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.

You ever drive down a street and find that you’re naturally more attracted to one home than another? What draws you to that particular home over another. Here’s why you might be more drawn to one property over another.

Outdoor lighting- We’re all naturally drawn to light, bright spaces. The same is true for homes as well.

Fresh paint- Paint can make a huge impact from increasing contrast between the body color and trim. Fresh paint can also make your property seem more well cared for.

Updated address numbers- Just like design and architectural trends, your address numbers can be apart of that.

Landscaping- Green grass, bright flowers, again, high contrast, can make your home feel bright, fresh, cared for and a very cheery beginning for your future buyer.

American Flag- Not only does it physically protrude from your home, it also adds movement that will help draw eyes to your property.

Potted plants- Don’t have a front yard or much beyond your garage? Brighten up your home with some potted plants with brightly colored flowers or natural herbs. Always a good rule of thumb to add color and movement in order to draw attention to your home.

As a seller, it’s important to initiate that eye gaze from your potential buyer. These are just some easy tricks to initiate that natural attraction to your property.

There has been a lot of discussion of Golden Handcuffs for a lot of owners given where interest rates are currently. We’ve also had a significant jump in pricing over the course of the last few years. If your home no longer suits your needs, the new interest rate marketplace and change in pricing can make the question of how to proceed very challenging.

Pro Rent

Here are the side effects of choosing to sell. First, capital gains tax. Depending on how long you’ve owned your home, the value of your home and whether or not you’re married, you could have a hefty capital gains tax bill. I’ll take myself as an example. Between price growth and the remodel I did at my home, my property has increased in value significantly. As a result, my tax bill would be pretty hefty. As a result, I decided to rent my property. The rental income I’m collecting is enough to cover my expenses and even have positive cash flow. I can still sell my property down the road and defer my capital gains tax by completing a 1031 exchange.

Second, new interest rate market. In order to upgrade, the interest rate would be nearly twice as high and would increase my monthly payment even to take on the same mortgage let alone taking on a larger mortgage. Now, by no means do I expect to have a similar payment, but in order to upgrade to what I’d like next, the payment would be more than I’d like it to be. The new mortgage rate market has really presented challenges for those of us looking to upgrade/expand.

These all sound like reasons to not sell. However, there might be a reason to sell after all. One, you might not want to be a landlord. If you’ve never been a landlord and it’s intimidating, you might not have the appetite. That’s ok.

Pro Sell

There are solutions to the mortgage market these days. They range from paying down your rate, temporary buy downs, and more. I’m very pro temporary buy downs in order to remove some burden for some time with the expectation/hope that rates come down. It’s not guaranteed, but we can hope. Either way, when you look at property value changes over the course of the last decade versus rent growth, rent growth can’t touch property value growth. If that’s the case, and you’re planning on “upgrading”, aka purchasing a more expensive property, you’re likely to increase your equity because growth is typically on a percentage basis instead of nominal growth.

My favorite example of this was a woman who purchased property in the 1970’s. She decided that she couldn’t afford the oceanfront property that was 25-30% more than non-oceanfront. Not only is that oceanfront probably worth more than double the non-oceanfront, considering the percentage growth, those properties have probably increased by more than 300%. Forgive me as the numbers are from memory, but I think the oceanfront was about $300,000 and the non-oceanfront was about $225,000. If this is the case, the non-oceanfront is $6,750,000 and the oceanfront is $9,000,000. That difference of $2,250,000 was only a difference of $75,000 many years prior. Percentage growth makes a great case for selling your home and purchasing a new one despite the change in interest rates.

Conclusion

The good news is that there are no wrong answers. The only concern is what the side effects are for each decision.

I think it’s appropriate to quote Warren Buffett: “Never bet against America”.

Nationally

I’ll also add that all of the emphasis will be on Orange County real estate. There are areas that have had some softening like the desert and the bay area.

Jerome Powell may have successfully achieved the soft landing at least within Orange County. Employment is still high. Wage growth has leveled off. The fed appears to be done hiking rates. This has afforded lenders to shrink their margin between the 10 year treasury and their mortgage rates because the Federal Reserve has indicated that they’re done increasing rates.  Inventory is still generally low. Buyer demand is low. This is continuing to prop up pricing.

Local Market

What we expect to happen is as follows. As interest rates continue to come down, we expect to see more sellers come to market as they decide that they’re willing to take on, what is likely, a higher mortgage rate than what they currently have. Buyers who have been on the sideline waiting for affordability to increase either via pricing coming down, rates coming down or their wage growth, are now available to get in with lower rates.

This presents a bit of an odd position because as prices hold steady and rates come down, this actually improves affordability aka decreases the buyer’s monthly payment. I’m going to circle back to my Warren Buffett quote: “Never bet against America”. Interest rates coming down can provide justification for an increase in pricing. Given how poor current affordability is right now, I don’t expect pricing to go up exactly in line with rates coming down. However, if a difference of one point in an interest rate means a difference in payment by 10%, I think we have justification for as much as a 10% increase assuming rates continue to come down. Rates peaked towards the end of October/beginning of November. We’re already down by nearly 1.5 percent. That 10% increase should already be sitting and waiting for us.

With affordability as low as it is right now, I suspect that we will have positive price growth somewhere between 3-10%. This is assuming that employment stays roughly where it is and we don’t see a massive change in wages.

Variability in Price Points

We might see variability in how different markets are affected by this. With higher priced transactions correlated with cash, not sure we will see a significant jump in the higher priced markets. A lot of the higher priced markets have been somewhat immune to affect of higher rates.

However, the first time home buyers who have been sitting on the sidelines waiting for a great opportunity, they’re more inclined to jump into the market. We also have the population of move up buyers who might be more inclined to move for a growing family or changing needs. The move up buyers ought to provide inventory.

The Big Takeaway

The big take away: we still ought to have growth for 2024. However, the likelihood that it will match anything that we saw through COVID is probably very low. It appears that we’re moving back to business as usual for real estate. Like I said at the top “Never bet against America”.

2023 was a significant surprise. I think we always look at our most recent pain with the expectation that is how our next pain will appear, aka a massive cliff with prices plummeting. I think that when rates popped up above 5%, many people expected to see a correction. Obviously, that’s not what happened.

Instead, what we saw was a decreased volume of active inventory aka a constrained supply that more or less correlated with reduced demand. As a result, we didn’t experience lower prices. Instead, both prices and rates went up. This combination resulted in one of the lowest affordability rates historically.

Just like the correlation between low supply and low demand, which propped up pricing, we had a higher correlation of cash for many transactions. Buyers paying cash were certainly less concerned with rates and the affordability without a loan.

What can we expect for 2024?

I will start this by saying that there are many different ways to calculate your rate of return. Options can vary from the very basic to emphasis on the minutia including the individual water bills and electrical bills.

The way that I was always taught was to calculate your cash on cash rate of return. This answers the question of how is my money doing within this property/asset. However, this formula is useful for calculating your own rate of return as opposed to the more open ended understanding of how someone else might view it. Because of this gap, I think that these are the two iterations that are most valuable. I’ll start with my own property.

First, I bought a property that was not upgraded or remodeled. Second, I lived in and remodeled the property before moving out and turning it into a rental property. These numbers are likely to seem better than average given those circumstances.

My numbers look as follows if you’re using cash on cash rate of return:

(rental income).  (mortgage payment).          (HOA)       (property taxes)

6500(12).            –          2800(12)           –         450(12)      –      1000(12)

100,000

78000- 33600 – 5400 – 12000

100,000

27000

100,000

=27%

I didn’t purchase the property for $100,000 which is why I have my mortgage payment included. The alternative is to calculate the rate of return on a more basic level. In this context, it would look as follows:

Rental Income   Purchase Price

[6500(12)].    /.    $700,000.    =.    11%

Both systems are accurate. On a personal level, I think it’s valuable to calculate your own numbers. Calculating a rate of return on a more basic level affords you the opportunity to compare your property to others more effectively for if you are considering buying or selling.

When you hear that the Fed is coming out and saying that we’re near the end of rate hikes, you would imagine that buyers would rejoice and hit the market. However, our data indicates that our monthly supply of inventory has sky rocketed and this is a direct reflection of buyer demand.

There is a part of me that understands from the standpoint that buyers aren’t thinking that they’re getting in before rates get worse. It feels a little like the Nordstrom’s Anniversary Sale has passed and the excitement of the deal and back to school shopping has subsided. On the surface, it may not seem like an ideal time to buy for most people. However, not only are there solutions to these lackluster rates and market, now might be a great time to buy and here’s why:

1. Buyer demand has plummeted. In the last month, our monthly supply, which is a direct indicator of buyer demand has sky rocketed. We have a couple of variables affecting this. First and foremost is the holidays and winter quarter. This is generally the slowest time for real estate. The last few winters have been outliers though because low interest rates aggressively drove the market into a wild market. Second, and also related to interest rates, the overall consensus is that it is unlikely for the Fed to increase rates anymore. This means that hypothetically, this is the worst that rates will be. Most importantly, because buyer demand has plummeted, there is little to no competition!! Unless something is priced to generate multiple offers, there is finally room to negotiate again!! Normal market, welcome back.
2. However, I would argue that there is a solution for poor rates and that is Seller Credit Buy Downs. This means that you ask a seller to provide a credit to reduce your interest rate for a brief period of time. For example, in a recent transaction, the seller provided a credit that equated to just over 2% of the purchase price. With this credit, my clients were able to reduce their interest rate by 2% for the first year and 1% the following year. This may sound like a bit of a teaser rate, but there’s a strategy behind this. First, given that the expectation is for rates to come down, the hope is that you could refinance into a lower rate before your buy down expires. When you do exercise a refinance, the remaining funds in the seller credit are yours to keep!!

Between lower buyer demand, aka less competition and the ability to exercise seller credit buy downs, now might be a great time to capitalize on the concept of date the rate and marry the home. Behavioral economics becomes very evident when you know that the Fed is unlikely to continue “the pain” and not expected to increase rates anymore. Even still, it’s important to have conversations with your lender because there is a bit of a gap between the Fed and the actual rate you will get from your lender. For example, according to mortgage news daily, rates have actually come down by nearly half a point!! It’s been awhile since we last had a half a point decrease in mortgage rates.

Don’t be left on the sidelines. I’m here to help you put the puzzle pieces together to get into your dream home!!

We continue to have a decrease in the volume of sales in the single family home market. However, sales volume have increased in the condo and townhome market. There are a couple of things to take away from this.

First, everyone is discussing affordability. With rates in the 7’s, that has drastically changed the purchasing power for a lot of buyers. However, for buyers that are all cash, they have far fewer competitors because in a lot of circumstances, the higher rates have eliminated their competition. This is most common in the 3 million and above price point.

Would be buyers in the single family home market have been pushed to the condo and townhome market. This has increased the volume of sales in that marketplace on top of an overall higher rate of inventory in that marketplace.

We also have what makes this market feel a little like the upside down: such low inventory has kept pricing high. In a lot of circumstances, we are missing inventory that would drive pricing down in correlation with the decreased demand. However, we still don’t have that inventory.

What does this mean for our future? Winter is generally the slowest time of year for real estate. We expect things to be business as usual and or with emphasis not on real estate. However, we very well could be coming into the first quarter and or spring with some of the lowest inventory historically. Without an influx of inventory and rates unchanged, it might not be the wild, wild west of a market that we have had with 20% year over year growth. However, there is no justification for pricing to soften. Now, it’s not to say that opportunities won’t become available. They might just take a little more digging than they have in the past.

Nearly all of us will end up with leftovers from Thanksgiving. Whether you’re hosting or being sent home with food, there always seemsto be an abundance of Thanksgiving leftovers. As a result, every year I try to come up with ways to re-invent Thanksgiving leftovers. My hope is that this recipe helps you target what leftovers to snag this Thanksgiving!

After a long discussion with my cousin, who is a great cook, we settled on a cranberry BBQ sauce. We thought with tailgating season in full swing, it might be a fun and great twist on traditional BBQ. Full disclosure, I was a vegetarian for about 10 years so I’m not the best at understanding what is popular for BBQ.  Don’t worry. My cousin was the main driver this year and her cooking is definitely reliably good. That being said, I did a test run with Chicken thighs and it was pretty spectacular. I’m thinking that darker meats might be a better fit for the acidic, tart, cranberries.

In all honesty, I looked at Ina Garten’s BBQ sauce recipe and made minor adjustments. I generally believe that she makes a fantastic version of most things. It’s not peculiar, but always good and familiar. I made her BBQ sauce and had a ratio of one cup of BBQ sauce to one tablespoon of cranberry sauce. I brought both to a boil and let simmer to ensure that the flavors mixed together. The flavor provided a mild sense of tartness to the BBQ sauce. Down the road, I might double the cranberry sauce. It all depends on how adventurous I and my guests are.

Ina Garten BBQ sauce recipe

Tempura Green Beans

Sweet Potato Pancakes