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CASH OFFERS AND AFFLUENT PURCHASERS DRIVE SOUTHERN CALIFORNIA HOUSING PRICES TO UNPRECEDENTED LEVELS

Monday, May 13, 2024   /   by Bob Cowan

CASH OFFERS AND AFFLUENT PURCHASERS DRIVE SOUTHERN CALIFORNIA HOUSING PRICES TO UNPRECEDENTED LEVELS


Cash Offer



In March, Southern California witnessed a historic peak in home prices, fueled by soaring mortgage interest rates, resulting in the most expensive housing market in decades. Zillow reported the average price for the six-county area surged to $869,082, marking a 9% increase from the previous year and surpassing the previous peak set in June 2022 by 1%. With mortgage rates averaging in the upper 6% range, the monthly payment on an average home exceeds $5,500, assuming a 20% down payment.

“It's insane,” remarked Tommy Kotero, a 43-year-old refinery worker, over the past weekend as he inspected a dated house priced at $899,000 in north Torrance, noting visible cracks in the ceiling and walls. "The asking prices for what we are getting is outrageous."


Housing Asking Prices

The narrative of how home prices reached a record despite the expensive borrowing costs revolves around a scarcity of homes for sale, coupled with a wealth gap enabling some buyers to offer substantial cash payments that offset the impact of high interest rates.

Initially, when interest rates surged in 2022, buyers retreated in large numbers, leading to a surge in inventory and a decline in home prices.

Subsequently, potential sellers largely refrained from listing their homes for sale, with many opting to stay put rather than exchange their sub-3% mortgages for loans with rates more than double that.

As a result, inventory dwindled, and a sufficient number of buyers returned, propelling home prices upward once more. Many of these buyers are affluent first-time purchasers who are not giving up low-cost mortgages.


Houses

Some individuals are retaining their existing homes while purchasing additional properties. Furthermore, others are selling their current residences and converting their substantial equity into substantial down payments exceeding 20%.

"People with available cash aren't overly concerned about interest rates," stated Alin Glogovicean, a Redfin real estate agent specializing in northeast L.A.

He approximates that in around one-third of his transactions, a buyer pays entirely in cash. Another third put down a minimum of 50%, with the remaining financed through a mortgage.

Glogovicean noted that at least two-thirds of buyers with down payments of at least 30% are not investors but individuals intending to reside in the property. They typically include professionals like architects and individuals from the entertainment industry who have either saved, liquidated stocks, accumulated equity, or received financial assistance from family.

Some are even tapping into their retirement savings, a move often discouraged by financial experts.

Similar trends are observed nationally, as per a Zillow survey, with an increase in the proportion of homebuyers putting down at least 20%, as well as those receiving financial aid from family and friends.

In February, 23% of homes sold in L.A. County were purchased with all cash, up from 16% in 2021, according to Redfin.

For those lacking access to substantial funds, the situation is increasingly challenging.

According to the California Association of Realtors, only 11% of households in Los Angeles and Orange counties could reasonably afford a median-priced house in the fourth quarter, the lowest figure since the mid-aughts housing bubble.

During that period, risky lending practices allowed individuals to purchase homes beyond their means. Today, lending standards are much stricter, which economists believe should prevent a similar price collapse in case of another recession.

Home prices have now reached record highs in Orange, San Bernardino, San Diego, and Ventura counties. In Los Angeles and Riverside counties, prices are marginally below their all-time highs.

Agent Alicia Fombona of United Real Estate Pacific States, who works across the Southland, highlights a strategy gaining popularity amid high rates and prices: co-borrowing, where family and friends pool resources to purchase a property to manage payments.

Although more homes are entering the market, inventory remains tight and is expected to stay that way, according to forecasts. Rates might decrease slightly but are anticipated to stay elevated.

This scenario could lead to moderate price growth or minimal declines, particularly as household incomes continue to rise.

Orphe Divounguy, a senior economist with Zillow, predicts robust price growth, albeit not as pronounced as during the pandemic.

A significant drop in rates could enhance affordability but might also attract more buyers, further driving prices upward.

To genuinely enhance affordability, Divounguy emphasizes the need for continued income growth and increased housing construction.

In California, construction took a downturn in 2023, with building permits declining from the previous year. However, there are recent indications of a rebound in single-family construction, primarily for sale homes.

However, some Californians are under pressure to act swiftly.

Kotero, the prospective buyer in Torrance, currently rents a house in the city with his wife and four children. They need to secure a new residence by summer as their landlord intends to move back in.

Despite Kotero's $160,000 managerial income at a local oil refinery, they've struggled to find a suitable property within their budget. Recently, they were outbid even after offering $1 million for a house listed at $900,000.

Unlike others, the Koteros lack substantial cash reserves to offset high rates. Consequently, Rikah, who currently stays home with the children, is contemplating returning to work.

"If we realistically want to buy a home in Torrance, there's no avoiding it," Kotero stated.

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