Right now you are seeing prices come down in many states/cities/counties across the United States of America. Southern California real estate markets; including Los Angeles & Orange County; have been more resilient areas against price declines, and continue to resist this trend due to a low supply of affordable homes which has introduced an interesting dichotomy of opportunity and cost to the current market. In times like these your general outlook of abundance or scarcity will determine whether you take advantage of the opportunity or suffer the costs of this real estate market.
First Look...
Higher interest rates can cause home prices in Los Angeles and Orange County to go down for several reasons:
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Reduced Affordability: Higher interest rates increase the cost of borrowing money, which means that potential homebuyers will have to pay more in interest on their mortgage loans. This reduces their purchasing power and can make it harder for them to afford homes in the area, leading to decreased demand and lower prices.
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Opportunity Cost: Higher interest rates can also make other investments more attractive, such as bonds or savings accounts. As a result, some investors may decide to put their money into these other investments rather than buying a home, reducing the demand for housing and driving down prices.
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Lower Demand for Refinancing: Higher interest rates also reduce the demand for refinancing existing mortgages. This can lead to less cash being available for homeowners to invest in their homes or make repairs, reducing the overall value of the homes in the area.
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Slowing Economy: Higher interest rates can sometimes be a sign of an economy that is slowing down or experiencing inflation. In such cases, people may become more hesitant to make large investments, such as buying a home, and may opt to wait until the economic conditions improve, leading to lower demand and lower prices.
Overall, higher interest rates can lead to decreased demand for homes, reduced affordability, and a slower economy, all of which can contribute to lower home prices in Los Angeles and Orange County.
AND On The Other Hand...
The lack of home supply in Los Angeles and Orange County, can create a situation where home prices may not fall much and could potentially continue to rise, even with higher interest rates. Here are a few reasons why:
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High demand: Despite higher interest rates, there is still a high demand for homes in these areas, fueled by a growing population, a strong job market, and desirable living conditions. With limited supply, this can lead to bidding wars and higher prices.
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Limited land availability: Southern California is a highly developed and densely populated region with limited land available for new construction. This can limit the number of new homes that can be built and further constrain supply.
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Construction costs: Building new homes in Southern California can be costly due to high labor and material costs, labor in these areas has increased in cost over 50% during the last few years due to inflation, as well as more strict regulations and permitting requirements. This can discourage developers from building new homes, further limiting supply.
Additionally, Southern California is a desirable place to live and work, which means that people are willing to pay a premium to live in the region. This further supports the argument that home prices in the area may not fall much and could still rise even with higher interest rates.
In summary, the lack of home supply, combined with high demand, may offset the potential impact of higher interest rates on home prices. As a result, it is possible that home prices in these areas may not fall much and could still rise despite higher interest rates continuing for the next few years.
My Take...
We are back in the market of our parents. There is plenty of opportunity to buy with less competition within your means and not over-extending yourself financially. This means likely having to buy a home, starter home or investment property at a higher mortgage rate, with a buydown, and/or some other creative financing and then continue to refinance over the next decade into a great deal.
Between 1990 & 2000 you would have bought a home at a 7-9% interest rates. Doesn't sound very good does it?
But let's say that home was worth $500,000 art the time. However between 2000 & 2010, you would have had ample opportunity to refinance that to a 5%; then between 2010 & 2020 you would have had the opportunity to refinance to a 3.5%; and even during covid to 2.0%. However instead of $500,000, your property from 30 years ago is now worth $1.5M-$2M. Think of how low your payment would be and how much equity you could leverage in those scenarios to achieve your goals. The equity can be used for traveling, other investments, college funds, medical bills, retiring early, etc... but most of all it gives you options and freedom that renting will not.
That is how you build wealth, get a home, and create a great investment out of real estate that didn't seem like a great opportunity "at the time". Buy 1-3 properties, pay them off, and watch them grow. Add this with your other diversified investments and you're really on to something over a 10, 20, 30 year period. I will be looking for opportunities over the next 18 months because these are the times that smart home choices will build the foundation for great investments. The average rate of appreciation in California came in at 6.77% annually over the 39 year time frame.
Call To Action...
What will you do?...
Call me to make your next real estate move a success and set the groundwork of a better real estate process. Whether you are 1 month, 1 year or several years away from buying a home, selling a home, or investing in real estate connecting with a strong real estate advisor like myself will benefit you and ensure you get the service that you deserve and not just the first agent you find. I am looking forward to assisting in any way possible.
