Following month-after-month, year-after-year increases in Long Beach home prices—generally growing upward by 14-18%—things are beginning to swing the other way as the real estate market teeters on the verge of a serious decline.
Back in March of last year I wrote about the horrible and sad situation the first-time home buyers faced, with prices skyrocketing and monied buyers outbidding new homebuyers with bids far in excess of asking prices, frequently offering cash.
Many would-be homeowners at the time told me they were laying low until things simmered down—often referring to “when the bubble bursts.”
The status of real estate, dodgy as it may turn out to be, isn’t the bubble burst that some believe or hope will make homes affordable again. It’s not a replay of the 2009 Great Recession collapse when buyers walked away from their homes en masse when faulty loans with their enormous balloon payments came due. In that year, according to the National association of Realtors, nearly 50% of agents were working with clients going through foreclosure or short sales. Today, that number is about 1%.
Rather, the downturn is being caused by what Phil Jones, Realtor and past president and director of the Greater Long Beach Board of Realtors terms “a perfect storm” of several unfavorable factors occurring at once, most severely interest rates rising fairly rapidly to their highest level in 15 years, along with the still-high prices for homes, inflation, plummeting 401K savings, the rising (again) price of gasoline and groceries and just a general wariness people have regarding their finances.
Now, says Jones, it’s become more difficult than ever for buyers still waiting to buy their first home. Home prices are no longer appreciating wildly and, in fact, have backed off a bit to the point where Jones says the median price for a home in Long Beach has backed down from a bit over $900,000 to about $830,000.
Experts have estimated that home prices nationally could fall by 10% over the next 12 to 18 months barring a recession. With a recession? More like 20%.
But a less-expensive price tag on a home doesn’t mean you’ll be saving any money. In fact, with mortgage rates reaching 7%, more than doubling in the past year from around 3%, it’s making mortgage payments significantly more expensive than last year at this time.
A 30-year fixed loan for an $800,000 home—a bit less than the median price—with 20% down payment and a 3% interest rate would’ve made your monthly payment on the mortgage $3,373. Make that loan at 7% and your monthly payment goes up to $5,322. Therefore, to keep your monthly payments more manageable, you need to adjust your home-buying budget downward accordingly and you might then be looking at houses far short of your hopes or expectations.
Higher interest rates, and, to a lesser degree, the fact that home prices have apparently plateaued if not decreased, have combined to keep would-be sellers, who may have missed the apex of the market, fairly trapped in their current residences because, explained Jones, if a homeowner sells their home, they still have to buy another, and they’re hesitant to trade their current low interest rate for one that’s thousands of dollars more pricey. And those who choose to list their home for whatever reason—perhaps to snag a still-considerable amount of equity and move to a more financially amenable location outside of California—will likely have to sell their home at a reduced price relative to, say, as recently as a couple of months ago. And selling at a reduced price, says Jones, is “something we haven’t seen in eons.”
The raising of interest rates, Jones said, “was like turning the faucet off” the real estate boom.
Federal Reserve Chairman Jerome Powell in a news conference admitted that the increased interest rates will likely have a long term effect on home prices, saying the housing market will likely have to go through a correction because housing prices were going up at an unsustainably fast level.
That correction is underway now and Jones predicts the long era of the seller’s market may come to an end and flipping over to a buyer’s market within a year.
In short, said Jones, “the Federal Reserve has dumped a bucket of ice water on the long-hot real estate market.”