In today’s atypical economic environment, the real estate market is exhibiting some unexpected trends. In a typical scenario, soaring interest rates would put a damper on both the volume of home sales and property prices. However, this is far from a typical economic environment. Let’s delve into the reasons behind this unusual situation and explore potential implications.
Supply and Demand Dynamics
One of the most glaring deviations from the norm is the historical shortage of homes available for sale. Concurrently, demand for housing remains strong. This supply-demand imbalance is a major factor propping up property prices, even when transaction volumes are lower.
For decades, the construction of new homes has failed to keep pace with population growth. Recent data from builders reveals an annualized construction rate of only 1.283 million new housing units, the lowest level since June 2020. This figure falls significantly short of the 2 million new homes needed to meet the demand. Moreover, rising interest rates are affecting builders’ construction costs, further exacerbating the supply issue.
Impact of Mortgage Rates
The prevailing 3-4% mortgage rates on existing homes are causing homeowners to think twice about selling and purchasing new properties. Higher rates, averaging around 7-8%, act as a deterrent for owners. As a result, approximately 69% of outstanding mortgages are under 4%, effectively locking owners in place and reducing the number of homes available for sale. (see chart)
Affordability Considerations
The spike in mortgage rates has a significant impact on the affordability of properties. On the surface, renting may seem cheaper from an immediate payment perspective. However, when considering tax benefits, mortgage payment amortization, and property appreciation, purchasing a home often makes more sense in the long term. A closer look at the net worth of households that own real estate versus renters illustrates this point effectively. Check out the chart comparing the net worth of households that own real estate vs renters.
Challenges in Accessing Down Payment Assistance
While there are various Down Payment Assistance Programs available, meeting the criteria to receive assistance can be challenging, especially with higher interest rates. Additionally, individuals must meet the income criteria to qualify for the Principal, Interest, Tax, and Insurance (PITI) payments. The rising interest rates add another layer of complexity to the equation.
Market Outlook
As we enter the seasonally slower time of year, it’s possible that there may be some softening of property prices due to higher interest rates. However, when interest rates eventually come down, competition for properties is likely to intensify, leading to substantial appreciation in property values.
The long-term outlook suggests that the real estate market will remain dynamic and competitive. Homebuyers and sellers should carefully evaluate their options and adapt to these changing market conditions.
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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