticipate a slight softening of the market due to less buyers. 2019 is expected to have even higher interest rates. Meaning 2018 could be a very good time to sell.

Currently, the Better Bet is on Buying Instead of Renting

If you're in a rent controlled apartment and you're paying about $1/sf, then you should probably stay put. You might still want to buy an investment, but you really should keep your apartment because $1/sf is too good to throw away.

However, if you're renting somewhere around $3/sf, which is about $3000 for a 1000sf pad, then it might be a better bet buy while interest rates are still at historic lows. Reasons why:

1. Interest rates are expected to hike up at least twice in 2017, then again in 2018. I don't think we'll be going into the 5% arena but it could go up to about 4.65% for a SFR.

2. If you're in a rent-controlled building, then the Landlord can hike up rents 2-3% per year. If you're in a non-rent controlled building, then the Landlord can raise the rents to whatever the market rate is after your lease is up.

3. If you get a 30-year fixed mortgage, then your "rent" is fixed for 30 years. Duh.

4. Rents are so high in LA right now, that if you ever decide to keep the home and rent it out, it's likely that someone else's rent money will pay for your mortgage. No brainer.

Pros & Cons of Buying During the Holidays

Do I wait til 2015 or do I take the plunge now? Some pros and cons to buying at this time of year. Surprisingly, it's mostly pros.

PROS

• Less competition with other buyers because many will wait until next year
• Interest rates are slated to increase in 2015
• Close before December 31, and get awesome tax breaks in time for 2014 taxes
• Spot things you might not otherwise see such as leaks due to rain
• Get deals on properties that have been sitting on the market
• Sellers can get desperate if they want to close before the end of the year

CONS

• Less inventory than say, spring or summer
• Properties may not initially look as good if the weather is drab or raining

2015 Housing Forecast

According to Freddie Mac economists, the following projections in housing for 2015

1. Mortgage rates: Interest rates will likely be on the rise next year. By next year, Freddie projects mortgage rates to average 4.6 percent and inch up to 5 percent by the end of the year.
2. Home prices: Continued house-price appreciation and rising mortgage rates will dampen affordability for home buyers. Historically speaking, that's moving from 'very high' levels of affordability to 'high' levels of affordability.
3. Housing starts: Homebuilding is expected to ramp up in the new year, projected to rise by 20 percent from this year. That will likely help total home sales to climb by about 5 percent, reaching the best sales pace in eight years.
4. Single-family originations: Mortgage originations of single-family homes will likely slip by an additional 8 percent, which can be attributed to a steep drop in refinancing volume. Refinancings are expected to make up only 23 percent of originations in 2015; they had been making up more than half in recent years.
5. Multi-family mortgage originations: Mortgage originations for the multi-family sector have surged about 60 percent between 2011 and 2014. Increases are expected to continue in 2015, projected to rise about 14 percent.

Median Price from Sep 2013 vs Sept 2014

Stats are out: The median home price in California was $428,290 back in September 2013. The median home price in September 2014 was $460,940. That's a 7.6 percent increase. And need I say again that interest rates are at an unprecedented low?