A BUYING OPPORTUNITY: Real Estate Market Update

A BUYING OPPORTUNITY
Prospective home buyers are perplexed at today’s competition to purchase, which will only amplify when rates drop in the future.

Mortgage Rate Projections

Many experts forecast mortgage rates to drop into the 5s by year’s end.

This year’s housing market is playing out much differently than expected. Nobody anticipated buyers bumping into each other with very few available homes to purchase, throngs of buyers cramming into weekend open houses, and bidding wars that result in multiple offers and sales prices above their asking prices. With today’s high mortgage rate environment, values were expected to continue to fall throughout 2023. That is precisely what occurred in the second half of 2022 when mortgage rates continued to soar higher, buyer demand plunged, and the inventory climbed and peaked at its highest level in two years. But that all changed as the inventory plunged to crisis levels.

The high mortgage rate environment affected both supply and demand. Naturally, everyone anticipated that high rates would enormously impact affordability and weaken buyer demand. Yet, very few anticipated that high rates would inhibit so many homeowners from listing their homes for sale. During the first three months of 2023 in Los Angeles County, 36% fewer homes were placed on the market, or 8,053 missing sellers. Homeowners are staying put and “hunkering down” because of their locked-in, low, monthly fixed mortgage payment. As a result, the inventory has dwindled, and the housing market has heated up substantially since January.

(See Southern California Housing Stats Below)

The housing market is currently affected more by a lack of home sellers than by low demand. This has led to multiple offers and prices above the asking price. The future of the market depends on mortgage rates, which are difficult to predict due to their connection to inflation. Inflation is decreasing, but it may take more than a year to reach the target set by the Federal Reserve. Recent bank failures have caused mortgage rates to fluctuate between 6.38% and 6.75%. Experts now predict a recession in the US between the third and fourth quarters of 2023.

During a recession, mortgage rates fall as investors seek safe long-term investments such as government bonds and mortgage-backed securities. This increased demand for these investments leads to a drop in their rate of return and subsequently, mortgage rates. Experts predict that mortgage rates will decrease to 6.33% in 2023 Q2, 6.07% in 2023 Q3, and potentially below 6% to 5.79% in 2023 Q4. The Federal Reserve’s efforts to slow down the economy through rate hikes will eventually lead to further economic deceleration and a decrease in 30-year mortgage rates.

For a $1 million home with 20% down, the payment was at $5,322 just before the bank failures at the start of March when rates exceeded 7%. It dropped to around $5,057 today, slightly less than 6.5%, a savings of $265 per month, or $3,180 annually. At 6%, the $4,796 monthly payment becomes a monthly savings of $526, or $6,312 per year, compared to 7%. If rates plunge to 5.5%, the payment drops to $4,542, a monthly savings of $780, or $9,360 annually.

As rates drop, affordability improves and buyer demand rises, heating up the already hot Los Angeles County housing market. Homes priced below $1.25 million are in high demand, with the market experiencing a decrease from 102 to 57 days on the market. However, the challenge is that the majority of Californians with a mortgage (89%) have rates at or below 5%, making them less likely to sell. Rates will need to drop to the mid-5s to encourage more sellers.

The issue is that buyer demand reacts quicker to falling rates than homeowners who need more time to prep their homes for sale. This occurred in 2017 and 2019 and in the post-pandemic world of 2020 and 2021. In each of those years, market times dropped considerably during the last few months of the year. Typically, the housing market slows during the year’s final quarter and does not get hotter.

The window of opportunity to purchase is right now, before rates fall further, igniting demand. While the market may be unexpectedly hot right now, even with high rates, it can grow hotter with even more competition to purchase as rates eventually ease.