If you’ve been paying any attention to the local real estate market you’ve probably noticed that prices for homes, condos and townhomes have been going up and up.
Buyers either think that’s just the way it’s going to be for a while or that we’re in another price bubble (in which case they aren’t really buyers right now).
Sellers think it is great but in many cases are either waiting for prices to go up more before they sell or for prices to come down before they buy their next home (of course then that means they will get less for the house they will be selling too).
Why are prices continuing to rise and how much longer will they do so?
Affordability no longer has to do with the price of a home, it has to do with how much a monthly mortgage payment is.
For cash buyers, they look at overall value and the purchase price they are willing to pay. For buyers who are financing their purchase, they want to know how much it will cost them each month.
Mortgage interest rates have been very low for over a decade now and despite the possibility of that changing soon, it hasn’t changed yet. Because of low interest rates resulting in affordable monthly mortgage payments, increasing home prices have not slowed the market down yet.
Let me give you an example to help make this easier to understand.
A homeowner with a 5 year old son purchased their home in 2000 for $500,000 with 20% down and got the best 30 year conventional loan interest rate of 7.5%. Their principal and interest payment was $2800 a month.
That homeowner’s son turned 21 and then bought his first home in 2016 for $800,0000 with 20% down and got the best 30 year conventional loan interest rate of 3.4%. His principal and interest payment is $2838 a month.
So even though some buyers do balk at the current prices, most are just used to this being where prices are at and look at what their monthly payments will be. This is why prices have been able to continue rising.
Sellers need to understand that even though buyers may accept where prices are at and are still buying – they want value for what they pay and will not overpay even in a market like our current one where inventory is low.
If a buyer can afford a home it doesn’t mean they feel they price is worth it and the homes that sell in our current market are the ones which can show buyers that they are getting adequate value for what they pay while the homes that don’t sell, or take a long time to sell (after dropping their price) are ones where buyers don’t see the value matching the price.
There will also be a point where we will hit an affordability ‘ceiling’ where the average home price is not affordable for the larger percentage of buyers even when just looking at the monthly payments. This will result in a decrease in number of sales, longer time to sell and lower percentage of sale price in relation to list price. It will likely start sooner in the west side of L.A. and happen later in the east portions due to the current higher prices on the west and lower prices in the east.
When this does happen there will be ways for both buyers and sellers to come out ahead if they know how to approach it correctly. Most buyers and sellers don’t have the info needed to really take advantage of that type of market – if you want to get the upper hand for when that day does come, just let me know so I can help you with that.