The Interest Rate Effect
Interest rates are the most important topic facing the residential real estate market in 2019. This past year, The Fed allowed interest rates to rise too fast in hopes of slowing the economy. As a result, the real estate market has taken a hit. Although The Fed will be more cautious this year, Jerome Powell and his directors will raise the federal funds rate one to two additional times.
The stock market will close higher in 2019 and in turn, bond market yields will rise. As a result, 30-year mortgage rates will climb to 5 percent in the second half of the year for the first time since 2011. This will hurt the real estate market nationally and in many parts of the South Bay.
Mortgage Rates in 2019
Thankfully, mortgage rates are easing down to around 4.5 percent to start the year. This interest rate relief, paired with the busy spring selling season will mask a lot of challenges in the real estate market during the first half of the year.
So, if you are planning to sell your home, sell it before summer hits.
If you are planning to buy, stay very patient. I would even suggest renting for the next 12 months.
As rates and prices rise in the first half of 2019, the lack of affordability will finally cause price reductions due to lower buyer demand. Ultimately, there will be price corrections that will end up being very healthy for the market.
Real Estate Market Correction
I am sticking to my prediction from 2018. Real estate price corrections will occur in late 2019 or 2020 depending on interest rates and demand. We will see price corrections between 5 and 10 percent (15 percent being the worst-case scenario).
To me, a correction has become more likely due to more risks than rewards in the market. Think rising interest rates, surging construction costs, government shut down, declining affordability, the Mueller report, and upcoming elections…what are the potential positives?
How This Relates to the South Bay Micro-Markets
Not all South Bay micro-markets will be treated equally. Here is how I see things playing out:
- If you refer to my December post, you’ll see that South Bay median incomes, median prices, and income needed to afford a home does not add up. Not to mention, Los Angeles County as a whole does not have much wiggle room depending on interest rates. I mean come on, you need to make $234,000 just to afford a median priced home in Redondo Beach. The median income according to loose census data is $99,000 for Redondo Beach.
- As a result of the income/price mismatch, the affordable South Bay markets will finally start to slow. Areas like white hot North Redondo will finally be a thing of the past, “affordable” East Manhattan Beach will continue to slow, and Rancho Palos Verdes prices will decline.
- New construction in areas more sensitive to income, price, and interest rate economics will become risky. In my opinion, buyers should be careful purchasing new construction in these assets/areas: Single-family homes in East Manhattan Beach, two-on-a-lots in North Redondo, and townhomes in East Hermosa Beach. The prices on these products have run so high and are becoming comparable to prices in better locations in their respective cities. Although unlikely, I think the above assets have potential to get crushed in 2020.
What is the Up Side?
I know it seems like there is a lot of negative predictions in this post, but, a 5 to 10 percent correction in the market is VERY healthy. Our market needs it to keep long term stability.
Remember, the stock market fell almost 20 percent at the end of the year…and everything is okay, right? The healthy correction I am projecting is good for our South Bay neighborhoods. Use this information to give yourself an edge on where and when to place you real estate dollars this year.
Where to Invest Those Real Estate Dollars?
Whether or not my price correction prediction is accurate, if you want to invest in real estate this year, I have a few suggestions…
- If you are looking to buy a home for the long term or you found your dream home in a rare location that you have been searching for…buy it! All investments are truly about the long game. This is true for stocks, bonds, and real estate. As long as you pay a fair price and are planning to hold onto it for a decade or more, who really cares about a potential 5 to 10 percent decline?
- The single most powerful force in Los Angeles real estate right now is tech. Large tech companies like Google, Facebook, Amazon, and Snapchat are planting roots in Playa Vista, Culver City, and West L.A. Not only are those areas on the rise and will explode higher, the traditionally lower-income areas surrounding them like Crenshaw, West Adams, Hyde Park, and West L.A. are gentrifying rapidly and it is just the beginning. Pair these areas with the Expo Light Rail, the coming LAX/Crenshaw line, and a lot of cool, old commercial space, and these areas are set up perfectly to change rapidly. As the incomes go from low, to middle, and potentially tech, it makes me very bullish (I have placed my own investment dollars in these areas). That said, I am seeing prices get slightly ahead of themselves in those areas, so markets may need to cool down slightly. But if you are long term, it is a can’t miss opportunity.
- Lastly, as a trading position, South Los Angeles is still undervalued and had a huge year in 2018. Minimum wage went from $10.50 to $12.00 in July and will jump to $13.25 ($14.25 for larger companies). Those increases have yet to be factored in and the summer wage increases will juice the market again. Not only will residents be able to afford more and pay more rent to raise prices, this is the last area for investors to get a reasonable yield on their dollars. Be careful! South Los Angeles tends to go up last in the cycle for various reasons. This is a short-term trading position for active investors.
Long-Term Bet: “Co-Living” Apartments Go Mainstream
Co-Living will play a massive part in solving housing affordability and homelessness.
In a nutshell, Co-Living apartments are buildings that allow for more units, giving tenants a room to sleep with sometimes only a sink while showers, kitchens, living room, and entertainment is shared. Think of them as adult college dormitories.
Currently, they are experimenting with these in Los Angeles and throughout California. While the luxury of having your own home or apartment will always be in demand, for those relocating from a move, transitioning from college, or working a lower-income job, co-living can be an affordable option.
I am excited to see how this develops as I believe it is going to be a big solution to solving affordability and allowing for low-income earners to live and thrive in Southern California.