The higher rates being expedited by the Federal Reserve to tame inflation is affecting housing purchase affordability levels and is now being reflected in recent statistics.
The housing market and pricing numbers are always a reflection of supply and demand. From a macro level, the Los Angeles region’s housing supply has not been constructed to keep up with population levels for decades. During the COVID years 2020-2021 the real estate and stock market boom was stimulated by artificially low mortgage rates created by the Federal Reserve.
From April 2020 till this April 2022 the Fed Funds Rate was at 0% and the Fed was buying Mortgage Backed Securities forcing rates low. The Fed started raising rates and stopped buying bonds this past April. Presently the Fed Rate is at 3% with the target at 4.25% by the end of the year. This is reflected in the 30 year fixed mortgage jumping from 3% to now over 7%. The Fed was a year too late in scaling back its low rates. The result was high inflation, especially in housing. Now the pendulum will swing in the other direction.
The housing market, buyer and seller psyche, and statistics always lag economic changes and Fed moves. The aggressive tightening in monetary policy is now being reflected in the local market statistics.
Specific statistical numbers don’t matter as much as the percentage of change and the direction of the moves. You can see in the recent September San Fernando Valley (Los Angeles) housing charts you can see inventory levels are substantially higher than in the past 2 years, while the number of sales are substantially lower.
It’s not that there is not a demand for buying real estate, but the higher mortgage rates are hurting the affordability levels, removing a percentage of the potential buyer base. Properties are still selling, but sellers have to make sure they are priced aggressively. Many sellers still have an inflated valuation from early in the year stuck in their heads. The result may have to be price reductions if there’s inadequate activity for their property.
Some sellers will not join the selling market. There will have to be a compelling reason to sell a property with a 3% mortgage rate to buy one with a 6%+ rate.
The Fed created an unhealthy housing market previously. 14 offers for every property just hitting the market and selling for substantially over list was unsustainable. Some of the inflated pricing has to come out of the system. Long term, that’s healthy. IMO a 15% or so retracement of the pricing is not a crash. It’s just taking the air out of the overly inflated market.
The recent high inflation and tight employment numbers reinforce the Fed raising their rates by another .75% in November, and probably again in December. When we have a recession at some point next year, the rates will come down.
Long term, properties will resume their appreciation. Buying now with a long holding period can still make sense. Rents are still going up. Bad for renters, good for landlords. You just have to sharpen your pencil and crunch the numbers.
If you are in the Los Angeles area and have any questions or real estate sales or financing needs, feel free in contacting me
Ron Henderson GRI, SRES, SFR, RECS, CIAS
President/Broker
Multi Real Estate Services, Inc.
Gov’t Affairs Chair – California Association of Mortgage Professionals (2017-2018)
Chairman – OutWest Marketing Meeting (Real Estate Education)
BRE #00905793 NMLS #310358
www.mres.com
ronh@mres.com
Specialist in the Art of Real Estate Sales and Finance
Real Estate market, mortgage rates, Los Angeles, San Fernando Valley, Conejo Valley, Simi Valley, Woodland Hills, West Hills, Calabasas, Chatsworth
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