Los Angeles, CA 90019
(323) 487-9865
Eric Zunkley is a licensed real estate agent operating in Los Angeles, California.
Living Room features high cove ceilings, Batchelder fireplace, and original fixed arched mahogany windows that provide plenty of natural light. Arched doorways and wrought iron railings. Updated kitchen and bathrooms. The guest bathroom featuring a steam shower. Private backyard for entertaining around the gas fire pit.
“The affordability medicine needed is double digit price declines”
The last time mortgage rates flirted with even 5% was fall 2018, a brief period lasting two months, during which housing demand quickly contracted. We're now in the sixth straight month of >5% mortgage rates, and housing is struggling to find a bottom. Home sales, construction volumes, and now even home prices are falling.
Here are a couple reasons the market is moving lower:
In 2020-2021, rock bottom mortgage rates enabled housing to hit escape velocity, but today they're locking up homeowners who bought or refinanced then.
This cycle, adjustable rate mortgages aren’t helping buyers find relief. In the mid-1990s when 30-year fixed mortgage rates climbed over 9%, ARM usage jumped to 35% of all mortgages. In 1999-2000 as 30-year fixed mortgage rates shot above 8%, ARM usage soared once again to 34% of all mortgages. Today, the percentage of homeowners using ARMs is just 8.5%, even as housing affordability resides near its all-time low.
A supply tsunami is unlikely. If there aren't significant layoffs or a sharp decline in income, homeowners with fixed-rate mortgages for 2020-2021 will not be forced to sell. The same can be said for the lion's share of homeowners avoiding the potential buzzsaw of adjusting ARMs, which can also trigger forced sales.
14 weeks ago in a video I mentioned rates are expected to go up. This should come as a surprise to no one as it was completely telegraphed. Since February rates have gone from 3.55% to 5.4% exceeding even what I thought would happen and far quicker.
If you’re buying the median priced house in Los Angles for $1.3m with 20% down the higher interest rate makes your payment 24% higher. To get the same payment now you would have to spend $203k less ($1.07m).
How are prices changing? Prices for SFR in the Mid City area are down -7.6% year over year. However it’s a little soon to call this a new trend.
Keeping an eye on inventory.
5,995 SFR and Condo’s are currently listed. The inventory likely bottomed in Jan 2022 at 5,063 units. On This graph, which only goes back to 2016 peak inventory happened on 11/2018 with 16,557 units. Interestingly if you look at the graph for the 30 year fixed mortgage it peaked at 4.94% in that same month. Will we see a similar trend to higher inventory? I think we will but the market is still digesting new rates. It will take some time to see if this translates to lower prices.
Inventory in Los Angeles
Interest Rates
What can you do as a buyer?
You can buy now and hope to refinance in the future when rates go down.
You can move to a cheaper area.
If you have access to more cash you can put a larger down payment.
You could get an interest only loan and refinance at the end of the interest only period.
Senate Bill 9 is a 2021 California state law that allows up to 4 homes in most single-family zones, regardless of local zoning. You can use SB9 to split your lot, add a 2nd home to a lot, or both (split lot and have 2 homes on each lot for a total of 4 homes).
Here's how you can build more homes once SB9 takes effect on Jan 1, 2022.
Why use SB9?
Earn money. Even if you don't have the cash to build new homes yourself, you can sell your backyard to a builder or a future homeowner. Take a look at how much empty lots in your neighborhood sell for - it's likely to be hundreds of thousands to over a million dollars.
Do your part to solve California's housing crisis. Maybe you have friends or family members that want a home but can't afford one due to California's high land costs. Homeownership is much more affordable if they're only paying for a new building.
Check if you're eligible:
Property is zoned by the city or county for only 1 home. (if you want to subdivide a multi-family lot, use AB803)
Property is located in an existing urbanized area or urban cluster. See 2010 Census maps and 2020 Census additions. This includes most suburbs.
Not prime farmland or farmland of statewide importance, wetlands, conservation land, habitat for a protected species.
Not on a hazardous waste site, earthquake fault zone, 100-year floodplain or floodway.
Not a historic landmark or in a historic district.
Ellis Act was not used to evict tenants on any buildings on the property within the last 15 years.
If splitting the lot, you need to plan to live in either your existing house or one of the new homes for the next 3 years. This rule does not apply to land owned by community land trusts.
Homestead, a company that finances, designs, builds, & sells homes, has created a map search tool that homeowners can use to check if their lot is SB9 eligible.
Special Conditions
Fire Zones: Cannot use SB9 on land within a very high fire hazard severity zone, unless the development complies with state mitigation requirements.
Rental Housing: SB9 housing cannot demolish or alter housing that currently has a tenant or has previously had a tenant in the last 3 years. You cannot remove more than 25% of the exterior walls of such a building either, even if the rental unit is not altered. Affordable housing or rent controlled buildings on the property also cannot be demolished.
ADUs: If you already have one or more Accessory Dwelling Units on your property, you can still add a house to your lot if you don't split the lot. However, ADUs count towards the maximum number of 2 homes per lot for split lots.
Septic Systems: If your property is not connected to a sewer system, the city or county may require a percolation test before allowing additional homes.
One lot split only: Lots created by a SB9 lot split cannot be further divided. Owners also cannot use SB9 to split adjacent lots.
No AirBNB's: Homes created by SB9 can be sold or rented. However, if rented, the minimum rental is 31 days.
For full details see the bill text and 8/28/21 bill analysis
Submit plans to city. Local regulations may require you to hire an architect. The city is required to approve SB9 projects at the staff level, without having to hold a public hearing.
Sell and/or build. Not interested in managing the construction yourself? You can split the lot and sell the new lot without having to build on it.
Information from Alfred Twu - How to use SB9
I’m going to paraphrase the explanation of mortgage points. There are plenty of resources online to find a more thorough description. This one on Bankrate is great. Any buyer interested in points should have a discussion with their lender to get the specifics.
Paying points on a mortgage lower’s your monthly payment and the interest you pay on the life of the loan. You eliminate any benefit to paying for points if you refinance or sell the home before the breakeven point.
The cost of points are linked to the value of the mortgage. If you are buying a $800k house and putting 20% down and have a mortgage of $640k. One point would be $6,400 upfront. Typically 1 point reduces the interest rate by .25%, check with your lender. Let’s look at the numbers…
$640k mortgage at 2.85% has a payment (principle and interest) of $2,647. Total interest of $312,836.
$640k mortgage at 2.6% (2.85% - .25%) has a payment of $2,562. Total interest of $282,384
$6,400 cost of 1 point.
$85 reduction in monthly payment.
$30,452 reduction in total interest paid over the life of the loan.
The breakeven time for points is $6,400/$85= 75 months.
So… If you have $6,400 laying around and you don’t plan to refinance or sell the home in the next 6-7 years you could benefit from paying for points. For most people that bought in the last 10 years they have refinanced as the rates continued to drop. Rates are not likely to go much lower, and very likely to rise over the next 5 years.
