Where Are We at Right Now?
The strength of the recovery can clearly be traced to the artificially maintained low cost of money due to the Federal Reserve program to keep interest rates significantly below the level they ordinarily would have been without government intervention.
With home values having fallen more than 30% by 2010 and interest rates having been lowered to all-time historic lows, the stage was set for a dramatic rebound because of the increased affordability for “regular buyers” and the attractiveness of potential investment profits by investors and developers with easy access to low-cost funds.
One interesting shift that has been quite evident in many cities for more than a year is the number of home purchases that have been made with no financing whatsoever. For many years about 25% of Pacific Palisades homes were bought with all cash. By the first half of 2010, 34% were all-cash purchases, and as of the first half of 2013, that percentage has risen to 41%!
Considering that the average home sold in Pacific Palisades is over $2 million, and a typical purchase used to be with 75-80% financing, that means that for every home sold in the Palisades on average there would have been a loan of $1.5 – 1.6 million.
So where is the money coming from? There have been various causes of this significant increase in all-cash transactions. Investors are undoubtedly the greatest source of the substantial increase in all-cash buying, including those purchasing for immediate development as well as those seeking havens for overseas money (such as an influx from China, Russia, and Canada). Other sources we have noticed include family trust-funded purchases and other family wealth-transferring transactions.
The impact of these changes has not been all positive. Buyers who need to obtain financing are at a distinct disadvantage if they are competing with all-cash investor bidders. For example, we recently sold a family trust property with marketing specifically designed for multiple offers. There were six bidders, of which five were all-cash.
The “regular buyer” could simply not compete because of their need for a contingency to obtain financing. This being their third attempt at purchasing their first home, they had become rather disappointed and feeling frustrated by the current market conditions.
Also, many previously well-qualified buyers are now being priced out of the market by the steady increase in the cost of homes. To compound that impact even further, interest rates have risen approximately one percent in the past two months. This has significantly diminished the purchasing power for those who need a loan. For example, a buyer who was approved for purchasing a $2 million home with 20% down two months ago may discover today they are only qualified to buy a home for $1.8 million.
The housing market pressure for many buyers has become quite painful, particularly since the level of inventory remains 20% lower than it was a year ago. Although there is a 3.5 month level of inventory in the Palisades overall, below the $5 million price point there is only a 2-month inventory level, which continues to be near all-time lows.
What will it take for the Palisades market to once again be more in a balance between buyers and sellers?
One way will be that a greater number of homes come on the market as owners begin to realize that their home values have increased tremendously over the past two years.
Another factor is that eventually, a large number of investors in our current market will finally have purchased enough properties to develop for future resale, that there will be some decrease in their presence in the purchasing. We may not see this happen for another year, but it is highly likely.