Neither prices nor interest rates show any sign of falling in 2019.
Although 2018 has been a cautionary tale for Orange County sellers about not overpricing their homes knowing that buyers have limited options, buyers started saying “no” in late Spring and that never really changed. Sales were sluggish through the end of the year, causing accumulated inventory levels to swell and price acceleration to flatten. All the while buyers continued to linger on the sidelines.
Why are they waiting?
Because regardless of how motivated buyers might be, affordability remains an issue. Rising interest rates and income tax code changes, which have the greatest impact in high cost areas like ours, have demanded that buyers ratchet down their expectations and buy lower cost homes than many had originally planned.
Per Daren Blomquist, senior vice president at real-estate data firm Attom Data Solutions, “What’s driving the slowdown in price appreciation and the rise in inventory is not so much that inventory is being created, but that demand is decreasing”. “This is an extremely mortgage-rate sensitive housing market.”
Affordable housing is extremely hard to find.
So buyers are patiently waiting for more suitably priced homes to enter the marketplace. Homes priced below $750,000 were, are, and will continue to be the most coveted sector of our market. Pay attention. There is a LOT more inventory available in the higher price ranges. Yet the demand is conspicuously not there.
Local Quantitative Economist, Steven Thomas, reports that 81% of the current demand is for homes priced below $1 million, yet only 62% of the available listings are in these ranges. The remaining 38% of the inventory is priced above $1M, where only 19% of buyers are interested. So if you have property priced under $1M, 2019 will still be a good time to sell.
“I would still rather be a seller than a buyer next year,”
said Danielle Hale, chief economist at real-estate website Realtor.com.
According to USA Today, “Price increases will moderate and everyone in the market will need to adjust.” At the same time these higher rates also dis-incent sellers, enjoying super low mortgage rates on their current homes, from moving on. This causes an “interest rate trap“, further suppressing the number of future resale homes, keeping the pressure on the available inventory and preventing prices from falling.
We need a LOT more inventory to hit the local market before we see an impact on prices.
Trulia says “…even if inventory begins to pick up in more markets, it will be rising from multi-year lows and will take a long while to get back to a more balanced level between buyers and sellers…”
Housing values are still expected to increase next year, but not at the gang-buster pace seen in recent years. NAR’s Yun forecasts modest price growth between 2 percent and 3 percent, down from close to 5 percent this year and over 5 percent in 2017.
Millennials will keep buying homes — despite those rising rates. Looking forward, 2020 is expected to be the peak Millennial home buying year with the largest cohort of millennials turning 30 years old.
Doing what we’ve always done the way we’ve always done it is a recipe for disaster in a dynamic market.
You must think creatively.
There are ways to make deals more attractive to both buyers and sellers.
For example, sellers can make an interest rate “buydown” part of their marketing plan. This literally means that some of the interest that would have been paid over the term of a buyer’s purchase loan is “bought down” and paid as a lump sum up front. Prepaying interest on a new loan can help a home sell faster and protect price integrity.
Here’s how it works.
As an example, for a $950,000 house a buyer putting 20% down will have a $760,000 loan. The seller credits 3% of the loan, or $22,800, to “buydown” (prepay) the interest which permanently reduces the buyer’s interest rate.
A buyer who is qualified for a maximum $950,000 priced home at 4.75% will only qualify for $896,000 if mortgage rates rise to 5.25% – and they will. But a seller could remedy this by offering to “buydown” the rate of interest to save the sale.
Which seller would you rather be? The one who took a $54,000 haircut on the sales price to keep this buyer in escrow? Or the one who credited $22,800 to the buyer and garnered an additional tax write off?* That’s pretty easy math.
This will be one of many useful tools for both buyers and sellers throughout 2019. Any market can be a good market if you know what you’re doing.
Buyers must buy the home they love and remember that over time their monthly payment is far more important that the price paid. Focus on the payment and make it happen. This may mean buying a starter home and planning a “move up” strategy. (Spoiler alert- rising rents will make waiting to buy even more painful!)
Sellers in lower cost areas are in the driver’s seat. Most others can make their properties more attractive by finding ways to add lower cost living units, like ADU’s (Accessory Dwelling Units or “Granny Flats”) or getting zoning variances to allow multiple living units on their current lots. Orange County is presently viewing such opportunities to address housing shortages favorably. Capitalize on that.
Everyone should know about proposed redevelopment within their local communities. Know what’s coming or going in your immediate area. This is a leading indicator that can make or break you.
Call me for help with your buying or selling strategy. Navigating this complex market is what I do best.