2020 Real Estate Forecast

What can Buyers and Sellers expect in 2002?

How abut an industry in transition where there may be different ways to buy and sell homes than in years past.

This post will for the most part stay away from whether prices are likely to go up (yes, they will) and if interest rates will come down (yes to that also) and write about the trends that might influence the Real Estate market and how they might play out locally.

While many of the comments below are relative to the South Bay and Westside of LA., there’s no doubt that the national picture will have an impact locally as it always does.

Let’s get started.

PRICES WILL CONTINUE TO CLIMB

For the most part prices will continue to go up albeit at a slower pace than 2019 and 2018. In general I am expecting 3-5% with the higher end being below the current median and at the top end in any neighborhood possibly a leveling off. In other words, for homes below the current median, they have the opportunity to go up the most as substitute Buyers from other neighborhoods refocus. This will continue unabated until interest rates go up or we hit a peak and….

THE BUBBLE MAY BURST

Am I saying I think we’re in a Real Estate bubble. No, not saying that. I am saying that we are past the point of when you could reasonably expect a correction and that there are a lot of external factors weighing on the housing market. I could say the same about the stock market as well. In fact I think the stock market is in thinner air than the housing market and we are always backstopped by the very real fact that people need a place to live. No on has to own a stock.

Without Buyers there is no Real Estate transaction. As long as there are Buyers, properties get sold.

One of the major drivers of home buying the past few years has simply been that the rents are so high. When you can be an owner for about the same as you are paying to be a renter, almost everyone will want to own.

One of the metrics I track is whether owning is less than 20X renting or not. For example, let’s say a home that rents for $3,800 a month can be bought for less than $900K. That’s just slightly under 20X the annual rent. At that price, listings seem to attract Buyers. At more than 20X, not so much.

Using the example above, if a Buyer puts down 20% and mortgages $720,000 at 3.75% that’s a principal and interest payment of $3,334. Throw in around another $1100 for property tax and insurance and you are at a little over $4400 for PITI before any tax deductions, appreciation or the fact that you are paying down your equity.

So as long as rents go up and interest rates stay low, all’s well. Speaking of which….

WATCH INTEREST RATES CLOSELY

As of this posting rates are in the mid to high 3’s which historically is very low. What I can share with you is that last year when rates hit the low and mid 4’s Q1, Buyers stayed home.

I’ve long felt the tipping point will come when rates hit 5%. At that point I believe prices will have to readjust. How much? Well taking the example above the $720K mortgage now becomes $3865. To offset the increase of around $500, the mortgage has to come down around $100K meaning the price has to come down to under $800K. This is how bubbles burst. I expect the rates will remain stable through November 2020 when (if you haven’t heard) there will be a Presidential election. But until anything changes…..

THE SELLER’S MARKET WILL CONTINUE

Expect that for the foreseeable future there will be low inventory and fewer transactions and that most neighborhoods will have less than 6 months inventory on hand. The reasons have been covered elsewhere but suffice it to say that with more homeowners turning their primary residence into an income property, more seniors retiring in place, and fewer net new properties coming on the market, there is no end in sight.

But, this Seller’s Market will be different in that I am expecting to see more price reductions and longer days on market for many listings. This is because….

BUYERS WILL BE MORE DISCERNING

We started to see this trend toward the end of 2019. I am predicting that in 2020 unless a home checks all the boxes, buyers will wait. At the current price points, most Buyers don’t want to start making updates and spending money on improvements. They will also be more critical of any flaws.

AN INDUSTRY IN TRANSITION

Over the past few years there has been a flow of venture capital money into what is referred to as “prop-tech”, property technology. While that hasn’t moved the ball forward very much on the tech front, it has unearthed the real opportunity which is providing solutions beyond the scope of what Brokerages traditionally offered. As a result, buyers and sellers may have more options available to them going forward.

One such example is the so called iBuyers. These are firms that buy your home - often based on an automated valuation model, to flip it. The benefit they are offering is the guaranty of a sale within a certain timeframe. At best when all is said and done the seller might achieve close to fair market value. More likely the offers will be under and setting new price records is just not in the cards.

For the most part these firms have been playing in lower priced markets such as Phoenix and Atlanta. To the extent they have come to LA, they seem to be topped out at purchase prices of around $800,000.

Some form of quick cash offers has existed for a long time. The only difference now is that it has a new label and is seemingly tech driven. A few things occur to me.

1) I’ve met with hundreds of Sellers over the years and most seem intent on getting the highest price for their home and are willing to undergo some short term inconvenience to get it.

2) The firms currently in the market are - as far as I can tell, not making any money. That’s most likely because they are paying, when all is said and done, close to the market value for the homes they are acquiring. That doesn’t leave much room for turning a profit as any flipper can tell you (unless they make substantial investments and upgrades to the properties).

This model also assumes in large part that the seller needs their funds to buy their next home or that time and certainty is more valuable than money. Any downturn in prices will most likely eviscerate most of these players.

Closely related is the model that says we’ll buy your next house for you while you sell yours - effectively making you a cash buyer. This is often coupled with some guarantee to buy yours at a pre-set price if it doesn’t sell.

Ostensibly the pain point being addressed here is the incredible difficulty of buying when you need to sell either because you need cash for the down payment or to remove the mortgage from your credit report to qualify or both. So along those lines, Brokerages are now partnering with some niche market lenders to provide bridge loans. Nothing new there, but bridge loans haven’t been much used recently.

On the Buyer side, if you don’t have the money for a 20% down payment, there are now firms willing to lend you anywhere from 5-15% for an equity stake in future profits when you sell. Presumably they are also exposed to future losses. I’ve also seen a variation of this for pulling equity out of your home. So why would anyone go for either of these options? Because they are not making payments on the money being fronted by the investor. Interesting model and I’ll be curious to see where it goes.

LOOSENING OF LENDING STADARDS

As we get to the end of the current cycle this is inevitable. Low rates can only drive so much business and with transactions down - and expected to stay lower than usual, there are only so many qualified Buyers.

So whether this loosening comes in the form of lower FICO scores, lower down payments and reserves, or new programs (interest only anyone?) this one is coming for sure. I’ve already seen some inklings of this.

VA loans are dropping their loan limits. You’ll still have to qualify but if you can afford a $2M house with no money down, there’s a VA lender for that. (Most of the ones I’ve spoken to seem inclined to put their own cap at $1.5M.)

I’ve also seen a loosening already from the major banks on reserves for less than 20% down programs. And often substantially like reducing 36 months to 18 or less.