Both my father and grandfather spent many years entrenched in the real estate industry and if there is any one thing that I have heard my dad comment on repeatedly, it’s the presence of extraordinarily low interest rates that he never thought he would see in his lifetime. For someone like him, seeing rates in the 4% range has him scratching his head as to why anyone would hold back from taking advantage of such cheap financing, and the fact that the rates have held at this level for so many years has been equally as astonishing. These interest rates have allowed many buyers to get into ownership positions, when something so simple as a 1-2% adjustment would easily have them trapped in the rental market. A 1% increase in rates results in an approximate 10% reduction in what you can afford, so you can see how quickly someone may be priced out the Southern California market. With this in mind, these approved buyers are chomping at the bit to get an offer accepted on a property before they find that they can no longer afford to do so.
Couple this large pool of eager and willing buyers with an inventory level that has remained consistently low, and you have a scale that is certainly tipped towards sellers. How low are the inventory levels?…Let’s just say that we haven’t seen these numbers since 2004/2005, which is right before the prices skyrocketed. This is certainly why we’ve seen a steady increase in home prices, but thankfully they haven’t increased at quite the breakneck speed that we say such a short time ago. The bottom line is that there are a whole lot of buyers out there, and just not enough homes hitting the market every month. Buyers need to know that they will need to play a very competitive game to get into the market, but they need to also remain focused on how inexpensive the financing remains. Holdouts for a downturn in the market could find themselves in a worse position if rates climb and prices don’t drop to a level at which they were hoping.
It will certainly be interesting to see what direction the market goes over the next couple of years. Current homeowners are experiencing a nice steady climb in their equity, and an increase in inventory or interest rates could certainly slow this down. Until then, this remains a great time for sellers who are able to take advantage of the large number of buyers, and for buyers who are able to capitalize on the historically low rates.