Growing up at the beach, 4th of July has always been fun. Newport Beach in particular has always offered such a great variety of activities throughout the day. My personal favorite has always been to ride my bike all over the peninsula to visit friends and see everyone having a good time. However, there are plenty of parades, Here are just a few fun activities:

Parades

Balboa Island

Newport Shores

Newport Crest

Although fireworks are illegal in Newport Beach, there are still great ways to see some beautiful shows.

Fireworks

Huntington beach

Newport Dunes

Don’t forget the harbor!! The American Legion hosts the Old Glory Boat parade complete with prizes for “Best Decorated,” “Best Music,” and “Best Theme.”

If you are a landlord or an open minded homeowner trapped by higher interest rates, think again. The side effect of higher interest rates are not created equal.

Not all segments of the market are created equal. Income property is particularly sensitive to rates because it typically trades based upon cash flow. Single occupancy or owner occupied properties typically trade based upon individual demand. With that said, our data is starting to show this stark contrast.

Multi family has nearly 10 months more inventory than we did this time last year. Our supply has doubled and prices are only up by 1%. When comparing that to single occupancy homes, condos and townhomes, we have about half a month more of inventory, supply is up by about 25%, but pricing is also up by about 10%.

So what’s the takeaway? Especially if you are a landlord and you’ve had a significant increase in the value of your property, you might have the opportunity to take those gains, negotiate on an upleg, generate more money and or reduce the effect of vacancy.

For example, I have one client who’s property has probably increased by about 150% and it generates about $12,800/month. However, for only 20-25% more for another property, they would generate closer to $35,000/month. That’s more than a 150% gain in monthly rental income!!

For you open minded homeowners, it could be that you get a much better value on your next property because you’re ok with becoming a landlord. In some cases, secondary units are detached AND some cities even afford you the opportunity to add more ADU’s and continue to increase your income!!

The last note, given that income property is very strongly correlated to interest rates, as rates come down, income property owners ought to expect continued and even more accelerated growth!!

One segment of the market that is affected by higher rates than most is income property. Income property typically trades based upon what a property generates on a monthly basis. When cross referenced against higher rates that eat in to profitability, prices start to come down to reflect the higher monthly payment to ensure proper cashflow.

It’s not to say that there are no cash buyers. However, sellers are forced to compete for those cash buyers more so than they did before. This is particularly true for properties in excess of more than 5 units where financing changes from residential to commercial.

What does this mean for the market today? Well, if you have a rental property that is less than 4 units, there is a possibility that you could trade into a property that generates a lot more money for a very similar property. For example, I have a client who could sell her property and acquire a new one at the same price, but generate twice as much in rent!! Yes her property taxes would go up. Twice the rental income is more than enough to offset higher property taxes. And given that she has owned the property for roughly 30 years, she can begin to depreciate the property again!!

Another client has a property where the net difference between the property they would sell and the property they would acquire would be about 20%. However, they would increase their cash flow by 3x!! That increased cash flow would not only make up for the higher property tax cost, but also the higher mortgage payment. This would be like getting a 50% bump in pay for doing the same exact job!!

Moral of the story, if you are a landlord with a single door or something that a young couple/family would be interested in purchasing, there is a strong possibility that you could generate more rental income for in a multi family property elsewhere. To find out if that could be you, contact me today!!

Mortgage application rates are down. Rates are nearing a 3 month low. Pending sales have been cut in half. We’ve been saying this for a long time, but the market continues to get weirder and weirder every day.

A lot of buyers have burnout. The days of “bids” appears to be over. However, there are still plenty of buyers who still want to get in to the market. Sellers are just needing to work harder in order to get more buyers to their property.

I think the hardest part of all of this is learning to remember what a “normal” market is. This means 3-6 months worth of supply. This can mean price reductions. This can mean negotiating. All of these factors are variables that contribute to a normal market. We just haven’t seen one in almost 5 years and we’ve all forgotten what that looks like.

I also think it’s important to say “normal” because the other option for a market that is beginning to slow down leads people to think that a crash is coming. The difference between then and now are the lending restrictions. Gone are the days of “no money down” lending. Naturally, people have quite a bit of equity in their homes. The equity in homes now isn’t just because housing values have increased by about 50% or more since 2019.

The other factor that makes this different from the recession is that there is still plenty of buyer demand. Buyer demand is largely limited to the entry level market. It is likely to sustain as unemployment remains low.

Ultimately, it’s weird to try to adjust to a “normal” market after nearly 4 years of what has been an absolutely absurd/crazy market. Historically low interest rates, 20% year over year growth, why wouldn’t this lead to a nutty market? The hardest part for all parties involved is to remember what a “normal” market feels like: some days on market, some price reductions, some negotiations, all of which contribute to an overall “normal” market.

Pending inventory is a great way to track the current level of demand for a community. As of late, our pending inventory is dropping suggesting that the days of “bids”, might be behind us.

Pricing is up year over year, but so are interest rates and it appears that our market is running out of runway for continued 20% year over year growth. Year over year, we’re still up by roughly 13% overall. However, at this time last year, we had roughly 60% of our inventory in escrow. Now, we’ve cut that in half. Following this, we ought to begin to see our days on market begin to grow as well.

Buyers are still out there. However, with higher rates and higher prices, they are being far more discerning and the percentage of inventory that is in escrow is a direct reflection.

After an unanticipated, wildly hot market due to covid stimulus and near zero interest rates, pricing increased by 50-100%. Flash forward to today with high rates, high prices and our crazy train might have finally run out of steam. Here’s how to compose what this picture looks like now.

First, this doesn’t mean the market is going to come crashing down. I think it’s easy to refer back to the most recent painful event expecting a repeat. However, this time is different. We have strict lending conditions and most buyers are only empowered to purchase what they can afford. Second, unemployment is still very low such that most Americans can still afford to pay their bills.

The issue with our market now is affordability. My favorite way to look at this is calculating the average price of a home and the monthly mortgage payment assuming the buyer is putting 20% down. In this case of 2019, the average price for a single family home in Newport Beach was about $2,900,000. Interest rates at that time hovered just below 4%. That made the monthly payment just under $11,000/month. Flash forward to today. the average home is valued at $4,450,000 with rates at about 7.4%. That would bring us to a monthly payment of almost $25,000/month. The takeaway: although your home might be worth 50% more, it will cost your buyer nearly 2.5 times your carrying cost to purchase the home. Although wage growth is up, hard to deny that homes are not only up in terms of prices, the month over month carrying cost in conjunction with higher prices is the real nail in the coffin.

If we’ve experienced such a jump in less than 5 years, why aren’t we following Darwin’s theory of what goes up, must come down? Inventory. Naturally poor affordability would reduce demand and either sustain or reduce prices. However, many owners have low interest rates and are unwilling/can’t afford these higher prices and are locked in place: golden handcuffs. This tells us that there are likely a number of sellers who would like to move, but choose not to because of their financial circumstances. As a result, they are not listing their homes and we have less inventory. Right now, we have nearly half the volume of inventory that we did this same time in 2019. Normally half the volume of inventory would send pricing skyrocketing, but these high interest rates have killed demand. These two variables have been moving in conjunction with one another, propping up prices. But like I said, the winds might be changing.

The story is the same: demand is waning. However, we might finally have inventory building and days on market for existing inventory lasting significantly longer than it has. All of this being said, this varies by price point. First time home buyers are still competing and encountering some real struggles to get into the market. However, above 5 million and the market is fairly soft. It’s one thing to change your vacation plans for the year from 4 to 2 trips to accommodate your additional housing costs. Coming up with an additional $15,000 every month doesn’t equate to cutting your vacations in half.

Sellers, there are still buyers who have had lifestyle changes and need to make housing changes. Buyers, depending on your product search and market, you might actually be able to negotiate in contrast to submitting a “bid” for a home. We are finally beginning to approach a more “fair” market where negotiations can happen. For those who have been waiting for the real estate narrative to change, it’s here. For those waiting for a crash, we still don’t see it coming without a massive increase in inventory and or many Americans losing employment and unable to cover their expenses. Even still, the fed could always cut rates very quickly enabling home buying and employment again. This is the most classic, not so classic market that is following economic rules.

Navigating a move, a transaction, picking a new house and navigating moving your family all at the same time can be challenging. As a result, one option you might want to consider is a leaseback.

What is it?

A leaseback is a lease after sale. You get to stay in your home for an agreed upon amount of time in exchange for a dollar amount just like any other lease. Normally the terms of the leaseback are negotiated prior to accepting an offer. The reason being is that the time and total sum is likely to vary drastically. This could range from a free leaseback for 6 months to $25,000/month for 2 years. The possibilities are endless. It just depends on what both parties agree to. In general, a leaseback is structured just like a lease including length of term, monthly rate and security deposit. It’s really a lease that is attached to the backend of a purchase. It just happens to be negotiated in a purchase contract just like any other part of the contract.

But I’m a Buyer

If you’re a buyer, this may work to your benefit because maybe you’ve found the perfect home, but you still have 6 months left on your lease. Let the seller stay in exchange for making sure that your mortgage and property taxes are covered!! Buying a property that will need a heavy remodel or to be torn down? Let the seller stay for a dollar amount while you develop your plans and can break ground as soon as the seller is gone.

A leaseback can be an excellent tool for a number of circumstances. Most of all, a leaseback can remove some time pressure while you find your replacement home immediately. It’s another tool in a toolbox that can help you make the right decision for you and your family.

Since the pandemic, real estate prices have increase by 50-100% for some properties. If you are in this position and your home no longer works for you, you’re confronted with a decision is you’re over the age of 55. Do you take the capital gains tax hit in order to maintain a lower property tax base or do you sacrifice a lower property tax base in order to defer your capital gains.

Exercising Prop 19 and taking the capital gains

First and foremost, consult your tax specialist. With prices jumped so quickly, there are some tax and financial considerations you may want to think about. First, let’s go over capital gains. The state of California affords you an allowance of $250,000 if you’re single and $500,000 if you’re married. That means that if you are married and your property has increased in value by more than $500,000, your capital gains ought to effect anything above your original purchase price plus $500,000. For example, if you purchased a home for $700,000, but you were to sell your home for $1,500,000, you ought to experience the capital gains tax total of $300,000. That is $700,000 (your original purchase prices) plus the $500,000 for a total of $1,200,000. This equates to a net difference of $300,000. Again, this is assuming you’re married. If you’re not married and experience similar gains, your capital gains total would be $550,000.
However, if you choose this route, hopefully you would be able to transfer your property taxes via exercising Proposition 19. Let’s use the same scenario and assume that you’re paying $9000/year in property taxes as a result of your purchase. If you were to purchase a new home for $2,000,000, your property tax math would look as follows:

$2,000,000-$1,500,000= $500,000

$500,000 (property tax rate of .0121)= $6050

$6050+(original property tax payment) $9000= $15,050

Although $15,050 is more than the original $9000/year, it’s still less than the $24,000 that would have been the tax rate if you had not exercised Proposition 19.

This means that scenario one equates to a capital gains tax on $300,000 assuming you’re married and but saving almost $10,000/year in property taxes. So what does scenario two look like?

Deferring your capital gains

Scenario two consists of deferring your capital gains, but taking on the higher property tax base. It starts with converting your property to a rental. This means that you would need to move out of your home and renting your home for two years. At this point, you can sell your home. However, within 45 days of selling your home, you are obligated to identify 3 other properties that you might purchase. For more specifics, contact an accommodator. Another time frame that is relevant is how quickly you can close on the next home. From the sale of your first property, you have 180 days to close on the next. Even after you close, you still cannot occupy the property for another 2 years. However, you should be able to move in after that time frame. Again, consult your tax professional for specifics. Deferring your capital gains tax might be worth it. Assuming the same scenario, the financials equate to the following: no capital gains tax, but new property taxes of $24,000/year.

In most cases, it probably makes sense to transfer your property tax base. However, if you can’t exercise Proposition 19, maybe deferring your capital gains tax would be best.

Barbara

Here’s why Barbara is so optimistic on pricing. Assuming a buyer puts down 20% for a home, every 1% change in the buyer’s mortgage rate, changes the buyer’s purchasing power by 10%. That’s a huge swing for a lot of potential buyers. Given the purchasing power change and based on Barbara’s input, this should be a 10% increase in housing prices. I don’t agree with a one for one correlation though. Here’s why.

My Response

My response is affordability and pent up sellers. Let’s start with affordability. Affordability has been very poor for a very long time Housing Affordability Index. The affordability calculation is a combination of mortgage rates and housing prices. I think we’ve experienced sustained poor affordability because we’ve had an odd combination of relatively high interest rates and low inventory.

What Barbara doesn’t mention is that if rates do come down, we might unlock pent up sellers. The combination of lower rates contributing to more inventory could result in an increase in housing prices that doesn’t directly correlate with interest rate changes. It also may not directly correlate because there is such a small portion of the population currently that can afford the housing as it stands. We do not have the same loose lending that created the recession.

The Future

Lower rates ought to bring more sellers to the market as well as increase the affordability for buyers. I don’t know what the exact math is as far as would a 1% change in mortgage rates reflect a 5% increase in pricing because of the increased buyer pool? I’m not sure. What I do know is that if buyers can’t afford homes, properties won’t sell. Affordability would likely need to improve with more inventory. This would combat the one for one correlation between rates and prices. However, I think the important correlation now is affordability and inventory. I will see what I can do about finding some information on both affordability and inventory. Stay tuned!!

If I had to draw a metaphor for our market, I would say that it feels a little like people are using Dorothy’s line “lions and tigers and bears, oh my!”

First, mortgage rates. Mortgage rates are holding high because inflation is much stickier than anticipated. Hope for rates coming down continues to be a challenge due to the unknown future with gas prices. In the last six months to a year, we’ve had a very strong correlation to rates. When rates pop up, buyers seem to get cold feet and either suspend their search and or back out of a transaction.

Second, legislation. This one has a lot to unpack. Let’s go with the low hanging fruit first: the mansion tax. Although I’m in Orange County, the mansion tax may prevent would be sellers out of LA moving to Orange County or vice versa. Asking either party to pay an additional $200,000 or more in order to complete a transaction that goes to taxes is a tough pill to swallow. The side effect of the measure results in a less mobile market overall with much heavier financial consequences for buying or selling a home.

Landlord Tenant laws is the next legislative challenge. Stories of squatters in guest homes or occupying owners’ second homes is growing. In the past, this wouldn’t have been such an issue, but with changes to landlord tenant laws, squatters are gaining tenants rights. When a squatter has tenant rights, removing the squatter becomes a long, arduous process. Many would be landlords have become deterred from owning rental property. However, one gentleman has turned this into an opportunity. To learn more about Flash Shelton, click here.

Last piece of legislation is the NAR ruling regarding buyer agent commission. This one is tough because we’re not exactly sure what this could look like. I’ve spoken with other agents and we have our two cents. These thoughts range from the first time home buyer who is properly represented is gone to why would a seller not incentivize buyers agents to bring their clients to their property. Another thought is that this opens the door for a lot of future legal problems because of Dual Agency conflict. I’ll unpack dual agency more in the future. Lastly, I think this opens the door for a record number of off market transactions. Why not try to get in touch with sellers directly for your buyers and take control of the conversation by finding the deal? This ruling will likely reduce transparency for all parties involved.

In total, I believe that all of the legislation was well intended. However, I’m not sure that the result will match the intention.