| Home Sales Down. Housing Prices Stagnant. Look to RENT for Answers.
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For Rent Long

19 Jul Home Sales Down. Housing Prices Stagnant. Look to RENT for Answers.

If you haven’t noticed, the hot real estate market of last year has slowed considerably since last October and has no signs of picking up steam anytime soon – even during the typical hot summer selling season.  In Southern California, home sales are down 12% year-over-year and the median sale price actually dropped in July from June.  But rents are hotter than ever and vacancy rates in Los Angeles are some of the lowest in the nation.

If you follow the real estate market in home crazy Los Angeles, you might be asking yourself, “Aren’t inventories still low?  Haven’t mortgage rates been steady? And if so, why haven’t prices risen?”  This is a common and natural question I’m frequently asked by my fellow real estate investors and by clients.  At first glance, it would seem to go against normal economic theory of supply and demand.  Inventories are low, mortgages rates are holding (and low), prices should go up.  But that’s clearly not the case.  The answer to this question is simpler than you think, particularly when rental market trends are brought into the discussion.

Across the country, we now have the highest percentage of households renting in 20 years.  And if you look at the data, you’ll find that a larger percentage of one’s income is going toward housing than ever before.  And with income growth lacking far behind the recent run-up in home prices and increasing rents, you can understand why 2.3 million adults (over 18) in California are still living at home with their parents.

Don’t get me wrong, the lust for homeownership is still as strong as ever.  But when you apply for a mortgage, most banks want to see no more than 30% of your income going towards housing payments.  That’s a tough nut to swallow, particularly in Los Angeles, which explains why over half of the population in California (even higher in L.A.) are forced to rent rather than own a home.  That’s also why so many homes with equity in L.A. are outdated when they come on the market.  Sellers just don’t have the income to support renovating the home and commanding a premium price.

So where is the market heading?

I think we’re looking at a fragile market right now.  If mortgage rates hold and nothing drastic happens in the stock market, you can expect housing prices to remain stagnant, even dip a bit as inventory creeps up and we head towards the winter months.  However, should the Fed start to raise mortgage rates (even slightly) or the record-setting stock market start to reflect what’s really happening in the economy, you can expect home prices to suffer.  Not to worry.  There are many other more secure, passive and powerful ways to invest in real estate without having to own the real estate itself or deal with rents.

If you’d like to discuss how best to use this information in your investments, please feel free to contact us at 626.788.9700 or click here.