Spring 2014 Pricing - Best Guess on the Resale Market?

[irvinehomeowner]

One interesting thing for those high interest/lower prices people:

Interest rates are higher this year than the year before, yet prices are not lower from a year ago.

 

[OpenSky]

 

[qwerty]

One interesting thing for those high interest/lower prices people:

Interest rates are higher this year than the year before, yet prices are not lower from a year ago.

Very true. In the past 12 months, interest rates have affected volume, not necessarily pricing. A good number of equity sellers have a floor based on peak pricing, one that pushes them into short sale status. Plus, banks are reluctant to foreclose-- they've played their hand and we all know it -- so that is keeping some number of homes off the market.

The only hope for patient buyers is a supply windfall ... And a softening in foreign investment attitude.

Higher interest rates will have an impact on pricing, it just takes time, it doesn't happen instantly, the higher rates will either reduce pricing if they go up high enough or will have the impact of minimizing price increases by keeping them steady instead of going up. It has less of an impact on cash buyers obviously because they don't need to meet financing requirements but eventually it will impact them as well. You won't see two tiered pricing, one for FCBs and one for financed buyers.

Right now buyers are perhaps willing to absorb the additional increase in payment from 3.5 to 4.5 but very few will likely be able to afford another increase from 4.5 to to say 5.5

 

[irvinehomeowner]

@qwerter:

But is the impact proportional? It hasn't been.

And how much time are we talking? It's been a year and not only did prices not go down, they went up.

In the last 7 years, I've seen:

1. Rates go down, and prices go down.
2. Rates stay low, and prices go down.
3. Rates stay low, and prices go up.
3. Rates go up, and prices go up.

As I've often said, rates and prices don't seem to be as inverse as they used to be. On top of that, no one has shown me that there is a directly proportional relationship between the two. I've shown several mathematical examples that the reduction of prices in correlation with rising rates is usually not enough to justify buying in a high rate environment. And, prices usually rise faster than they drop.

So the original advice of Larry back in the day of waiting until rates are high because prices will be low doesn't really track any more.

Do you honestly think that a home that was bought for $750k, $600k LTV at 3.5% is going to drop to $530k, $425k LTV at 6.5%? They have the same monthly payment.

It's a fallacy, while price may go down when rates go up, it's not proportional enough to wait.

You should buy when you can afford it, and quite frankly, I would rather buy in a low rate, higher price environment than a high rate, not as low price scenario.

I remember that proponents said that you can always refi when rates go down but you can't change the price of the home.

But there's a corollary to that if you're shopping for a home:

It's easier to gauge when rates are low and if they go lower, you can refi, but the prices of real estate are harder to predict and whether they go higher or lower, you can't reprice. So to me, it's easier to make that decision based on payment affordability tied to rate, than tied to price.

 

[eyephone]

There still is a demand for housing. Unemployment is lower. Consumer spending is up. Building permits are up.

The only thing to watch is the rates - as the Fed taper starts in January.

 

[qwerty]

IHO - it's hard to quantify the higher rate impact on irvine for a couple of reasons. One it's one of several variables and second as we have learned over the years is the impact of the fcb. Also, if people are using arms instead of a 30 year fixed the rate impact will be less. In a more traditional market where the pool is finances buyers who used 30 year mortgages I believe the rate impact on pricing would be more pronounced. Normal fundamentals don't seem to apply in irvine which is why I said instead of price decreases it may have the effect of slowing price increases.

All I know is that if today I was looking to buy a million dollar home today at 4.5% and rates went up to 6 tomorrow all I know is I'm not paying a million for that house anymore. The seller may not reduce the price and you will say, see there was no price impact but all I know is that there is one less in the demand pool for that million dollar house and less demand should lead to lower prices everything else held constant.

 

[qwerty]

Some of the new home developments are have issues selling, a couple fave had minor price reductions, more and more of them are hiding price decreases with upgrades. Is this due to the higher rates over the past year? Perhaps. But I can't say for sure. Something is leading to lower demand

 

[eyephone]

There is abundant of new construction homes in Irvine.

 

[quattroporte]

So, for those actively looking in the resale market, what are you seeing?  A little more time to look at different houses, without having multiple bids on them in a couple of days?  Or, not much better, yet?

It has cooled. You have time to think after you go to a open house and you dont have to rush into making an offer the same day. Also, you dont have bidding wars, can make a lower offer and not have to remove the contingencies.

 

[quattroporte]

OC Register today had a couple of columns each with their own predictions.

The first, from mortgage beat writer Jeff Lazerson:

WHAT I THINK: My 2014 top 10 predictions, in consultation with my crystal ball, are now etched in stone, with numbers 1 through 5 posted today. I'll reveal 6-10 next week.

1) Home prices in Orange and Los Angeles Counties will drop between 6 and 8 percent in 2014. This will be due to a continuum of the current housing sales slowdown (that?s code for the housing economy is rapidly flattening), very untimely higher taxes on mortgages in the form of loan level pricing adjustments and guarantee fees and higher FHA mortgage insurance charges (that were introduced in 2013), as well as the tighter underwriting standards that start January10, aka the Qualified Mortgage and Ability-to-Repay rules.

2) Interest rates will rise in the first half of the year, touching 5 percent. The second half of the year will see a nosedive with 30-year fixed rates dropping to 3.25 percent to provide housing CPR and regain a market pulse.

Based on 1 and 2, he is expecting the nose dive to occur in the front half of the year. Interesting.

The second is from Register financial writer Chris Diaz, who concurs on the first half:

Housing prices in Orange County will stay even. They'll slip at the beginning of the year followed by a small bounce back by summer to end the year even. Right now, I see very few homes going off the market quickly. After the rally we saw this past year, things really slowed up after September. I know that the market normally slows up during the holiday season, but what I've seen since summer ended doesn't look like just a seasonal adjustment. I wonder just how many folks out there put their house on the market looking to capitalize on the hot market and found out that it cooled off quickly. What's the incentive for people to sell right now?

OCR is usually upbeat on housing; I found both of these to be rather sobering.

Can you provide the link please? Thanks.

 

[quattroporte]

The resale inventory is garbage right now. Everything that's sitting is blemished or overpriced. So the "3.8 months" of OC inventory doesn't tell the whole story. Plenty of WTF asking prices (like this one, $450/sf in Northpark) that will rot for a few months like the rest of them.

Can someone from TI give the realtor a reality check? Maybe we can send test over?

 

[quattroporte]

One interesting thing for those high interest/lower prices people:

Interest rates are higher this year than the year before, yet prices are not lower from a year ago.

Very true. In the past 12 months, interest rates have affected volume, not necessarily pricing. A good number of equity sellers have a floor based on peak pricing, one that pushes them into short sale status. Plus, banks are reluctant to foreclose-- they've played their hand and we all know it -- so that is keeping some number of homes off the market.

The only hope for patient buyers is a supply windfall ... And a softening in foreign investment attitude.

Higher interest rates will have an impact on pricing, it just takes time, it doesn't happen instantly, the higher rates will either reduce pricing if they go up high enough or will have the impact of minimizing price increases by keeping them steady instead of going up. It has less of an impact on cash buyers obviously because they don't need to meet financing requirements but eventually it will impact them as well. You won't see two tiered pricing, one for FCBs and one for financed buyers.

Right now buyers are perhaps willing to absorb the additional increase in payment from 3.5 to 4.5 but very few will likely be able to afford another increase from 4.5 to to say 5.5

I agree with qwerty. It is not going to happen overnight. It takes time.

 

[quattroporte]

And how much time are we talking? It's been a year and not only did prices not go down, they went up.

Its been 6 months not 1 year since the jump in interest rates. The prices didnt go up after that. They pretty much stayed the same or slightly dipped.

In the last 7 years, I've seen:

1. Rates go down, and prices go down.
2. Rates stay low, and prices go down.
3. Rates stay low, and prices go up.
3. Rates go up, and prices go up.

I dont think I agree with:
4. 3. Rates go up, and prices go up. - I dont think they went up.

As I've often said, rates and prices don't seem to be as inverse as they used to be. On top of that, no one has shown me that there is a directly proportional relationship between the two. I've shown several mathematical examples that the reduction of prices in correlation with rising rates is usually not enough to justify buying in a high rate environment. And, prices usually rise faster than they drop.

Thats because you have a record number of FCB. Including Wall Street becoming landlords for the first time in history. Heck, Blackrock now even has bonds backed by U.S. rental homes.

From Bloomberg "Five years after defaults on home loans packaged into securities helped trigger the worst financial crisis since the Great Depression, Wall Street is turning to bundling assets into bonds to help institutions buy and rent out properties. The transaction comes after Federal Reserve stimulus to bolster credit markets contributed to property gains exceeding 40 percent in some regions where Blackstone has been investing from California to Florida"

 

[quattroporte]

Some of the new home developments are have issues selling, a couple fave had minor price reductions, more and more of them are hiding price decreases with upgrades. Is this due to the higher rates over the past year? Perhaps. But I can't say for sure. Something is leading to lower demand

Agree again. Also the builders are giving credit for closing costs and offering higher $$ to brokers instead of lowering prices, in addition to the upgrade incentives. This was unheard of at the beginning of this year.

 

[irvinehomeowner]

All I know is that if today I was looking to buy a million dollar home today at 4.5% and rates went up to 6 tomorrow all I know is I'm not paying a million for that house anymore. The seller may not reduce the price and you will say, see there was no price impact but all I know is that there is one less in the demand pool for that million dollar house and less demand should lead to lower prices everything else held constant.

You guys keep missing my point, 6 months, 1 year or 7 years, prices don't adjust at the same rate interest does.

That price won't lower to a monthly payment to equate a 1.5% rate increase. For 20% down, the LTV on $1m house will be $800k and the payment will be just over $4k at 4.5%. To get that same payment at 6%, the price would have to be $843k, or $875k if you want to use that same $200k down. I don't see that happening.

The difference here is rates are not emotionally affected by the pool of sellers, listing prices are. Theory and reality are not the same.

 

[irvinehomeowner]

Its been 6 months not 1 year since the jump in interest rates. The prices didnt go up after that. They pretty much stayed the same or slightly dipped.

Check a chart, rates hit a low of 3.39 in December of 2012. They've moved up a bit and dropped a little in the beginning of 2013, but didn't get below 3.43 (April, 2014) and then just went up.

I dont think I agree with:
4. 3. Rates go up, and prices go up. - I dont think they went up.

In that same time period, from December 2012 to July 2013, prices jumped significantly.

 

[qwerty]

All I know is that if today I was looking to buy a million dollar home today at 4.5% and rates went up to 6 tomorrow all I know is I'm not paying a million for that house anymore. The seller may not reduce the price and you will say, see there was no price impact but all I know is that there is one less in the demand pool for that million dollar house and less demand should lead to lower prices everything else held constant.

You guys keep missing my point, 6 months, 1 year or 7 years, prices don't adjust at the same rate interest does.

That price won't lower to a monthly payment to equate a 1.5% rate increase. For 20% down, the LTV on $1m house will be $800k and the payment will be just over $4k at 4.5%. To get that same payment at 6%, the price would have to be $843k, or $875k if you want to use that same $200k down. I don't see that happening.

The difference here is rates are not emotionally affected by the pool of sellers, listing prices are. Theory and reality are not the same.

I'm not missing the point I acknowledge this, like I said, interest rates are just one component of the equation. Rates could up tomorrow to 7% and then banks could offer 0 down interest only Payment loans for the first five years at 1% and people would flock to those keeping prices up or even inflating them and u would be yelling at the top of your lungs " u see rates didn't have an impact". Like I said, all I know is that if you do something that raises my cost with everything else staying constant there will be at least one person less in the demand pool. That's theory and real life. The thing is there are a bunch of other variables at play that have helped housing due to government intervention

 

[quattroporte]

Its been 6 months not 1 year since the jump in interest rates. The prices didnt go up after that. They pretty much stayed the same or slightly dipped.

Check a chart, rates hit a low of 3.39 in December of 2012. They've moved up a bit and dropped a little in the beginning of 2013, but didn't get below 3.43 (April, 2014) and then just went up.

I did. When the rates hit a low in 2012, they didnt stay there permanently. They were at their lowest point for about a week or so before going up 1/8 to 1/4 of a point. How many people do you think were able to time the bottom and lock their rates? Similarly, the "low" in April 2013 only lasted for a week. Since the "low" of 2012 and before the spike in May/June 2013, the rates were consistently generally between 3.5% and 3.75%. That increase is not significant enough and borrowers were able to absorb that. Rates generally always fluctuate 0 to 0.25 points in any given period. Borrower absorption of an increase of three to four times that much.......not so much. So saying the rates going up for a year is not 100% accurate. They have "techincally" gone up from May/June 2013.

I dont think I agree with:
4. 3. Rates go up, and prices go up. - I dont think they went up.

In that same time period, from December 2012 to July 2013, prices jumped significantly.

See comment above.

 

[quattroporte]

All I know is that if today I was looking to buy a million dollar home today at 4.5% and rates went up to 6 tomorrow all I know is I'm not paying a million for that house anymore. The seller may not reduce the price and you will say, see there was no price impact but all I know is that there is one less in the demand pool for that million dollar house and less demand should lead to lower prices everything else held constant.

You guys keep missing my point, 6 months, 1 year or 7 years, prices don't adjust at the same rate interest does.

That price won't lower to a monthly payment to equate a 1.5% rate increase. For 20% down, the LTV on $1m house will be $800k and the payment will be just over $4k at 4.5%. To get that same payment at 6%, the price would have to be $843k, or $875k if you want to use that same $200k down. I don't see that happening.

The difference here is rates are not emotionally affected by the pool of sellers, listing prices are. Theory and reality are not the same.

I'm not missing the point I acknowledge this, like I said, interest rates are just one component of the equation. Rates could up tomorrow to 7% and then banks could offer 0 down interest only Payment loans for the first five years at 1% and people would flock to those keeping prices up or even inflating them and u would be yelling at the top of your lungs " u see rates didn't have an impact". Like I said, all I know is that if you do something that raises my cost with everything else staying constant there will be at least one person two persons less in the demand pool. That's theory and real life. The thing is there are a bunch of other variables at play that have helped housing due to government intervention

 

[irvinehomeowner]

@qwerter:

I guess what I'm getting at is that there has been bad advice dispensed over the years and using rising rates as a reason to wait so that prices will go down is not something I would recommend.

For a long while, rising rates was the boogie man but as we've seen, there are probably stronger factors that will affect prices.

You didn't wait around for a high rate environment so that tells me you know it's not a proportional inverse relationship.

If the relationship was proportional, it's a no-brainer to buy in a high-rate/low-price scenario, but it's not, so saying that rising rates will bring down prices isn't an informative statement.

And based on the last year of activity, not really a true one either.