How often can you go back to the low rate well? That seems to be the question at least when it comes to low interest rates. I heard an analyst say that the bulk of low hanging fruit already refinanced so small basis point moves are simply not going to make an impact on refinancing activity short of home values going higher. I would also add that sales volume is not going to jump significantly because of a few basis points given current levels. The higher price amount is constrained by a variety of factors including stagnant wage growth. Younger Americans that make up the bulk of first time buyers are largely absent from this market and many are living at home with parents. Headlines were raging that mortgage applications soared in the last reading. But when we look at the data, it looks like a blip on the radar screen. Who needs a mortgage? Anyone that isn’t the Wall Street investor buying crowd or foreigners that purchase properties with all cash offers. Given how low mortgage rates are, you would expect more people to be buying into this momentum but they are not. Why? Rates have been low for some time now and it is rather apparent that investor buying was a large push for higher prices, not regular families buying up homes.
Real estate agents and brokers make a large portion of their income once a sale is completed. Escrow closes and the nice healthy commission is dished out. During the heyday of the housing bubble we had over 260,000 active real estate agents in California. Today it is down to 170,000 as licenses expire. The drop in the number of agents corresponds to the big drop in sales volume. California home sales are a shadow of what they were during the boom. So it makes complete sense that real estate agents have pulled back in conjunction with the drop in sales volume. From the perspective of an agent, you would rather sell two $500,000 properties instead of one $700,000 home. Inventory is still low so for those looking to buy, you have slim pickings and crap shacks still permeate the landscape. So where did all the real estate agents go?
According to some, every single piece of livable space in Los Angeles is gentrifying at a glorious pace. Crap shacks are now mansions in their Kool-Aid colored glasses. Many try to disguise their deeply speculative ways as being conservative but in reality, they might as well be speculating in oil futures. Some feel that they missed out and shed tears but this only makes sense if you bought, and then actually sold the place. Unless you sell, that equity is locked in. Of course we have tons of Friskies eating boomers who just can’t cash in their housing lottery ticket and instead are house rich and cash poor because they would rather die in L.A. living like a pauper versus going elsewhere and leveraging their winnings. If you truly were buying to stay put for 30 years then what does one or two years of price fluctuations matter? Unfortunately in SoCal we have financial amnesia and people actually forgot what happened in 2007 through 2010. Many buyers are property ladder wannabe climbers so they want to use their first home as a “starter” home before ending up in their dream mansion. Since every area is perfection, let us look at some deals in Los Angeles. According to some folks these are the important metrics: be in L.A., be close to “action”, make sure the sun is shining on you, and remember that every area is gentrifying. So today we’ll take a trip to Watts.
There is an interesting aroma in the housing market that is now placing many sellers in the position of having to lure buyers. The easy days of listing a crap shack for $700,000 and getting multiple offers will get more challenging as potential lemmings buyers wake up and realize how much they are plunking down and what they are getting in return. I’m not sure if people really think it through when they take on a 30 year mortgage. They focus on the monthly nut and when hormonal juices are roaring, the desire to buy can overpower the brain’s mechanism for common sense. For many folks with beer budgets and champagne tastes, there is the HGTV small home movement. Basically you will be living in a closet in your city of choice. Instead of people realizing that there is an alternative of renting, many are deciding to take the plunge into incredibly small properties. Today we focus on a 480 square foot property in Echo Park.
As the year comes to a close, it is useful to put things into perspective. Sure, California has a love affair with real estate and we go through our traditional booms and busts. $700,000 crap shacks now litter the landscape but there are fewer and fewer lemmings taking the plunge. In Canada there was no correction. In fact, households continue to go into deep debt to purchase real estate. The argument goes that mortgage standards are much tighter in Canada so therefore, they are much more enlightened when it comes to financing homes. People forget that the bulk of the 7,000,000 foreclosures in the US came in the form of standard loans. Garbage loans imploded in more dramatic fashion but people lost their homes because the economy shifted. At that point, it merely meant covering the monthly nut. We were housing dependent and that market contracted aggressively. Canada is housing and oil dependent. And oil just got a big kick to the shins.