It’s subtle, but the market is slowly cooling. We’re seeing less new inventory. The existing inventory is becoming stale. The number of escrows is down significantly. All of this being said, we still only have 4 months supply of inventory. That may suggest that we’re not in a buyers’ market yet. List price versus sale price is tending down, but really negligible. Finally, pricing is relatively flat for the last 4 months.

So what’s the takeaway? We appear to have 3 different variables all working in conjunction with one another: rates, inventory and pricing. It appears that an awful lot of buyers are happy to wait for lower rates. We are not seeing more new inventory, but the existing inventory is hanging around. Some of the pent up inventory is waiting for lower rates too. Most homeowners are experiencing the golden handcuffs effect where they don’t want to give up their low interest mortgages to take on much higher rates for a preferred home.

Prices held firm through rate hikes because our inventory and volume of transactions plummeted in comparison. Good news for all parties involved, rates are dropping. Lower rates makes the exact same price for a home more affordable. Just like prices held through rate hikes because of low inventory, if inventory is rising and rates are dropping this ought to provide justification for prices to stay steady or increase. This would increase affordability without increasing prices and open the door for a lot more transactions for both buyers and sellers.

When looking to acquire a multi family property, oftentimes there are two different rents advertised: current rents and pro forma rents. Just to complicate things further, there is also market rents and they can all vary wildly. It’s important to understand the difference. Here’s how to think about it.

Evaluating multi family properties can seem fairly straight forward. Use either a cap rate or gross rent multiplier against what the property is generating and calculate the value of the property from there. However, this doesn’t take into account disengaged landlords and Covid.

It’s not uncommon for me to see a number of properties where rents are roughly 50% below their highest and best use. Whether this is a result of a disengaged landlord who doesn’t give their tenant rent increases or the landlord was already behind and couldn’t catch up with new Rent Cap laws, sometimes rents end up below market. On the flip side, sometimes rents can be artificially inflated because the property is being rented on a short term basis. Typically when properties are being rented on a short term basis, the expenses are higher and you eventually see this in the net operating income.

To bring rents up to market, normally this means that there is significant investment on the part of the new owner to bring the property to its highest and best use. This normally includes paint, bathroom and kitchen remodels, new lighting and flooring. Trying to calculate what the difference might be to convert a short term rental property to long term is a bit of a shot in the dark. Location typically has the greatest affect, but still challenging to calculate.

Next, and this is where I really come into play, knowing how to compare current rents, pro forma rents, versus market rents. Current rents is simply what the property is currently generating. If you know the rental market, you’ll know if this owner has been working to stay close to market or if they’re just happy to have the property rented and haven’t increased rent on their tenants in years. Pro forma rents are the anticipated rents if the owner is to replace the tenants. Sometimes the listing agent is taking into account that the new owner will remodel the property such that he or she can charge market rent. However, I’m always a little skeptical of pro forma rents because you don’t want to purchase a property with a miscalculated after repair value for rent.

It’s not weird to see pro forma rents vary from the current rental income. It’s also important for you to know what the market rents are in order to know how neglected the rents are or how artificial the pro forma rates are. Also, sometimes the pro forma rates can be low in anticipation that the incoming buyer will not remodel the property to its highest and best use.

Affordability is a severely neglected topic. We talk plenty about interest rates and house prices, but talking about affordability and what that conjunctive picture looks like would provide some significant clarity.

Affordability is the conjunction of your house price and your interest rate. If we include wages, that tells a story of what percentage of the population can afford the home. For now, I’ll focus on house price and interest rates.

Now that rates have come down, affordability has definitely changed. Despite the fact that homes are worth more right now than they were this time last year, with lower interest rates, we actually have lower monthly costs and increased affordability. Month over month, affordability hasn’t changed. However, that is likely to change as we anticipate rates continuing to drop.

As affordability improves, I suspect we will begin to see more inventory, and probably more transactions. The average monthly price of a home with 20% down and the corresponding interest rates for the last year are as follows:

2024: $20,586.96

2023: $18,190.72

2022: $15,397.98

2021: $9,9765.26

2020: $9,187.85

2019: $9,263.34

Affordability Video-Reports on Housing

Our market is demonstrating slowing demand and increasing inventory. Our days on market is increasing and for the first time in a long time, buyers are able to negotiate and homes are selling for 97% of their list price.

I think many people have a tendency to look for signs of a slip in our market. However, it appears that we are adjusting to a more normal territory. Buyers can expect to negotiate. There aren’t multiple offers within the first several days. A fair market is described as 6 months of supply. As of right now, we’re currently at just over 4 months. This would indicate that it’s still a seller’s market. However, I think our baseline as a result of COVID is so far out of whack that normal seems inappropriately slow. It’s like part of a conversation I had today: “rather than going from 30 miles per hour to 20 miles per hour, it’s like we’re going from 70 miles per hour to 50 miles per hour”. We’re definitely moving forward, we’re just slowing our acceleration.

I think the important note is that the Fed has the ability to decrease rates if they feel it’s appropriate in order to stimulate the economy. Last week there was definitely concern related to the Sahm Rule being triggered. However, how do we put that in context of record low unemployment for such a lengthy period of time. Even with where unemployment is now, we’re still below our historical average. Unemployment

If we have approached a more fair market and we can’t anticipate ferocious nominal price growth, our affordability will likely increase as rates come down. In general I anticipate that the volume of transactions will begin to increase as more people begin to decide that another home would be a better fit. Better than their low interest rate. It may take a quiet winter, but housing has always been resilient and I don’t suspect that will change as people will always need a place to live.

In case you’ve been living under a rock, interest rates have ticked up. However, it has been over a year since we have incurred any rate hikes. What becomes even more interesting is when you stop and look at the significant changes in rates, despite Federal Reserve intervention. Why does this occur?

There are a couple things. I’m going to focus on the bank side and business side of rate changes. We had a massive drop in January because it was preceded by the Fed announcing that they were hopeful that they were done increasing rates. The banks heard that news and were able to cut rates because they no longer needed as significant a margin in order to protect themselves to secure profitability. A lender I know constantly tells me that based on where bond rates are, mortgage rates should be significantly lower, but they weren’t.

The bottom line is/was that the banks were nervous. They were hedging their bets. When we didn’t have a huge crash and still had continued, positive growth through the spring, we prohibited the fed from being able to come out and cut rates. Translation: we were too resilient. That brings us to our spike towards the end of April and beginning of May.

Flash forward to between May and now, we’re just waiting. As I said before, it has now been more than a year since the Federal Reserve intervened with rates. Given where the health of the economy is now, there doesn’t appear to be any anticipation of a rate hike. We’re just waiting on a cut. When that happens stay tuned. However, even if we get a rate cut, it doesn’t mean that we will have a strongly correlated reduction in mortgage rates as demonstrated by the significant swings we’ve had in just the last year.

I noted this last month and it’s roughly the same story: more inventory and fewer escrows. In contrast to last year, we have a nearly 17% increase in inventory, but a 10% decrease in the volume of escrows. This is another indicator that our market is slowing down. In contrast to the year before Covid, we’ve got nearly half the inventory and a little more than 50% more in inventory. Proportionately, now we’ve got about 22% in escrow. Last year it was 28%. The year before COVID we had about 19% of our inventory in escrow.

So what does all of this mean? This is an indication of still relatively low demand correlating with low inventory, but that correlation is weakening. This is a reflection that we are definitely not likely to see 20% year over year growth. However, we still have a higher percentage of inventory currently in escrow than we did prior to Covid reflecting a relatively stable or strong market. We probably will continue to have growth, just less than we did through Covid.

We also have a couple of external variables that may be affecting this market: the election and impending changes to interest rates. It’s astonishing to hear how many people would rather suspend their sale either listing their home or purchasing their home. As a result, we might have artificially low numbers for both listings and escrows. Couple this with the growing anticipation of rate decreases and we have another reason for artificially low listings and escrows.

No one has a crystal ball. However, I think there is excellent justification for a rip roaring spring 2025. In the meantime and for additional input in our current, buyer trending market, take a look at the article below. Watch Months-of-Supply

There is a new bill that is in the middle of approval that would increase the number of ADU’s on multi family properties. If this passes, this is welcome news for a lot of multi family owners and potential multi family buyers.

It has been many years since it made any sense for developers to build multi family or large scale apartment buildings beyond companies like the Irvine Company. I think it’s fair to say that the Irvine Company has an awful lot of power in Irvine and can make building multi family make financial sense. Although this bill doesn’t quite grease the wheels to build large scale apartment buildings enough to make them financially profitable, it would increase density for individual properties. If enough individual owners increase the density of their properties, this could function like adding an apartment building in a neighborhood.

Increasing density ought to increase income for multi family owners and supply more inventory for renters. More supply would mean rents won’t increase quite as quickly and renters should be able to both manage that cost and negate a lot of housing inflation. This ought to increase the affordability for a lot of renters.

In addition to helping renters manage their housing costs, this ought to increase rental income for many owners. Increasing rental income naturally increases the value of owners’ properties. More often than not, multi family properties sell based on their rental income.

For more information regarding SB1211 click this link