At the close of the summer season, would-be homebuyers in Southern California saw encouraging signs that the robust real estate market was softening with reduced demand and an increase in the number of available listings.
However, these mild changes haven’t changed the balance of power between sellers and buyers. Southern California remains a seller’s market, much to the chagrin of first-time buyers priced out of many homes throughout the Southland.
From cash buyers to well-funded flippers, first-time buyers have struggled to afford the climbing home prices. The increase of mortgage rates to 5 percent created even more strain over the summer as monthly payments shot up by hundreds of dollars despite a slowdown in appreciation.
Are First-Time Homebuyers Priced Out of Southern California?
One of the rules of thumb recommended by financial advisors is that buyers shouldn’t purchase a home that’s more than three times their yearly gross income. According to figures published by the United States Census Bureau, the median household income in Los Angeles County is approximately $71,358.
That would mean the average household could afford a mortgage of $214,074. According to Realtor.com, as of August 2022, the median listing price for a home in Los Angeles County was $850,000. An article from Morning Star suggests homes in Los Angeles were 12.5 times the average income of a first-time buyer.
Some of the most common barriers to ownership for first-time buyers include poor credit, high debt, and lack of savings for a down payment. However, in Los Angeles, the lack of affordability is also a significant contributing factor.
With the numbers painting such a bleak picture of affordability in Los Angeles, should first-time buyers wait until a significant change in the economy, or should they do everything possible to buy a home now?
Fewer Bidding Wars for Starter Properties
Circumstances aren’t as dire as the numbers might suggest. A report shared by The Los Angeles Times suggests that high mortgage rates have allowed buyers to gain some leverage in negotiations. One of the biggest changes in buyer behavior in 2022 is the gradual reduction in bidding wars.
Throughout 2021, homes routinely sold for many tens of thousands of dollars above their asking prices. Bidding wars were expected by sellers as part of the normal sales process throughout the Southland. As of mid-2022, Southern California sellers can no longer expect bidding wars.
A valuable number for buyers to consider is the sale-to-list price ratio, which is the home sale price versus the asking price. Further data shared by The Times revealed the ratio was 99.8 percent at the close of August 2022, a drop from 101.5 percent at the same time in 2021.
A number above 100 percent means most homes are selling for higher than their asking price. Since the number was at less than 100 percent at the unofficial close of summer, fewer buyers were engaging in bidding wars.
However, homes still routinely get multiple offers. In August, nationwide numbers indicated that about 37 percent of homes sold for more than their list price. The caveat is that the percentage was at 50 percent a year ago. The drop is good news for buyers shopping at the top of their budget who can’t afford to enter a bidding war.
Homebuyers Who Can Buy Should Buy
When deciding to buy a home, the personal needs of the buyer should weigh just as heavily as the state of the real estate market. Buyers who find a home that meets their needs in every way shouldn’t back down from making an offer, especially if it is within their means to do so.
One of the key points here is that interest rates at three percent probably won’t return. Historically, rates were never that low, and it’s unlikely that they’ll dip to the threes at any point in the next several decades. When inflation was at its peak in the early 1980s, the 30-year fixed mortgage rate actually reached more than 18 percent.
Experts also advise avoiding making a decision based on the expectation that the housing market will crash in 2023. Buyers should avoid comparing today’s real estate market to the Great Recession. According to an article published by Time, the loose lending environment of the 2000s no longer exists, and experts don’t consider today’s high home prices a bubble.
In fact, there is reason to believe that prices will continue to climb for the foreseeable future, even if they don’t climb at a terrific rate. It’s very unlikely that interest rates will drop or that home prices will change, so first-time home buyers who are ready to buy and find their dream home should strongly consider making an offer.
If you or anyone you know has questions about financing or the current housing market, your expert Los Angeles mortgage brokers at Peak Finance are here to help. Contact us today at [email protected].