Tuesday, September 23, 2014

Los Angeles Real Estate Market - From So So to Fizzle - Except Rents

Fall sees lowered demand, fewer sales, lower prices, fewer mortgages

No one who watches the real estate market will be shocked to see fewer unit sales and overall activity in September than in July. School decisions still drive a lot of buying, and if you haven't moved into your favorite school district by mid August, you are likely to stay put until next summer.

What caught the pundits by surprise was how lackluster the summer turned out to be. Sellers were lowering prices by mid season and still the homes didn't move. While far to early to call a trend, there is plenty of evidence that Los Angeles prices are off by around 10% from highs of Spring 2014.

What are the culprits?
  • Middle class left behind in the Obama Economy
  • Young folks saddled with massive college debt
  • Family formation starting later
  • Millenials choosing to stay flexible in this job market by renting
  • Less interest in home ownership by millenials
  • Fear that economic doldrums may take us back to recession
  • International conflicts
On the other hand:
  • Rents are going higher by 7% or more in 2014
  • Mortgage rates are still at historic lows
  • Mortgages are getting easier to get
  • Home prices after dropping are more affordable
Will the good news outweigh the bad and get a countercyclical buying upturn going before Christmas? Nothing points that way at the moment. However, if the economy stays the course through the winter into Spring, there might be some pent up demand to drive folks into the market. There is also a great likelihood that current expected Fed tightening will result in higher mortgage interest rates. This commonly creates a last chance panic that might help to spur sales. As noted elsewhere, while consumers will work hard to save 1/8th of a point on their mortgage, the monthly increase in the payment for a $500,000 loan is $400 or so per month for a full percent rise in the interest rate. Many, including Goldman Sachs, would say that 5% loans are likely within 12 months.

Could this be the last best chance to purchase a home in LA? Maybe the bottom will come in December or February. Maybe the country will slide into recession again, and prices will go down even further. However, unless there is a long term fundamental change in the American way of thinking about housing, eventually the market will move upward again. If you are thinking about getting a home, playing the real estate market may be less important than finding a solid deal that you can afford. 

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