Home price cuts are rising as high mortgage rates slam buyers

Home sellers are increasingly slashing their asking prices as buyers, constrained by higher mortgage rates and overall inflation, have become less willing to jump into the housing market at any cost. .

A growing number of price drops, a trend shown in data from Southern California and across the country, are among the strongest signs that the market has been red hot before, fueled by low mortgage rates. and the all-cash bidding wars, are cooling down. .

A drop in price doesn’t mean the overall home value is falling. In Southern California and more broadly the United States, they make up a handful of the listings, and most homes still sell for more than list price.

For now, industry experts don’t think the housing market will plunge, leading to record-high prices in the first two years of the pandemic as more people look for more space and new savings to spend. .

Values ​​could fall modestly, some experts say, if the Federal Reserve’s actions to curb inflation send mortgage rates significantly higher – or push the economy into recession. .

For buyers, the market already feels dramatically different from the frenetic competition of a few months ago.

“The market is not what it was a month ago, not even what it was a month ago,” said Lindsay Katz, a Los Angeles dealer at Redfin, a brokerage.

On Covello Street in Van Nuys, the owner of a four-bedroom home recently slashed its price by $50,000 to $949,900 after the 1950s home was on the market for three weeks.

Other homes in the area are seeing even bigger discounts: $78,000 off a two-bedroom home and a home with an accessory unit listed at $1 million for the first time now. sold for $860,000 – a $140,000 discount.

Katz doesn’t represent Van Nuys’ listing, but similarly recently had to drop the price of a four-bedroom home in Woodland Hills to $40,000.

According to real estate experts, the explanation for this drastic change is very simple. Mortgage rates have skyrocketed in recent months, quickly making housing a lot more expensive.

Monthly mortgage payments on a home of the same price are now in the hundreds of dollars — sometimes up to $1,000 — more than they were at the start of the year, when interest rates were in the 3% range.

This shift has placed some buyers in an entirely new price bracket and priced others in altogether.

“I have buyers who are currently at a standstill,” said Yolanda Cortez, an LA-area dealer at Century 21 Realty Masters.

Some have been looking for homes in the LA area with their highest budgets.

But after interest rates rose, Cortez said, they can now only buy a home in the Antelope or Victor valleys, high desert communities more than 60 miles from downtown Los Angeles that aren’t smart places. “because they work in the LA area.”

As a result, fewer and fewer homes are in escrow, inventory grows, and sellers begin to react.

The percentage of homes for sale that have recently been discounted has more than doubled since last year. In the four weeks ended June 5, 16.2% of listings in LA County dropped in price at least once, up from 7.5% in the same period last year, Redfin data showed.

In Orange, Riverside and San Bernardino counties, the discount rate rose to more than 20 percent on listings, up from about 7% a year earlier.

Nationally, there haven’t been many such sales since 2019. Homes for sale in Los Angeles and Orange County haven’t seen this number of price drops since late 2018 – the last time a profit. Mortgage rates skyrocketed. In the Inland Empire, the price drop was at an all-time high in the data set starting in 2015.

Despite the slowdown, agents say there are still many eager buyers and the number of homes for sale remains far below pre-pandemic levels, with the bidding war still raging to find the best homes. .

Tregg Rustad, an agent with Rodeo Realty, said that two weeks ago, his client submitted an offer to buy a home in Silver Lake that was hundreds of thousands of dollars more than the asking price.

“The buyer didn’t get it,” he said, noting that he’s seen similar bidding wars in Santa Monica and Hancock Park.

However, there has been a marked shift in the climate for homebuyers and other changes taking place as discounts become more common.

Over the past two years, many sellers have dropped offers unless the buyer has given up in certain unusual circumstances, especially the appraisal case that allowed the buyer to walk away if the appraisal came out low. .

Buyers can now ignore those contingencies and take their offers seriously, real estate agent Derek Oie, founder of Movement Real Estate in the Inland Empire, said. .

“Buyers are not in the driver’s seat,” says Oie. “But they’re not being dictated to anymore.”

Carl Izbicki, a real estate agent at RE/MAX Estate Properties in Los Angeles, says homes that once received 15 to 25 units are now receiving three to five.

As the market burned, one of Izbicki’s clients, a married couple, lost about eight homes despite bidding above the asking price. Last week, Izbicki sent them a list of properties that have been on the market for more than 30 days.

“If they like one of these homes, we’ll offer less,” he said.

In an interview a few days later, Izbicki said the couple did just that, offering about $40,000 less than the asking price of a three-bedroom home in Van Nuys listed at $789,000. . They are waiting to hear back.

Michael Simonsen, founder of real estate data company Altos Research, says that although some buyers have now been bid, others may have paused their searches for other reasons.

As inventory grows, even those who can still buy don’t choose, which creates somewhat of a prophecy of a self-fulfilling slowdown.

“Buyers know they can wait until summer and have more options,” says Simonsen.

Despite the increasingly common price drop, many analysts don’t expect the actual value of Southern California homes to fall anytime soon — no recession.

After accounting for discounts, most sellers are still listing their homes for more than they were a year ago, and on average, homes are still selling for more than list price, said Taylor Marr, an economist with Redfin. said.

In Los Angeles County, the average initial listing price – the price at first listing – for the four weeks ending June 5 was 9% higher than during the same period last year, while the average price decline – occurred increasing. but it’s still a handful on the list – it’s 5%, according to Redfin.

Experts say some of the recent price drops may have come from aggressive sellers, who valued their properties above market value to take advantage of what until recently was the market. School is very hot.

Furthermore, in case of a drop in value, homeowners who don’t need to sell can opt out of the falling market.

For example, Izbicki just cut the price of a two-bedroom apartment in the Palms to $24,000. If no one bids close to the new list price of $824,000, he said his client plans to rent it out instead.

Many analysts expect home prices to continue to rise this year, but at a smaller rate than they are now.

One of the more upbeat forecasts comes from John Burns Real Estate Consulting, which last month predicted that by December 2022, Southern California home prices would increase at an average rate from a year earlier, a marked drop from the year before. with about 20%. achieved in May.

The consulting firm predicts home prices will then fall to mid-single digits in both 2023 and 2024 as the Fed’s anti-inflation efforts push the economy into recession.

However, the market could change further. Following a report Friday that showed inflation accelerating, many economists now expect the Federal Reserve to raise interest rates this week more than has been widely anticipated, which could making mortgage rates even higher.

On Monday, partly in anticipation of a more aggressive Fed, the average rate on a 30-year mortgage hit 6.18%, up from 5.5% the previous Monday, according to Mortgage News Daily.

Rick Palacios Jr., research director at John Burns Real Estate Consulting, said the research firm is debating whether to revise down its forecast due to mortgage rates soaring above 6%.

“I wouldn’t be surprised that by the end of the year, we’re halfway through the buyer’s market,” said Heather Presha, a Keller Williams dealer in South LA. . ”

The Times has put together a guide to help first-time homebuyers understand the market. Check out the awesome SoCal House Hunt here. An abridged print version is available for purchase here.

https://www.latimes.com/business/story/2022-06-14/california-home-buying-sellers-slash-prices Home price cuts are rising as high mortgage rates slam buyers

Edmund DeMarche

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