2015 is shaping up to be a great year for South Bay Real Estate as arguably the entire nation gets back on the game and we see that reflected in our local market. What we'll most likely see is a unique alignment of economic and market forces with jobs and wage growth, low oil prices and low interest rates. This equates to more money in consumer's pockets, and higher confidence in spending. In other words, housing happiness.
In addition to traditional market demand, there are three key market forces at play. First, many "baby boomers" are nearing the age of retirement and may be selling their current homes and looking at other options. Second, first time buyers, many of whom were on the sidelines the past few years, most likely will beat their historic average of being 40% of the market. Third, homeowners who previously did short sales or were foreclosed on and now approaching the point where they have sat out the mandatory waiting period and can now buy again.
As we move out of the housing recovery mode into a more stable period, many economists are referring to these market conditions as "the new normal". Most likely while we'll still see prices increase it will not be at the pace of the past 18 months but will be more moderated in the 4-5% range. Of course, considering the price of homes in the South Bay, that still means some nice price gains. The economists are also predicting that prices will rise faster than overall incomes. So if you are thinking of buying, there's really no reason to wait.
One of the byproducts of the new normal will be a rather healthy trend in inventory rebalancing. So while the MSI or months supply of inventory, may still remain tilted towards sellers, it would be surprising to see less than 30 days supply on hand as we have previously at a few junctures.
Everyone has heard for a while now that interest rates are poised to go up but if anything, they've gone down. But they will go up in 2015 (if you believe the Mortgage banker's Association). An increase of even a half of one percent can easily change the payment by a few hundred dollars per month.
Let's take a real life example of a $600,000 mortgage, which isn't that unusual in the South Bay. At 4%, that's a payment of $2865 per month (not counting property taxes and insurance). At 4.5% the payment goes up to $3040 per month. That's $175 per month more. If rates go up one percent, the differential is now at $3221 per month vs $2865 which may be a non starter. While some will most certainly move to different loan products, ie 5 and 7 year ARMS, that only buys so much time until we hot a price ceiling.
The offset to the potential increase in rents is wage and job growth. Additionally, as we see new household formation with potentially two incomes to meet the mortgage, there is more purchasing power in the first time buyer segment than we've seen recently. And with rents rising, many who weren't thinking of buying will wake up to the reality that once the rent check is paid, that money is gone forever and owning is a great alternative.
Rents are anticipated to go up as demand will outstrip available rental units. We already see a fairly high rental population in the Beach Cities and that can only go so high as well. But for now, the pace of rents is outstripping price appreciation which makes this a great environment to buy and hold rental property. In fact, I had a client who closed escrow on a townhouse purchased as a rental unit on a Friday and by Monday there was a tenant in place.
So the question may be why aren't more people buying. Often the answer is downpayment and credit. While lending has loosened up a little bit, borrowers still need solid verifiable income and most likely 10% down to buy in Redondo Beach unless they find a SFR that will fit into the FHA loan limits. Most 5% down programs max at a loan amount below what it takes to purchase a home in Redondo Beach, CA.
What I've noticed through the last few market changes and adjustments is that often the public is about 3-6 months behind where the market is. So as we enter the Spring selling season, it would not be surprising to see some homeowners over pricing properties and not realizing that they may have more competition and buyers may have less budget if rates go up.
So whether you are buying or selling, remember that the real estate market is in a constant state of change and best to consider the current facts on the local level and not be too influenced by the national statistics and data and what you read in the national media.