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July 21, 2023

Why Multifamily Investments Are a Good Option When Inflation Runs Wild

With stubborn inflation, investment triggers feel harder to pull in 2023. Multifamily real estate is a strong option.

In an inflationary environment, many investors flounder as pulling the trigger on investments of any kind can feel like higher stakes. The questions are endless. With rising interest rates, falling returns and concerns about recession, where are our dollars best placed to serve our long-term financial goals? Will I need to keep this cash more liquid in case inflation gets out of hand? Or what investments are safer when economics are shifting so rapidly all around us?

One particular category of investment is especially daunting to many, and even more so during shifting economic times—commercial real estate investing. In countless financial advisory offices this year, the question has been posed ‘is now a smart time to invest in commercial real estate?’

Our analysis points to yes, particularly when it comes to multifamily. Unlike stocks and bonds, real estate provides a strong defensive strategy against market volatility, a hedge against inflation and a  wide range of tax advantages (especially in 2023). Additionally, the sector is currently benefitting from a fundamental imbalance in supply and demand, which is generating higher income and cash flows not available with other asset classes. Let’s take a closer look at the many factors at play.

Recession

There are several advantages of investing in multifamily real estate in a recessionary environment. Supply of both rental and for-sale housing is constrained, as lenders and equity partners have moved to the sidelines and new housing deliveries are delayed. Demand is increased, as renters are priced out of homeownership by exorbitant home costs and rising interest rates, and new cohorts join the rental market. Apartment occupancy rates also tend to remain firm during economic downturns, as renters are disinclined to relocate and opt to stay in the rental housing longer than they otherwise would.

Interest rates

Apartments are likely to perform well in both stable and rising interest rate environments. Historically, financing rates for apartments have been lower than other commercial property types, as federal backing of multifamily mortgages from Fannie Mae and Freddie Mac results in a lower risk premium than privately sourced mortgages. In fact, according to Real Capital Analytics, apartments have benefitted from financing rates that averaged more than 48 basis points lower than commercial property over the last 10 years. Apartment investors may actually benefit from demand destruction caused by higher interest rates—especially if the increase in rates is due to rising inflation, as is underway now. As homes become more expensive to buy, and new product more expensive to build, the existing inventory of rental housing becomes more valuable and in demand.

Inflation

Multifamily investment can serve as a hedge against inflation by offering the opportunity to reset lease rates as frequently as every 12 months, compared to three to 10 years for other property types. This provides managers with the flexibility to quickly reset pricing to meet demand or offset rising operational costs.

Historically, apartment rents have tended to outpace overall inflation rates. However, the potential for pushing rents upward will vary by how cost-constrained each market is, so strong local knowledge and acquisition selectivity is essential.

RealPage recently published a study that found the vast majority of renters were able and willing to pay their rent. While rents have soared due to a 40-year high in inflation, so too have renters’ incomes. This has kept rent-to-income ratios much lower than widely assumed, and not enough to meaningfully change apartment affordability.

The benefits to apartment investors go beyond the dramatic increase in rents. At Hamilton Zanze, operating expenses for the company’s national portfolio of multifamily properties represent approximately 40 percent of revenue. Even though rents are rising faster than inflation, if both revenue and expenses rose at the rate of inflation, our net operating income (NOI) and cash flow would still increase.   

Liquidity

Liquidity is the biggest factor differentiating multifamily from other types of commercial real estate right now. As capital markets have largely frozen up, it has become incredibly difficult to get a loan for an office building, for example. We predict we will see a significant amount of distress in these properties, which may provide opportunities for savvy investors. By contrast, there is plenty of liquidity for apartments, with government-backed lenders like Fannie Mae and Freddie Mac doing exactly what they are supposed to do—step up to provide liquidity to the nation’s residential mortgage finance system. As a result, apartments have been spared the dramatic drop in asset values we are currently seeing with other types of commercial real estate.

Tax benefits (especially in 2023)

Total returns on real estate investment are enhanced with several tax advantages, including depreciation (particularly with bonus depreciation through cost segregation), capital gains deferral through 1031 exchanges, as well as the tax-efficient cash flow to investors considered a return of capital and reduction of basis before becoming taxable.

Smart investors will want to act quickly in the fourth quarter to take advantage of bonus depreciation, which allows purchasers to deduct 100 percent of eligible property through December 2022. Beginning with acquisitions in 2023, this benefit will gradually decrease each year until it is phased out in 2026.

Portfolio diversification

As the world slowly reemerges from COVID and investors prepare for whatever lies ahead, it is important to remember that portfolio diversification is essential in uncertain economic times. Apartment properties can provide a proven alternative asset class to a well-constructed portfolio, and to a growing number of investors, the category is increasingly recognized as a “fourth asset class” and a valuable alternative to traditional investments such as stocks and bonds.

Valuations

Another question on investors’ minds right now is what is happening with valuations.

Capitalization rates (and therefore asset values) are largely influenced by capital flows—more so than interest rate movements. According to Dr. Peter Linneman, “the connection between both multifamily and office cap rates and interest rates is weak, while the connection with flow of funds is the powerful driving force.”

Currently, cap rates have expanded by 10-20 percent, as interest rates have caused many funds and private equity groups to sit on the sidelines. However, there is a tremendous amount of equity that needs to be deployed for apartments and we expect transactional volume will pick back up in the first quarter of 2023. As the flow of capital returns to the market, cap rates should begin to stabilize.

According to a new report from Freddie Mac, multifamily is well positioned despite pressure on cap rates, and they expect every market they cover to experience gross income gains this year. The reason for this is that while cap rates are influenced by risk appetites, perceived uncertainty, cost of capital and market upside, net operating income (NOI) is generated through operations. Consequently, NOI growth is eroding the decrease in valuation from cap rate expansion.  

Demographic trends

Homeownership rates remain well below levels witnessed in the last recession and today’s demographic trends continue to favor renting. The prime age group for renters—typically those 20-34 years old—is still increasing in size. In fact, more than half of the nation’s total population are now members of the millennial generation or younger. 

While millennials are getting older, many continue to rent, whether as a lifestyle choice or due to rising home prices and burdensome student loan debt. Gen Z has also now entered the rental housing market, which will have a significant impact in the years ahead. Additionally, due to lifestyle changes and down-sizing, baby boomers also continue to be a significant source of apartment demand.

High demand, limited supply

Despite recent increases in multifamily starts, demand for rental housing still far exceeds current supply with a shortfall of 600,000 units, as reported by the National Multifamily Housing Council and the National Apartment Association.

In recent years, apartment construction has been concentrated on class-A, “renter by choice” product in downtown or central business district (CBD) areas of the major gateway markets. This has reflected demand from young workers who prioritized prime location and amenities over living space, a preference that will likely shift as millennials seek larger, more suburban properties to start families. Developers have largely overlooked prime suburban areas, where rent and occupancy performance have outperformed downtown areas. This presents an opportunity for investors to acquire suburban apartments at more favorable initial acquisition yields.

There continues to be limited new development for properties targeted toward the more moderate “renters by necessity,” who are a stable source of demand and less likely to shift toward homeownership regardless of changing market conditions.

It is worth noting that current inflation is also impacting the upcoming supply of new multifamily product. The rising price of construction materials and labor costs may cause some planned projects not to be built and limit the development of future projects. This will have the effect of making existing product more valuable, as replacement costs increase.

Affordability gap

While rents have been rising sharply, home prices have risen even faster. As a result, renting remains a far more affordable option than buying almost everywhere. According to recent Zillow data, mortgage payments are higher than rent in 45 of the 50 largest U.S. metros, up from 22 in 2019. Typical U.S. rents are now $2,031 per month, having crossed the $2,000 threshold for the first time this year, with an annual growth rate more than three times that of July 2019.

As barriers to homeownership remain high, which will likely hold true for some time, renting remains the most cost-effective option for many would-be-buyers.

Pandemic impact

Counter to the assumptions of many, rent collections have remained generally stable throughout the pandemic—consistently averaging between 95 percent and 96 percent since March 2020, according to RealPage.

After rents were frozen for two years, landlords are now playing catch-up. Despite sharp rental rate increases in many markets, residents are staying in their apartments longer. According to RealPage, apartment retention rates rose by 3.5 percentage points year-over-year in April to 57 percent. Notably, when renters renew their leases, they are also spending significantly more—10.7 percent more when compared to their previous lease. New renters, however, are paying even higher rates for the same units.  

Demand for rental housing continues to outpace inventory in many areas. The 2023 Rental Housing Report from the Joint Center for Housing Studies (JCHS) of Harvard University reported the lowest rental vacancy rates since the mid-1980s.

Conclusion

In summary, there are many compelling reasons for why now is a particularly good time to invest in multifamily real estate. Historic demand across multiple generations, an anemic supply of new housing, demographic and lifestyle trends that favor renting, and economic advantages for both investors and renters will continue to provide tailwinds to the multifamily market. It is, quite frankly, a great time to be a landlord in whatever form or fashion that role can be held.

July 11, 2023

Los Angeles Housing Market: Prices, Trends, Forecast 2023 / 2024

The Los Angeles housing market has been closely watched by real estate professionals and potential buyers alike, as it is one of the most active and competitive markets in the United States. In this report, we will take a closer look at the current state of the Los Angeles housing market, including prices, trends, and forecasts for the rest of 2023. We will analyze the latest data on median home prices, sales volume, and inventory levels to provide insights into what buyers and sellers can expect in the months ahead.

The May 2023 Los Angeles Housing Market Report reveals a mixed picture of the current state of the market. While the median sold prices experienced some fluctuations, the sales volume demonstrated an overall upward trend. These changes may indicate shifting dynamics in the demand and supply of housing in the region.

Median Sold Price of Existing Single-Family Homes

·       Los Angeles County's median home price in May 2023 was $744,770.

·       The median home price in April 2023 was $738,520.

·       Last year, in April, the median home price was $798,720.

The median sold price of existing single-family homes is an essential indicator of the overall health and stability of the housing market. C.A.R.’s resale report for May 2023 shows that the median sold price for Southern California stood at $800,000. This represents a slight increase of 1.9% from the previous month but a significant decrease of 5.3% compared to May 2022.

Within Los Angeles County, the median sold price was slightly lower at $744,770, with a month-to-month increase of 0.8%. However, when compared to May 2022, the median sold price in Los Angeles County witnessed a decline of 6.8%.

The Los Angeles Metro Area experienced a median sold price of $765,000 in May 2023, showing a month-to-month increase of 3.4%. Comparing this to May 2022, the median sold price dropped by 5.0%.

Sales Trends

Examining the sales trends in the Los Angeles housing market provides us with valuable insights into the level of activity and demand. In May 2023, the Southern California region reported a month-to-month increase of 19.4% in sales, indicating a rise in buyer interest. However, when compared to May 2022, there was a significant decrease of 22.3% in sales.

Within Los Angeles County, the sales figures for May 2023 showcased a month-to-month increase of 20.6%. However, in a year-over-year comparison, the sales volume dropped by 21.8%.

Similarly, in the Los Angeles Metro Area, sales experienced a month-to-month increase of 25.0%. Nonetheless, there was a notable decline of 20.9% in sales when compared to May 2022.

Housing Supply 

Generally, a balanced market will lie somewhere between four and six months of supply. Inventory is calculated monthly by taking a count of the number of active listings and pending sales on the last day of the month. If an inventory is rising, there is less pressure for home prices to increase. With 2.2 months of supply left, it is still short of what economists say is needed for a balanced market. Hence, the Los Angeles County housing market will continue to see upward pressure on home prices.

·       Months Supply of Inventory (SFH) for Los Angeles County is now 2.2 months.

·       Months Supply of Inventory (SFH) for the Los Angeles Metro Area is 2.2 months.

·       Months Supply of Inventory (SFH) for Southern California is 2.1 months.

Is Los Angeles a Seller's Real Estate Market?

The following Los Angeles housing market trends are based on single-family, condo, and townhome properties listed for sale on realtor.com. Land, multi-unit, and other property types are excluded. This data is provided as an informational resource only.

When it comes to the real estate market, one crucial factor to consider is whether it favors sellers or buyers. A seller's market indicates that there is more demand from buyers than the available supply of homes. Let's explore whether Los Angeles County, CA qualifies as a seller's real estate market based on data from May 2023.

Median Listing and Sold Prices

In May 2023, the median listing home price in Los Angeles County, CA was $965K, showing a significant increase of 7.3% compared to the previous year. The median listing home price per square foot was $625, indicating the high value placed on real estate in the area. Furthermore, the median home sold price in Los Angeles County during May 2023 was $830K.

Sale-to-List Price Ratio

The sale-to-list price ratio in Los Angeles County was 100% in May 2023. This means that, on average, homes were sold for approximately the asking price. A sale-to-list price ratio of 100% suggests that sellers have the advantage in negotiations, as buyers are willing to meet their asking prices.

Seller's Market

Los Angeles County, CA can be classified as a seller's real estate market in May 2023. The combination of high median listing prices, rising year-over-year prices, and homes selling for the asking price indicate a market that favors sellers. In other words, there are more people looking to buy than there are homes available.

Average Days on Market

On average, homes in Los Angeles County, CA sell after spending 37 days on the market in May 2023. This metric, known as the median days on market, provides insights into the pace of home sales. It is worth noting that the trend for median days on the market in Los Angeles County has decreased since last month, suggesting a faster-selling market. However, compared to the same month last year, the median days on market has slightly increased, indicating a potentially more balanced market than before.

Hence, Los Angeles County, CA can be characterized as a seller's real estate market in May 2023. The combination of high listing prices, homes selling for the asking price, and relatively quick sales suggests that sellers have the advantage in negotiations.

Are Home Rents Going Up or Down in Los Angeles?

The Zumper Los Angeles Metro Area Report analyzed active listings across the metro cities to show the most and least expensive cities and cities with the fastest growing rents. Rents in Los Angeles are higher than the state median rent. The California one bedroom median rent was $2,065 last month. Laguna Beach was the most expensive city with one-bedrooms priced at $3,500 while Twentynine Palms was the most affordable city with one bedrooms priced at $1,000.

The Fastest Growing Cities in the Los Angeles Metro Area For Rents (Y/Y%)

·       Laguna Beach had the fastest growing rent, up 16.7% since this time last year.

·       San Bernardino saw rent climb 15.7%, making it the second fastest growing.

·       Beverly Hills ranked as third with rent jumping 15.5%.

The Fastest Growing Cities in Los Angeles Metro Area For Rents (M/M%)

·       Twentynine Palms had the largest monthly rental growth rate, up 6.4%.

·       Ontario rent increased by 6% last month, making it second.

·       Newport Beach & West Hollywood tied for third with rents climbing 5.9% last month.

 

Los Angeles Housing Market Forecast 2023-2024

Let us look at the price growth recorded by Zillow, a leading real estate marketplace. As of May 31, 2023, the average home value in the Los Angeles-Long Beach-Anaheim area stands at $885,564. This figure represents a 4.3% decrease over the past year, indicating a slight decline in home prices. Additionally, homes in this region typically go pending in around 13 days, showcasing a fast-paced market with properties quickly attracting buyer interest.

Home Value Forecast

Based on the market data available as of May 31, 2023, a 1-year market forecast for the Los Angeles housing market suggests a 4.3% increase. While the past year has seen a decline in home values, the forecast anticipates a rebound and a positive trajectory for home prices in the coming year. It is important to note that market forecasts are subject to various factors and should be interpreted with caution.

Sale to List Ratio and Pricing Trends

The median sale to list ratio in Los Angeles, as of April 30, 2023, is 0.998. This ratio indicates that, on average, homes are selling very close to their list prices. It suggests that sellers are generally achieving their desired sale prices, with minimal deviation from the initial asking price.

Sales Price Performance

In April 2023, approximately 42.3% of home sales in Los Angeles were closed above the list price. This statistic reflects a competitive market environment where buyers are willing to pay more than the listed price to secure a property. On the other hand, around 45.1% of sales were closed under the list price, indicating that some buyers were able to negotiate a price lower than what was initially advertised.

Median Days to Pending

The median days to pending, as of May 31, 2023, is 13. This metric represents the median amount of time it takes for a property to receive an offer and go under contract. A relatively low median days to pending value indicates a fast-moving market where buyers are actively engaging with properties and making timely purchase decisions.

Is Los Angeles Housing Market Going to Crash?

Some of housing analysts say that home prices in Los Angeles and Orange counties will fall by the middle single digits in 2023, while home prices in the Inland Empire will fall by the high single digits over the same time period. They anticipate that prices will continue to fall on a regional and national scale in 2024 but at a considerably slower rate, followed by a little increase in 2025.

Do buyers have any advantage? Is it the right time to buy a house in Los Angles? This is a never-ending question with no definitive answer. Buyers believe it is not a very good time to buy a home in Los Angeles due to rising mortgage rates and home prices. On the other hand, it is a good time to sell so you can expect more inventory due to increasing seller optimism.

More houses are expected to be listed in the coming months which may bring down the pace of appreciation to some extent. Affordability is a big issue in Los Angeles County as nearly three in four residents can’t afford to buy a median-priced home in the area. According to Housing Wire, an index that combined median income and median home prices made Los Angeles the least affordable city in the country, and several younger residents said they were concerned they will never be able to afford a house. Home shoppers are leaving Los Angeles for cheaper metros, the most popular being Las Vegas.

Is Real Estate a Good Investment in Los Angeles?

Should you consider Los Angeles real estate investment? Many real estate investors have asked themselves if buying a property in Los Angeles is a good investment. You need to drill deeper into local trends if you want to know what the market holds for real estate investors and buyers in 2023.

Los Angeles is a moderately walkable city in Los Angeles County. It is home to around four million people. It is the largest city in California and the second-largest in the United States. Los Angeles Metropolitan Area is a 5- region that includes Los Angeles, Orange, Riverside, San Bernardino, and Ventura. The L.A. metropolitan area with over 13 million people rivals New York in population as the largest in the country. However, being a huge real estate market is not reason enough to invest here.

The Los Angeles real estate market is considered one of the premier markets for both investors and homeowners. It is also touted as the nation’s least affordable housing market. If you look in the long-term, it’s always a good investment to buy in Los Angeles. It is said that you will always get your money back or you would make a profit, as Los Angeles has a track record of being a great long-term investment.

Los Angeles Rental Market Trends 2023

Current Rent Prices in Los Angels: Before the pandemic, the average rent for an apartment in Los Angeles was $2,524, growing by 2% YTY, according to RENTCafé. The average size for a Los Angeles, CA apartment is 792 square feet. 40% of the households in LA are renter-occupied while 60% are owner-occupied. Studio apartments are the smallest and most affordable, 1-bedroom apartments are closer to the average, while 2-bedroom apartments and 3-bedroom apartments offer more generous square footage.

As of June 2023, the average rent for a 1-bedroom apartment in Los Angeles, CA is currently $2,399. This is a 1% increase compared to the previous year. Over the past month, the average rent for a studio apartment in Los Angeles remained flat. The average rent for a 1-bedroom apartment decreased by -1% to $2,399, and the average rent for a 2-bedroom apartment increased by 2% to $3,375.

·       The average rent for a 2-bedroom apartment in Los Angeles, CA is currently $3,375. This is a 5% increase compared to the previous year.

·       The average rent for a 3-bedroom apartment in Los Angeles, CA is currently $4,750. This is a 12% increase compared to the previous year.

·       The average rent for a 4-bedroom apartment in Los Angeles, CA is currently $6,700. This is a 28% increase compared to the previous year.

Some of the most affordable neighborhoods in LA are:

·       Jefferson Park, where the average rent goes for $1,355/month.

·       El Sereno, where renters pay $1,396/mo on average.

·       Vermont Knolls, where the average rent goes for $1,445/mo.

·       Glassell Park & Cypress Park, where the average rent goes for $1,485/month.

·       Cypress Park, where renters pay $1,396/mo on average.

·       North Hills, where renters pay $1,530/mo on average.

Construction Isn’t Meeting Housing Demand in LA

The Los Angeles housing market has seen a bump in residential construction. This has helped to satisfy some demand from renters. However, due to increasing demand, the new supply hasn’t brought prices down. The current supply of existing single-family homes is 1.4 which is insufficient to meet the demand. This also suggests that any new wave of construction will at most result in rental rates remaining steady instead of causing them to fall.

The geography of this region also limits the supply. The Los Angeles metropolitan area is perched between the ocean and the mountains. You obviously can’t build on water. There’s only so far you can build into the hills when mudslides and earthquakes limit how much you can build there. The Los Angeles real estate market is further constrained by the vast national parks around L.A. like the Angeles National Forest. These areas simply cannot be turned into residential areas.

Two of the most fundamental economic indicators are employment and income. Home sales usually are directly tied to an economy's health and rise and fall with economic activity. As economies slow, the supply of money tends to become more restrictive. What makes Los Angeles unique is the employment market. Want to work in Hollywood? Move to L.A. Want to work for a production company or in fashion? Come to L.A. If rent is too high, share an apartment or single-family home with friends. In terms of home prices, income, and employment indicate whether people can afford current and future increases.

The Golden State added 310,300 jobs in 2019, a 1.8% increase, to a total of 17.61 million, according to data released by the California Employment Development Department. The previous year’s increase was 1.6%. In Los Angeles County, nonfarm jobs grew by 67,800 to a total of 4.65 million. That was a 1.5% rise, led by healthcare and social assistance (up 28,000) and construction (up 8,500). The unemployment rate was 4.4% in December, down from 4.7% a year earlier.

 

May 22, 2023

Is Building An Additional Dwelling Unit (ADU) Right For You

Why build an ADU on your property?

 

Many homeowners are excited about the simplified restrictions and are now exploring building an accessory dwelling unit on their property, but why? I’d say it comes down to two things: their new ability to add living space to their property in a simplified manner, coupled with the tremendous variety of potential uses for an ADU.

 

Adding square footage to an existing home in the past meant building an ‘addition’ or second story, which was a headache. Not only was it often very costly, time-consuming, and usually required considerable changes to the home's existing layout, but it also meant living through the discomfort of construction in your home.

 

An accessory dwelling unit relieves many of these problems and allows for many flexibility in uses. People are building them as extra space (an office or guest house), a music or yoga studio, a mancave or she-shed, or a home for their retired parents or grown children.

 

 

Beyond these ‘typical’ uses, it’s also an opportunity for a homeowner to use as a rental unit for additional income. I’ve heard from several soon-to-be retired homeowners planning to build an ADU in Los Angeles so they can move into it (as they don’t need as much space) and rent their primary home as a source of retirement income. That’s pretty ingenious.

 

Who can build an ADU?

 

With regard to parking, an ADU is exempt from any parking requirements as long as the property is within one-half mile of public transit (bus stop, etc).ADU on their property

 

Los Angeles ADUs are also allowed on multifamily properties such as duplex, triplex, four-plex, and apartment buildings. These properties generally have different guidelines for the construction of ADUs, but they also have the potential to build several ADUs on a single property. 

 

If converting an existing garage into an ADU, two spots need to be maintained for the existing residence but can be uncovered spots on a driveway, which can be side-by-side or even tandem. A new accessory dwelling unit must be at least 10’ away from the existing house and garage or it must be attached to either. Also, a new unit must be at least 4’ from both the rear and side property lines. A garage conversion into a living space, however, does NOT need to meet these setback requirements.

 

How much does an ADU in Los Angeles cost?

 

An accessory dwelling unit cost will vary greatly in cost based on the options and size you choose. As discussed, the most cost-effective option is to convert an existing garage into an ADU garage conversion.

 

Since the major components already exist, the construction entails items such as constructing the fourth wall (where the garage door is currently), adding the interior components such as interior walls, a kitchen, bathroom, flooring, etc; adding windows and doors, plumbing, electrical, HVAC, insulation, and a new sewer line that will probably connect to the sewer lateral at the front of the main home.

 

 

 

 

The cost for an ADU garage conversion can usually range from $95,000-$120,000 depending on the homeowner’s requirements. Costs to construct a new accessory dwelling unit in Los Angeles can also vary considerably based on size, the number of stories, location, access, etc, but will generally range from $150,000-$400,000

A safe rule of thumb is to assume $250-$400 per square foot – the bigger the space, the lower cost per square foot. If you’re considering ‘building up’ for a 2-story ADU, costs will go up considerably as well. Keep in mind that ADU cost also can vary greatly depending on the quality and style of materials you plan to use. ADU cost will be affected by both interior materials (flooring, kitchen cabinets, tile, lighting, etc) as well as exterior materials such as roofing, stucco/siding, hardscape & landscape. Finally, ADU costs are affected by things like ADU permit cost, city requirements or fees, and the proximity to utilities on your property. For ADU cost-saving ideas check out this blog (link). 

 

Finding The Right Team – How do I hire a good Los Angeles ADU contractor?

 

When looking to build an accessory dwelling unit or even starting to explore the idea, it’s best to search for only local, licensed General Contractors. No other contractors are qualified or equipped to do this sort of construction, and using an unlicensed contractor or handyman would be a mistake.

 

 

Any contractors you contact, always confirm they have experience with these types of projects. It is best to hire a contractor who’s built additions and garage conversions in the past and knows the potential issues/pitfalls. There are several other important criteria you should use in selecting a contractor, not including their cost estimate.

 

Other things to look for in a contractor include:

  • Check for a valid contractor’s license

It’s extremely important to check their license on the Contractors State License Board website to confirm it is active, there are no disciplinary actions, and it has Workers Compensation insurance associated with it (assuming the GC has employees).

  • Make sure they’re insured

Always ask the contractor for a copy of his insurance certificate and make sure that it hasn’t expired. It might be a good idea to call the insurer directly, just to be sure. There have been cases reported where uninsured contractors have ‘Photoshopped’ their insurance papers to trick homeowners, so you can never be too careful.

  • Check their references

Ask your contractor for at least three references you can call. It’s important to ask them about their experience and satisfaction with the quality of the contractor’s work. If you can get any pictures of the work, even better.

  • Read their reviews online

It’s also a good idea to do a Google & Social Media search of the contractor to ensure there are no major red flags. Read any reviews you can find about their business, and don’t be afraid to address what you found with the contractor if there is anything concerning.

 

Building an ADU is not dissimilar to building a small home. Therefore, it’s super important to interview multiple ADU contractors in Los Angeles. The planning, permitting, and construction of an ADU is a long process, so the ADU contractor you select and hire will be “in your life” for a long time. You can be certain there will be cost overruns and delays, so ensuring that you’ve hired an honest and trustworthy ADU contractor will make a big difference during the process. The right contractor will be upfront and communicative with you.

 

 

 

 

 

 

 

 

 

May 22, 2023

What is an Accessory Dwelling Unit (ADU)?

What Is an Accessory Dwelling Unit (ADU)?

For many aspiring real estate investors, having enough money to put down on a property can be a barrier to entry. But real estate investing doesn’t have to start with buying a house. A more affordable way to get started can be by buying or building an accessory dwelling unit (ADU).

An ADU is a second residential unit that shares a building lot with another home. So, if you already own your primary residence, you may be able to build an ADU on your existing property and rent it out (i.e., house hacking). In turn, you may be able to use the extra rental income to save up for a separate investment property.

In this article, we’ll explore what an ADU is, the different types of ADUs, the benefits of using an ADU for rental purposes, and more.

What Counts as an ADU?

 

To be considered an ADU, a structure must have all the amenities necessary for living. That includes a bathroom and kitchen as well as standard utilities like water, electricity, and heating. It must also have a separate entrance from the primary home.

An ADU can look like a basement apartment, guest house, backyard cottage, or even a garage or barn (if the necessary elements are added).

What all ADUs have in common is that they share a building lot with another (usually larger) primary structure. As a result, they are considered a part of the main home and cannot be sold as a separate piece of real estate.

Types of ADUs

 

Now that you know what an ADU is, here are the three main types of ADUs:

  • detached ADU (DADU) is structurally separate from the main home. This could be a tiny house, a backyard cottage, or a detached garage that’s been renovated. Most detached ADUs are somewhere between 400 and 800 square feet.
  • An attached ADU (AADU) is connected to the main home. It could be an apartment built onto the back or side of the house, for example. Attached ADUs can be a good option for smaller lots that may not have space for a detached ADU.
  • An internal ADU (IADU) is an ADU that exists entirely within the primary property. This could be a basement apartment, attic apartment, or any interior space that has been converted into its own living space with a separate entrance.

 

Benefits of Owning an ADU

 

As an aspiring investor, building an ADU can offer many benefits. Here are some to consider:

Potential Rental Income

 

ADUs can be a great source of rental income if your zoning laws allow them.

If you’re able to use an ADU for rental income, you can either rent them out to a long-term tenant via a traditional 12-month lease or put it up as a short-term rental (STR) on platforms like Airbnb and VRBO (make sure to check your local STR regulations since some areas place heavy restrictions or even bans on STRs).

Either rental strategy is a great way to leverage the untapped potential of your primary residence to make some extra cash (and save for a separate investment property!).

Potential Property Appreciation

 

Another benefit of building an ADU is that it can add value to your home. According to United Dwelling, an ADU can improve the value of your home by up to 30%.

How? An ADU adds extra living space that can serve as a guest house, an office, or an additional rental unit, which makes the property more attractive to future buyers.

As an investor, you may be able to take advantage of this appreciation by selling the property (which now includes an ADU) for a profit when you’re ready to move onto another property.

How to Comply with Local ADU Regulations

Before you start building an ADU, it’s important to check your local zoning laws.

Some areas may not allow ADUs, while others may have limits and restrictions on their size, style, and who can live in them. For example, some housing codes may require that only family members or domestic employees live in the ADU (in which case, you wouldn’t be able to use it as a rental).

Other codes may stipulate minimum lot sizes, a maximum number of occupants per bedroom, and off-street parking restrictions—all of which should be considered.

The key is to do your research upfront, so you don’t have problems after investing time, money, and energy into adding the ADU. Violating city ordinances could result in hefty fines and future problems if you try to refinance or sell the property.

Once you’ve verified your local ADU regulations, you’ll need a building permit no matter where you live. The only time you may not need one is if the structure is uninhabitable and under 200 square feet, which wouldn’t qualify as an ADU anyway.

The best thing to do is to consult a legal professional who understands the local housing regulations where you live and can give you their advice. If you plan to finance the ADU, you’ll want to clear your plans with your lender as well.

 

The Growing ADU Trend and What’s Driving It

 

 

ADUs are on the rise.

 

According to a July 2020 study by FreddieMac, first-time MLS listings of ADUs have increased an average of 8.6% year-over-year between 2009 and 2019. During that same period, ADU listings as a percentage of total active listings also rose from 3.5% to 6.6%.

 

ADU rental listings have gone up, too. From 2003 to 2019, the number of active rental listings increased from 1.8% to 4.1%, and the number of leased rental listings increased from 1.2% to 2.9%.

 

So what’s driving these trends? Several things:

 

The average American household is shrinking. In 2021, the average number of people living in one house was 2.51, down from 3.33 in 1960. At the same time, the average U.S. house size has increased from 1,500 square feet in 1970 to 2,496 square feet in 2019. Many homebuyers today simply don’t need all that space and prefer to buy something smaller instead. 

 

Additionally, many baby boomers are beginning to downsize as they retire and become empty nesters.

 

There’s a nationwide housing shortage. As of the fourth quarter of 2020, the U.S. had a housing supply deficit of 3.8 million units. That’s partly because new construction is down due to labor and supply issues brought on by the pandemic. However, construction of entry-level homes below 1,400 square feet has been down since 2008 and hasn’t recovered since. Now, it’s at a 50-year low. With fewer listings on the market, many are choosing to stay with family in multi-generational homes and ADUs.

 

Housing affordability is down. Across the country, housing has become less affordable due to inflation and rising mortgage rates. Many would-be homebuyers are getting priced out of their market and are choosing to rent instead. For some (especially millennials and younger generations), an ADU rental can be an attractive option because it can offer more privacy and outdoor space than an apartment can.

 

Short-term rentals are becoming more popular. More and more travelers are choosing to book stays on short-term rental (STR) platforms like Airbnb and VRBO instead of hotels. According to a 2021 U.S. Short-Term Rental Outlook Report by AirDNA, available STR listings are expected to continue rising as they have since 2019 (aside from the minor slump in 2020 brought on by the pandemic). In addition, many STR guests are interested in properties like ADUs that offer unique experiences. Case in point: The fastest-growing STR property type in 2021 was the tiny house (with a 27% year-over-year change).

 

Government restrictions on ADUs are loosening. In response to many of the economic trends listed above, many state and local governments have passed laws and ordinances that eliminate previous barriers to building ADUs. For example, California has passed S.B. 1069, A.B. 2299, and most recently A.B 2221 to encourage ADUs and prevent local governments from exploiting loopholes to exclude them. This has led to a 1,421% increase in California ADU permits from 2016 to 2021. Other states that have helped lead the adoption of ADUs include Florida, Texas, Georgia, and Oregon.

 

Whether you’re just getting started as a real estate investor or a seasoned pro, ADUs present an exciting new opportunity with no shortage of ROI potential. If you use an ADU for passive income, don’t forget to follow your local zoning regulations, research your market and do your due diligence.

 

If the numbers add up, this could be just what you need to get your real estate investing career off the ground or take one you’ve already built to the next level!

April 25, 2023

Mortgage Qualification Tips: How To Qualify For A Mortgage

Qualifying For A Mortgage: The Basics

Let's begin by looking at the major factors lenders first consider when they decide whether you qualify for a mortgage or not. Your income, debt, credit score, assets and property type all play major roles in getting approved for a mortgage.

 

Income

 

One of the first things that lenders look at when they consider your loan application is your household income. There is no minimum dollar amount that you need to earn to buy a home. However, your lender does need to know that you have enough money coming in to cover your mortgage payment, as well as your other bills.

It's also important to remember that lenders won’t only consider your salary when they calculate your total income. Lenders also consider other reliable and regular income, including:

  • Military benefits and allowances
  • Any extra income from a side hustle
  • Alimony or child support payments
  • Commissions
  • Overtime
  • Income from investment accounts
  • Social Security payments

Lenders need to know that your income is consistent. They usually won't consider a stream of income unless it's set to continue for at least 2 more years. For example, if your incoming child support payments are set to run out in 6 months, your lender probably won't consider this as income.

 

Property Type

 

The type of property you want to buy will also affect your ability to get a loan. The easiest type of property to buy is a primary residence. When you buy a primary residence, you buy a home that you personally plan to live in for most of the year.

 

Primary residences are less risky for lenders and allow them to extend loans to more people. For example, what happens if you lose a stream of income or have an unexpected bill? You're more likely to prioritize payments on your home. Certain types of government-backed loans are valid only for primary residence purchases.

 

Let's say you want to buy a secondary property instead. You'll need to meet higher credit, down payment and debt standards, since these property types are riskier for lender financing. This is true for buying investment properties as well.

 

Assets

 

Your lender needs to know that if you run into a financial emergency, you can keep paying your premiums. That's where assets come in. Assets are things that you own that have value. Some types of assets include:

  • Checking and savings accounts
  • Certificates of deposit (CDs)
  • Stocks, bonds and mutual funds
  • IRAs, 401(k)s or any other retirement account you have

Your lender may ask for documentation verifying these types of assets, such as bank statements.

 

Credit Score

 

Your credit score is a three-digit numerical rating of how reliable you are as a borrower. A high credit score usually means that you pay your bills on time, don't take on too much debt and watch your spending. A low credit score might mean that you frequently fall behind on payments or you have a habit of taking on more debt than you can afford. Home buyers who have high credit scores get access to the largest selection of loan types and the lowest interest rates.

 

You'll need to have a qualifying FICO® Score of at least 620 points to qualify for most types of loans. You should consider an FHA or VA loan if your score is lower than 620. An FHA loan is a government-backed loan with lower debt, income and credit standards. You only need to have a credit score of 580 in order to qualify for an FHA loan with Rocket Mortgage®. You may be able to get an FHA loan with a score as low as 500 points if you can bring a down payment of at least 10% to your closing meeting. We don't offer FHA loans with a median credit score below 580 at this time.

 

Qualified active-duty service members, members of the National Guard, reservists and veterans may qualify for a VA Loan. These government-backed loans require a median FICO® Score of 580 or more.

 

Debt-To-Income Ratio

 

Mortgage lenders need to know that you have enough money coming in to cover all of your bills. This can be difficult to figure out by looking at only your income, so most lenders place increased importance on your debt-to-income ratio (DTI). Your DTI ratio is a percentage that tells lenders how much of your gross monthly income goes to required bills every month.

 

It's easy to calculate your DTI ratio. Begin by adding up all of your fixed payments you make each month. Only include expenses that don't vary. Debt that’s considered when applying for a mortgage can include rent, credit card minimums and student loan payments.

 

Do you have recurring debt you make payments toward each month? Only include the minimum you must pay in each installment. For example, if you have $15,000 worth of student loans but you only need to pay $150 a month, only include $150 in your calculation. Don't include things like utilities, entertainment expenses and health insurance premiums.

 

Then, divide your total monthly expenses by your total pre-tax household income. Include all regular and reliable income in your calculation from all sources. Multiply the number you get by 100 to get your DTI ratio.

 

The lower your DTI ratio, the more attractive you are as a borrower. As a general rule, you'll need a DTI ratio of 50% or less to qualify for most loans.

 

Lenders will often use your DTI ratio in conjunction with your housing expense ratio to further determine your mortgage qualification

 

Other Mortgage Qualification Factors

The factors lenders look at during the mortgage loan process aren't the only things you need to consider before you submit an application. Make sure you consider PITI, private mortgage insurance and closing costs when you calculate how much buying a home will cost you.

 

PITI

 

PITI stands for principal, interest, taxes and insurance, and acts as a rough estimate of how much you can afford to purchase a home. Many lenders will use your PITI estimate to determine if you qualify for a mortgage, as it provides an idea of whether you can afford to pay back the loan. You can calculate your PITI yourself if you have an idea of what you’ll owe in each category. That way you’ll know how much house you can afford before you fall in love with one you can’t.

 

Private Mortgage Insurance

 

Many people believe that it's impossible to buy a home if they don't have at least 20% down. This actually isn't true. You can buy a home with as little as 3% down, depending on your loan type. Some government-backed loans can even allow you to buy a home with $0 down. However, you will need at least a 20% down payment if you want to avoid paying for private mortgage insurance (PMI).

PMI is a special type of insurance that protects your lender in the event that you default on your loan. Despite the fact that PMI affords you no protections as the buyer, most mortgage lenders require that you pay it if you bring less than 20% down at closing. You have the option to cancel your PMI once you reach 20% equity in your home by paying down your principal each month.

 

Closing Costs

 

You also need to factor in closing costs when you apply for a mortgage. These are processing fees you pay to your lender in exchange for finalizing your loan. The specific closing costs you'll pay depend on where you live and the type of mortgage you're getting. Some common closing costs include appraisal fees, attorney fees and escrow fees. You can expect your closing costs to equal around 2% – 6% of your total loan value. Make sure that you have enough money to cover these costs before you apply for a loan.

 

 



 

March 24, 2023

The Art of Real Estate Negotiating

 

Real estate negotiations 

are a part of the business everyone needs to be familiar with. In many markets where supply is limited, how well you negotiate will directly determine how successful your business is. There are certain skills and styles that have become synonymous with the best negotiators.

They know when to be aggressive and how to keep the negotiations moving forward. They also understand that sometimes the best thing you can do is walk away. If you can get just a few more deals a year with your negotiating ability, your business will be transformed. The next time you are in the midst of negotiations, remember these real estate negotiation tips:

1. Know when to walk away: 

Before you get involved in any negotiations, you should have a number in mind for which you want to acquire the property. This should not be based on the asking price or where you think the negotiations will take you. Take the time and come up with your own bottom line number. The hard part is being disciplined enough to know where to draw the line. There are many negotiations that come down to wire, and a few thousand dollars may secure you the property. The problem is that you never know where the bidding will end up. Once you go over your bottom line number, there may be no turning back. Even if you up your price and get the property, you will be putting yourself at a disadvantage. You probably overpaid, and will be forced to cut corners in other areas. Don’t let yourself get involved in these situations.

2. Don’t take it personal: 

When you are negotiating for a piece of real estate, it is important to consider the end-game. You are not looking to get the property just for the sake of winning the negotiation. Winning or losing a bid should never be taken personally. The listing agent may come back three or four times looking for a higher offer. Instead of getting frustrated and turning it into a personal battle, take a step back and think about what you are doing. By the time the dust settles, you may win the property bidding battle but end up losing the war. The same is the case with auction bidding: instead of having the mindset that you aren’t going to let someone outbid you, focus more on the property. There will always be someone in your local area that you end up butting heads with during negotiations. You will not get every property that you have your eyes on. If you are outbid, don’t take it personally. It is just part of the business.

3. Evaluate risk and reward: 

There are times in every negotiation that you need to take a step back and evaluate what you are doing. Time is always of the essence on every deal, so you will need to make your decisions rather quickly. You may have to make your evaluation hastily or while you were distracted with something else. Before you commit to changing your offer or something on the contract, think about the risk and reward that come with the property. There reaches a point in every negotiation that the returns of the property are not worth the risk. Once you go over a magic number, the deal no longer looks as attractive as it once did. Instead of moving forward because you think you are committed, consider the return. If it is not what you expected or desired, there is nothing wrong with walking away. The goal is not just to accumulate properties, it is to buy properties that impact your bottom line.

4. Small concessions: 

Negotiating is not about who wins, it is about the bottom line. Many people need to feel like they are getting the best end of the deal in order to move forward. Whether you are dealing with a lender or a traditional seller, small concessions can help seal the deal. Little things such as small credit or a change in closing date could make all the difference. Try to find the motivation of the other party. Once you know their position, cater your stance on giving them what they want while still making the deal attractive for you. This may cause you to waive concessions or to close in a shorter amount of time than you would like, but it will ultimately be well worth it. Small concessions can have a huge impact.

5. Keep taps on negotiations: 

Odds are you will negotiate with the same party again in the future. Every time you battle for a property, you should make notes on what worked and what didn’t. Some lenders may want to see their contract structured a certain way. Certain bidders at an auction have a style they use when they really want a property. Taking notes will not guarantee the property, but it may just give you an advantage in the future. It is also important to take notes on the deals you don’t get. It is important to find out where the price ended up, and if there was anything that tipped the scales to the other party. Negotiation is often about who is the most prepared and who knows how to structure the deal best. Keeping tabs on past negotiations will only help you.

There are many little things you can do during negotiations that will help you secure your next deal. The more negotiations you are involved in, the more comfortable you will be.

 

Dec. 27, 2022

Leaders of Industry Forecast Real Estate for 2023

2023 Real Estate Forecast: Market to Regain Normalcy

But even though mortgage rates and home prices are expected to moderate, home sales may still sag under persistent inventory shortages, housing economists predict.

 

While 2022 may be remembered as a year of housing volatility, 2023 likely will become a year of long-lost normalcy returning to the market, economists predicted Tuesday during the National Association of REALTORS®’ annual Real Estate Forecast Summit. Next year, mortgage rates are expected to stabilize while home sales and prices moderate after recent highs, according to NAR’s forecast. However, the details could be different from region to region.

Some housing markets may see an uptick in homebuying activity at the beginning of the year, especially if mortgage rates continue receding from a recent high of 7%. Housing inventory is expected to remain tight in 2023, with housing starts below historical averages and fewer homeowners willing to sell, said NAR Chief Economist Lawrence Yun. The ongoing housing supply challenges will prevent home prices from falling, though price appreciation will slow, he added. “I see many hopeful signs for early next year,” Yun said.

 

But first, the market has to close out 2022, a year when inflation soared to a 40-year high and rapidly rising mortgage rates put the brakes on what had been a pandemic-era

home buying frenzy. Existing-home sales are expected to end the year 16% down from the same time period in 2021, marking their lowest level since 2014, Yun said. Annual new-home sales likely will be down 17% for 2022, returning to pre-pandemic levels.

 

Yun predicts home sales to fall by 6.8% in 2023 compared to 2022, with the brunt of the slowdown to occur in the first quarter of the new year. Some of the softening can be attributed to homeowners who are unwilling to trade in a higher mortgage rate, as well as economic uncertainty. Meanwhile, home prices in 2023 are forecast to reach $385,800, an increase of 0.3% compared to 2022.

“After a big boom over the past two years, there will essentially be no change nationally” in home prices in 2023, Yun said. “Half of the country may experience small price gains, while the other half may see slight price declines.” He pointed to markets in California, like San Francisco, that may be the exception. The Bay Area could register double-digit price drops of 10% to 15% next year, Yun added.

 

“Mortgage rates are the lifeblood that drive home sales,” Yun said. For the last four weeks, rates have been dropping after reaching 7.08% in November. On Tuesday, the Consumer Price Index offered hope that inflation is further cooling, prompting the Federal Reserve to start slowing the hikes to its benchmark interest rate.

Yun said he believes mortgage rates may have already peaked. He points to an “abnormally high spread” between 30-year fixed-rate mortgages and the Treasury, which historically are more closely tied together. “As the mortgage market normalizes, it will be an opportunity for rates to decline even further,” Yun said, adding that he expects mortgage rates to settle at 5.7% by the end of next year.

Still, mortgage rates are more than double what they were a year ago, ramping up rapidly this fall and walloping housing affordability. But if inflation continues to slow and rates stabilize, that could bring more buyers back to the market and boost demand for housing, Yun said.

Other leading housing economists also gave their take during NAR’s Real Estate Forecast Summit about what’s in store for the real estate market in 2023.

 

Realtor.com®: Bullish on Home Prices

Realtor.com® Chief Economist Danielle Hale was upbeat about the prospects of property appreciation, projecting a 5.4% increase in existing-home prices for 2023. “We think price growth will be half of what it was in 2022, and we may see some months of year-over-year declines,” Hale said. “But overall, we believe prices will be higher. [Housing] shortage conditions are still going to be present in the market.”

She said she expects home shoppers to continue to grapple with housing affordability in the new year. Realtor.com® predicts mortgage rates to average 7.1% by the end of 2023—considerably higher than NAR’s prediction of 5.7%. Home buyers still will face sticker shock, Hale said, “but they will have more time to make a decision and more options.”

NAHB: Sharp Contraction in Construction

Danushka Nanayakkara-Skillington, assistant vice president of forecasting and analysis at the National Association of Home Builders, said she expects housing starts to drop by double digits in 2023. Then, “as the economy improves in 2024, the housing market will gradually come out of this slump that is expected from the next year,” she added. 

Builder confidence has fallen over the last 11 months as mortgage rates rose and buyer traffic slowed dramatically. Fifty-nine percent of builders have reported using incentives, like mortgage rate buydowns and price cuts, to try to win buyers back, Nanayakkara-Skillington said.

Labor shortages combined with lot shortages, higher material costs and lending issues for builders are all compounding factors preventing more construction. And while lumber prices have eased from record highs, construction costs remain 14% higher due to shortages in other supplies, like gypsum and steel. “All of these issues will keep homebuilding down,” Nanayakkara-Skillington said. “We don’t see these issues being resolved in the near future either.”

Bright MLS: The Great Reset

“We believe 2023 will bring lots of variability in how housing markets adjust,” Bright MLS Chief Economist Lisa Sturtevant said. “There will be a lot of resetting expectations for both buyers and sellers.”

Sturtevant predicted variations from market to market, with the greatest risk for price declines likely to occur in pandemic-era boomtowns—communities that saw some of the largest increases over the last two years. “In places where buyers bid up prices, they will have to reset—and in some places, they could see prices fall significantly from their peak,” she said. “Regardless, in almost every market, we believe prices will still remain above 2019 levels. So even if prices do come down, we should still be ahead of where we were prior to the pandemic.”

Sturtevant added that many consumers could take a wait-and-see approach as they digest higher mortgage rates and come to terms with the changing market. Bright MLS data shows 40% of sellers have adjusted their home price downward or offered concessions. “This period of acceptance will take some time,” she said. “Sellers have to process all of this, and that is underway now. It’ll take a little time—probably into the first quarter of next year—to fully digest it.”

CoreLogic: ‘A Crisis of Consumer Confidence’

“There is a different sentiment happening: I call it a crisis of consumer confidence,” said Selma Hepp, CoreLogic’s interim chief economist. “Sellers are contending with not wanting to reduce their prices. Buyers are seeing the headlines saying that prices will come down but are also finding their purchasing power has been diminished by higher mortgage rates. They’re wondering: ‘Should I even enter the market? I may end up with negative equity.’”

Annual home price growth is expected to slow to 8% by December—and then 0% by the spring of 2023, according to CoreLogic data. “We believe this will vary greatly across the country, and the rate of growth and decline will depend on the region,” Hepp said. For example, markets like San Francisco, Seattle, Las Vegas and Phoenix, all of which saw surging home prices during the pandemic, could experience the most pronounced price declines of up to 12%, she added. “Housing markets will continue to struggle with the loss of consumer confidence.”

 

 

Dec. 14, 2022

Do You Qualify for a Home Loan? Let me tell you

How many of you thought you may like to buy a house but there is no way to qualify for a mortgage?, you would be surprised how many people have told me this and we did get them that mortgage. Let my team of mortgage brokers review your financials and see what they say. They will also tell you the best way to show your finances to put your best foot forward.

Click below and watch this short video about qualifying for a mortgage. I am the professional, let me tell you what I think about you getting that home loan.

 

Dec. 12, 2022

7 STEPS TO SELL YOUR HOME

7 Steps To Sell Your Home in the Fastest Time and at Top Dollar

Let me guide you through what to do when getting your house ready to sell. Please take a look at this video that will lay out the steps for you. Please click on the picture below, I did put a little humor in so enjoy

 

 

 

 

Oct. 12, 2022

IS NOW A GOOD TIME TO BUY A HOUSE?

Is it a Good Time to Buy a House? Or Should I Wait Until 2023?


A looming recession, inflation, and rising mortgage rates have made plenty of homebuyers wary of entering the market. According to a recent National Housing Survey, only 20% of consumers believe it’s a good time to buy a home. Some potential buyers wonder if falling home prices are on the horizon - and whether it makes sense to wait.

There are benefits and drawbacks to buying a home while the market is in flux: here's what you need to know.

Mortgage Rates Are Up - But Perspective is Important

Mortgage rates rose rapidly this year as the Fed looked for ways to tamp down inflation. After reaching historic lows of under 3% last year, average 30-year rates are now closer to 6%. When the rates were low, buyers eager to take advantage of cheap borrowing flooded the market. Now that rates have risen, many buyers have backed off as they saw their estimated monthly mortgage payments jump by hundreds of dollars.

But there are a few reasons that rising interest rates aren’t as bad as they seem.

Of course, it’s going to sting to see mortgage rates rise from a record low of 2.7% to 6.4% where they are now (and perhaps higher as the year progresses). This dramatic jump means that homebuyers have to cope with a more limited budget, and larger, newer homes in desirable neighborhoods are further out of reach.

In context, though, mortgage rates today are low. In 1980, you would’ve been paying close to 15% for a 30-year mortgage, and in 1990, the rate hovered around 10%. The overall average since 1971 has been 7.77%, according to The Mortgage Reports. Perspective is key when it comes to evaluating the current mortgage rate. 

Second, rates are not set in stone the way home prices are. If you stay in your home for the entirety of the 30-year term, there’s a fair chance that mortgage rates will dip again. If they do, you always have the option of refinancing your loan in order to take advantage of the lower rate. Although refinancing does come with a processing fee, it can often save homeowners thousands of dollars overall. 

Homebuyers also have the option of doing an Adjustable Rate Mortgage. Though these got a bad rap during the last housing crisis, they can actually be a useful way to receive a lower rate - especially if you don't plan on living in your house for the entire 30-year term.

Third, mortgage rates and home prices tend to work like a balancing scale. When one goes up, the other goes down. With fewer people seeking to buy homes, competition eases - leading to fewer bidding wars that drive prices sky high, and more pressure on sellers to accept reasonable offers. 

Fourth, many homebuyers are asking: will rates fall again, allowing for cheaper borrowing in 2023? According to Business Insider, experts believe rates aren't likely to drop again until the end of 2023 or into 2024. And even then, you shouldn't bet on rates reaching those historic lows again.

Make no mistake: homeowners are definitely paying more in interest now and will have to adjust their budgets accordingly. Rising interest rates aren't easy to deal with. But when it comes to whether or not waiting to buy a home makes sense - waiting won't bring back the historically-low rates that were an anomaly.

"Even with interest rates constantly fluctuating, being able to buy a home is always a financially smart decision,"

 

 

 

 

Chart showing historical primary mortgage rates (via Freddie Mac)

A Market Shift = More Inventory

Sellers realize that the window for maximizing their profits is closing. As they watch listing after listing in their local area do price reductions to the tune of several thousand dollars, more and more sellers have been entering the market in an attempt to get in before the hot market dissipates completely. 

In June, Realtor noted that there was YoY inventory growth for the first time since mid-2019, with the market seeing a 6.3% increase in newly listed homes since last year. And according to the National Association of Realtors (NAR), "The inventory of unsold existing homes rose to 1.26 million by the end of June, or the equivalent of 3.0 months at the current monthly sales pace."

This is big news, because the incredibly low inventory of homes on market has been a major driver of rising prices. The increase in inventory gives buyers more options - and more leverage. Home value gains will be much more modest now that sellers are receiving one or two offers in many cases, not 20. 

It wasn't like this a year ago. Before, buyers would have very little to no say in negotiations, but now with the market shifting, buyers have some leverage on sellers who want to overprice their home.

National inventory is trending upward, and that's been true, while that bodes well for homebuyers today, one benefit of waiting until 2023 is the potential for an even greater shift in inventory, which could put more power in the hands of buyers.

Although inventory is slowly rising, it’s still far below the 6-month supply which indicates a balanced market (Washington DC's supply of housing inventory rose 20% in June YoY, for example, but that only took it from 1 month to 1.2 months' supply). Make no mistake, it will still be a seller’s market for the next several months, if not several years. 

Buyers today, though, should feel more comfortable and confident when it comes to asking for home inspection and financing contingencies - the likes of which were tough to come by in 2021’s crazy market conditions. 

In my local area I am seeing some changes. Some pockets of homes are staying on the market a little longer, with prices of homes going down - a year ago or during COVID times, they would have easily sold for asking price and been on the market less than a week.

 

Rising Inventory for 2022 (Realtor.com) 

Escaping Rising Rental Rates

If you're not buying a house, there's a good chance you're renting in the interim. Unfortunately, there is no hiding from rising housing costs. Even if you decide to rent instead of buy for another year or two, rental prices have skyrocketed around the country. On average rent rose 11% last year, and some metro areas experienced average rental increases of up to 40%. 

While buying a home might be a costly endeavor in the short term, in the long term it sets you up with predictable expenses and a hedge against inflation. Even though rent will continue to rise year by year, your mortgage payment will increase more gradually (the actual amount you pay to the lender is pre-determined if you have a set rate - but property taxes will go up in time). 

And of course, when you pay rent, you ultimately pay off your landlord's mortgage. When you pay for your home, that's equity toward your future. 

Let's say your current monthly rent is $1,200, and your estimated monthly mortgage payment is $1,500. If you do the math too quickly, it might seem like you "save" $300 per month by continuing to rent - and this can be tempting. But at the end of the rental year, you net $0 from all those payments.

On the other hand, if you buy your home? By the time a full year rolls around, you'll have already paid $18,000 toward your home loan balance - and you don't need to worry about your landlord hiking your rent by $500 because "that's the market value now."

Should I Wait to Buy a House Until 2023?

Many potential home buyers are asking themselves whether it’s a good idea to wait until 2023 to buy a home, or whether it's better to buy a home now. There are benefits and drawbacks to both approaches.

If you buy a home in 2023, you get more time to save for a down payment, which might help to lower your monthly payment once you get a mortgage. You may also benefit from a further increase in housing inventory, which means more choices and fewer bidding wars that drive up prices. And if you haven't quite figured out a 5-year plan (which is advisable when you buy property), waiting until 2023 buys you additional time to figure things out. Not everyone is in the right situation yet to buy a home - and that's okay! 

On the other hand, home prices are expected to continue rising - just at a less blistering pace. CoreLogic is predicting an increase of 5.6% in average home prices over the next year. If this holds true, a $400,000 home today will cost approximately $422,400 a year from now (which may negate any money you save while waiting).

Additionally, you miss out on the benefits of owning a home today (not having to answer to a landlord, building your equity, avoiding crushing lease increases).

Regardless of whether you plan to buy a home now or in 2023, don't bank on dramatic price reductions à la 2008. 

Homebuyers waiting for a market crash will be disappointed. Today's market is different from the Great Recession housing bubble, as supply and demand are the driving forces behind home prices - and lenders follow more stringent guidelines today for loan approvals, but now as we see a slow shift in the market, the competition for buying a home is going down."