Saturday, March 28, 2020

Five Takeaways - COVID-19 and the Los Angeles Real Estate and Mortgage Market

COVID 19 and Real Estate 2020

What Do We Know So Far About the Real Estate Market and Mortgages in 2020

We are all taught that history should be our guide as we head fearlessly into the future. Unfortunately, in 2020 there is precious little that we can look to for guidance, as so many things are clearly happening for the first time:
  • A World-wide pandemic, but in an era of advanced medicine and fast computers. If this were really the Spanish Flu, we could predict 200,000,000 dead and plan around that. But our technology will probably keep that number to 200,000 world wide. Just another bad flu season.
  • A shut down of economies around the world with no clear starting date for reopening. 
  • Real estate in LA at all time highs after running up for over 10 years. But interest rates are at historical lows, and inventory is almost non-existent. This set of data has been true for several years, but the statistics are even more extreme this year than in the past 10 years. 
  • Almost no new listings, no open houses, no shoppers, and deals collapsing. 
Some pundits are looking to 2008 as the comparison, but that was an economic collapse specifically associated with a housing bubble.

More realistic would be to look at the 911 terror attack and the related panic. The stock market recovered within two months. Because this crisis has a longer time of uncertainty and has a more direct impact on more people, the stock market is likely to remain depressed until the US is getting back to work. However, it wouldn't be shocking to see the Dow back to 30,000 by the end of 2020.

Housing is likely to follow a similar trend. Once the US starts back to work and folks relax about their future, shoppers will likely head to open houses again, and sellers will call agents to get their listings started. Timing? President Trump says Easter. Bill gates says end of May. Take your pick, but it seems likely that the country will be moving towards recovery during that period.

What to do now?

  1. If you are a seller, and you need to sell, put it on the market. But you are likely to get a lower price today than you will in June. If you don't need to sell today, wait until May to list. 
  2. If you are a buyer, there are probably some great deals out there. Interest rates are at historic lows, and this might be a great time to go bargain hunting. 
  3. You might want to refinance at this point. Four reasons to do so: Drop the interest rate on your current mortgage and lower your payments; take cash out to pay off higher interest loans, help your business, or remodel; Get rid of FHA or PMI which might save you $1000 or more per year; Change to a 15-year mortgage with very low rates.
  4. If you are going to sell right now, take your time to find a great realtor. You will want someone very aggressive who is using state-of-the-art methods like virtual tours. 
  5. If you need a mortgage for refinance or for a purchase, you'll need an outstanding lender at this time. The banks are overwhelmed with applications for refinance. Call Bill Rayman at 310-453-4016. He will take the time to walk you carefully through your choices and make sure you get the perfect loan for your needs in these unusual times. 
Bill Rayman - Guaranteed Rate

#covid-19 #pandemic #losangelesrealestate #economy #realestatemarket #mortgages #refinance

Saturday, January 11, 2020

Lower End of Los Angeles Housing Market, $750,000 to $1.5 Million, Is Active Early in 2020

Prices Are High, but Everyone Needs Housing. Renting in LA Is Popular, but Very Likely a Poor Financial Choice

newly weds in their new house

After writing and reporting about the housing market for over a decade (and commonly getting it right except for interest rates), predicting 2020 is childsplay. We know that there are eight major factors at work that tend to set prices: Inventories, affordability, interest rates, population trends, projected new housing, current pricing, the economy, and the rent vs buy equation. Another factor has also played a part at times - investors, including foreign buyers.

If you need a mortgage, call Bill Rayman right now at (323) 682-0385.

If you take a quick look at each of those, seven of the eight would bode very well for continued increases in prices and flat-to-increasing sales as inventory allows:

  • Inventory is still very low
  • The economy is still red hot
  • The population is bursting with new families
  • New housing starts in the pipeline are generally insufficient to meet overall demand
  • Interest rates are low, and likely to continue low through 2020 into 2021.
  • Increasing housing prices in LA are now about even with increases in wages
  • Investors are back, looking to capitalize on excellent rental markets
  • Foreign investment is the only questionable issue. Chinese investment slowed in 2019, and isn't likely to return unless trade agreements are signed.

A huge factor doesn’t really fit with the above. This would be the rent vs buy equation. Generally, as rents rise, tenants consider buying. Of course, as rents rise, investors are willing to pay more for rental properties, and builder are attracted to build more. Lots of moving parts there. The reality is that very, very few markets have anywhere close to enough affordable housing when you combine owned and rented units, and there isn’t enough being built to catch up with population.

Overall, there is still a huge squeeze on tenants to afford apartments, and many are doubling up who don’t prefer that arrangement. Thus, this 9th issue would point towards more demand for purchased housing.

If these were the only factors at work, you might expect a slight uptick, and that seems to be what we have right now. But, a fantastic article in the NY Times in 2018 provided a few nuances. Moreover, in a shocking development, the letters to the editor provided significant insights, too. Here are some fascinating elements to consider. Each, on their own, would not have much effect on the market, but taken together they might give hints as to future trends.

  1. Grandma still isn’t selling – This is huge and is reducing inventory. But if she sells, she still needs to live somewhere and there is no rental property available at reasonable prices.
  2. Millennials are still living at home – Most reporting after this article suggest that millennials are starting to buy, with the national figures showing 30% of home purchases to mellenials.
  3. Student debt a huge problem – For some professionals this debt is six figures and hurts their ability to borrow or pay. For some middle-class young people, the debt is less substantial, but still cuts into what they can afford.
  4. Very little affordable housing being built – You will hear that new home sales are down, and that homebuilders are despondent. The reality is that they are not building the homes that new families want. This is partly due to the reality that building a smaller home isn’t as profitable, given all the regulations and the cost of land. Affordable housing predicted to go from 20% of new builds to 30%.
  5. Earnings are just starting to improve. Through the first nine years of the recovery, earnings have been very flat. With unemployment so low, it would be odd to see earnings not respond, and now they are. This will improve affordability.
  6. Immigration will increase – legal and illegal. Every nation with low birth rates must increase immigration or their economy will stagnate. One way or the other the US will see more immigrants moving here due to our huge demand for labor. This will increase demand.
  7. Doubling and tripling-up – Singles are commonly living with roommates who would rather not be. This is, of course, due to the cost of rentals. As these individuals find a better job, they will be adding to demand.
  8. End of mortgage deduction - The changes in the tax law that increased the amount of the standard deduction, eliminated a major advantage to ownership. This is a factor right now, but will play itself out. 
  9. Massive housing wealth – Those who owned their home 10 years ago are now sitting on massive amounts of home equity. If these individuals choose to move, they have substantial down payments, whether they are moving up or downsizing. 
  10. The millennials and Z gen are not that different than the boomers or X gen that went before. Their folks and other relatives are likely to be needed for down payment help. The good news is that the older generation has massive equity, and may have also created additional wealth through the soaring stock market.
  11. Concentrations in major urban areas – In the major tech cities, prices are high due to lack of new places to build. Los Angeles, San Francisco, Boston, NYC, and other such cities can only build up. While these areas may see some relaxation in rental pricing over the next two or three years, it will only be a pause.   
  12. Lower expenses in other home budget areas beside housing – This is a huge factor in the last 25 years. We are spending less and less AS A PERCENT OF TOTAL INCOME on food, cars, clothes, entertainment, travel, children, and almost every other category of expense. This frees up dollars to be spent on housing. The result is that the average individual or family has more money to compete in the market.
For instance, if a family used to spend on average 70% of their $50,000 a year income on everything but housing, they would have $15,000 a year to spend on housing. If their cost for everything else dropped to 50%, then they have $25,000 to spend on housing. This provides more buying power, and therefore more competition for scarce resources. Put another way, we aren’t spending 50% on housing because we have to. We are spending 50% because we can.

2020 Housing Forecast

Where does all this leave us? What might 2019 bring in sales and prices in 2019?

  • Location, location, location – Real estate will still be about location in 2020. Crazy high rents and prices for luxury apartments and condos in some major cities are likely to soften. The same can’t be said for middle and affordable housing. This will likely be steady to up. There is some indication of softening in the very high-end luxury market.
  • In Los Angeles, January activity in 2020 is already looking like March with multiple offers.
  • Areas with lots of building, such as the Inland Empire in Southern California, may see slackening demand for resales, but the demand is great due to outward migration from the urban and suburban areas where prices are much higher. Therefore, don’t expect much downward pressure on pricing, and rents will continue up.
  • Suburbs that are fully built out will likely see continued increases if the business climate holds.
  • Sales will follow established patterns. Activity will bounce up in March with excellent sales in the Spring. However, by Spring their might be the lowest inventory levels ever.
  • The Fed is unlikely to move up or down on interest rates. Once the reality of historically normal interest rates has sunk in, some buyers will move off the sidelines.
  • Days on market will decrease to historic lows.

Maybe you have a very different opinion. Please leave your comments below.

If you need a mortgage, call Bill Rayman right now at (323) 682-0385.  Bill specializes in tailoring a mortgage to fit your needs. When you work with someone like Bill, you will realize that there are many, many products on the market, and one size does not fit everyone. Call (323) 682-0385