Market Shift | Good News for Buyers

Yes, it’s true. As we enter the 4th quarter of 2018 we are definitely in the early stages of a market shift.

After years of low inventory and low interest rates, both are on the rise. On the flip side sellers can not expect to sell their home for more than the last comparable sale because buyers are simply saying no to higher price points. (Please note, though, many listings are still selling for higher than the MLS list price with multiple offers.

So what’s going on?

If you roll back the clock about a year to the Fall of 2017, the market slowed down because buyers were simply unsure as to what effect, if any, the not yet implemented new tax law would have.

Surprisingly as we entered Q1 2018 the new tax laws continued to have very little effect and it is easy to understand why. For renters, who were not getting any tax deduction for their rent, having their mortgage deduction capped at $750K was still a benefit. So for anyone buying at let’s say less than $1M with 20% down, not much of a difference.

And even if they could not deduct the property taxes, well as I said that was not considered a loss of any kind because they didn’t have that deduction as renters anyway.

And then as we got further into 2018 rates started to go up. And up some more. So now as of this writing, we’re at maybe 4.5-4.75 for some products which is historically low but certainly not the lowest we’ve been.

Here’s where things get interesting.

At 4.5% each $100K adds about $500 to a 30 year mortgage. For most families, particularly those who have few kids, things can start to get tight particularly when you factor in the cap of the local property tax (or state tax) deduction and reduction of mortgage interest above a $750K loan.

The end result can be a real difference in cost of ownership of that can now start to top $1000 a month in certain instances at the same price point.

The first reaction or adjustment we always see is “substitution”. Here’s how that works.

The buyer who can’t afford Venice looks in Mar Vista. The buyers priced out of Manhattan Beach look in Hermosa etc. The migration becomes to the next tract south or east or wherever has been a little less desirable. But that can only last for so long before buyers just say no and that’s where we are today.

Now I’m not saying that no deals get done. What I am saying is that all over town I am seeing properties on the market that would have been in escrow at the same prices earlier this year. When a property has no flaws and it isn’t selling there is only one reason: price. No matter what a seller might think there home is worth, ultimately “the market” decides. And most sellers aren’t quite there yet as to what they are pricing at.

So with more choices, buyers are more discerning and picky.

In fact, we’re starting to see the return of the “low ball offer”.

A lot of the market shift will be accelerated by the news - fake or not, which is already touting the number of price reductions that are going on and the longer days on market.

As both buyers and sellers read more of those articles, each side will adjust and probably over react. Buyers may really resist making full price offers because they see reductions and sense or rather fear that the market is headed down. Sellers who have been on the fence may list their home while we are still near or at all time highs. And those who are already listed may may further reduce their prices.

Which brings to mind a few things I always share with my clients.

  • No one rings a bell at market tops or bottoms

  • All we ever know in real estate is what the market is doing today.

In other words, markets change.

If the current trend continues, expect to see a full fledged buyers market if not by spring 2019 then certainly by this time next year.

Alternately, home owners who feel they may not be able to sell for their target price may hold off listing and we could be back where we were six months ago in a seller’s market.

My prediction? Most likely we are in a balanced market for the rest of this year and into 2019 or until such time as macro economic trends change.