Fewer Homes, High Prices as Mortgage Rates Climb
Southern California home buyers, already bedeviled by an acute shortage of houses for sale, have received more bad news in recent days as interest rates on fixed-payment home mortgage loans have climbed above 11% in their second major surge this year.
Fixed-rate mortgages have increased 1 to 3 percentage points since mid-March, boosting housing costs sharply. The monthly payment on a $100,000 mortgage loan, $823 at an interest rate of 9.25%, increases to $972 when the interest rate is 11.25%.
“This is bad timing” for anyone buying a home, said Robert K. Heady, publisher of Bank Rate Monitor in North Palm Beach, Fla.
The rate increases come when a lack of homes on the Southern California resale market has ballooned the value of choice residential real estate and has left many would-be home buyers and real estate brokers frustrated and angry.
It is a market that has, as Venice real estate broker Richard Rosenthal described it, “put smiles on the face of the sellers, pain on the face of the buyers and has brokers tearing their hair out.”
The latest interest rate spurt on mortgage loans has accompanied Friday’s increase in the discount rate to 6% from 5.5% and the boost in the prime rate to 8.75% from 8.25%. The discount rate is what the Federal Reserve charges on loans to U.S. financial institutions; the prime rate is the benchmark rate that banks charge their best customers.
The average annual percentage rates on fixed-rate loans by large California lenders exceeded 11.1% in early September, according to a weekly Times survey. Those rates averaged less than 10.8% at the end of August. The Veterans Administration has also raised the maximum rate for its federally backed home mortgages to 10.5% from 10%, its third increase this year.
Rates on fixed-payment mortgages surged toward--and in some cases pushed through--11% this spring, but then leveled out between 10% and 11% through most of the summer. The latest surge seems certain to accelerate the trend toward consumer use of adjustable-rate home loans, which have low introductory interest rates, and to take business away from mortgage lenders who specialize in fixed-rate financing.
“We’re just sitting around waiting for what’s going to happen next,” said George Francis, senior vice president of Metmor Financial, one such Los Angeles mortgage lender.
Would-be home buyers in California are also being plagued by a surge in the value of residential real estate.
According to real estate industry figures, the median price of a California home reached an all-time high of $141,599 in July, 13% higher than it was just six months ago. Borrowers need an annual income of almost $45,000 to qualify for loans on homes in this price range, according to the California Association of Realtors.
The July median sale price was $143,220 in Los Angeles, $168,656 in Orange County and $128,333 in San Diego. (The median price means that half the homes are selling for more than that and half are selling for less.)
With prices escalating, would-be buyers are falling increasingly behind in their ability to afford homes. Less than a third of the state’s households could afford to buy an existing median-priced home in July, the Realtors association said in its latest monthly survey.
The shortage of homes in Southern California is largely a regional phenomenon that, some real estate experts say, reflects in part the impact of powerful “slow-growth” movements. Housing supplies are normal or even in excess in most of the country.
Real estate observers in Southern California said there has not been a similar shortage in years. The California Association of Realtors confirms that inventories of existing homes for sale have not been this low since the trade group began keeping such figures five years ago.
“From San Diego to Santa Barbara, you’re seeing less homes for sale on the market any time since 1979,” said Sanford Goodkin, a real estate consultant in San Diego.
Onslaught of Bidding Wars
Single-family housing construction in California fell nearly 18% in July contrasted with the same period a year ago, the Construction Industry Research Board said. The slower the pace of new-home construction, the fewer homes that are eventually available for resale.
The market conditions have meant unexpected windfalls for sellers, some of whom are receiving multiple offers well above their asking prices. Rather than having to negotiate, sellers are seeing the prices of their homes driven up in bidding wars.
“I’ve seen sales where homes have sold for as much as $40,000 above the list price,” said Barbara Knox, a real estate agent for Merrill Lynch Realty in Palos Verdes.
Despite the rise in interest rates, Orange County builders and brokers said they have not seen a slowdown in sales, which have been exceptionally brisk. They added, however, that home buyers are increasingly turning to variable-rate mortgages, which offer lower interest rates than the fixed-rate variety, to help them qualify for home purchases.
“What we have been seeing is a terrific demand for homes and a shortage of inventory. Buyers are frustrated because they cannot find what they are looking for,” said Kay McDaniel, owner of a Century 21 franchise in Yorba Linda.
She said, however, it is too early to tell if the latest rise in mortgage rates will discourage buyers.
Supply and Demand in Balance
Builders and brokers in Orange County said that although higher mortgage rates and rising home prices are reducing the number of households that can qualify as first-time home buyers, the housing shortage is keeping supply and demand in balance.
“It is a battle between interest rate increases and a shortage of supply,” said Peter Ochs, chairman of Newport Beach-based Fieldstone Co. The rise in interest rates since the spring, he said, has helped temper the previously sharp growth in housing prices.
Ochs said that although he hasn’t seen a decline in housing sales, he is concerned that sales may suffer in the future. He said the latest increase in mortgage rates “hasn’t fully hit the market.”
Frank Gootrad, vice president of sales and merchandising at Irvine-based John D. Lusk & Son, said he does not believe the latest mortgage rate increases are enough to damage the market.
He said mortgage rates would have to rise to almost 13% before they would cause a significant decline in sales, and he said he doesn’t expect that to happen at least through 1988.
Though home resales have been robust and the regional economy strong, the inventory shortage has unnerved real estate brokers. It has sent them competing madly for sales in a climate where the best homes disappear from the market in days.
“The scramble on the part of licensed real estate agents is just unbelievable,” said Gail B. Berge, a real estate broker in Riverside County.
Competition Among Brokers
Cary Hairabedian, a Century 21 real estate agent in Cypress, said: “Three of the last five homes I’ve had sold even before the ‘for sale’ sign went up.”
The tight market has caused some hard feelings between competing brokers as the scarcity worsens. An increasingly common practice is a controversial tactic known as the “office exclusive.”
These are sale listings that are excluded from the multiple listing service (the brokers’ shared list of homes for sale). The computerized MLS allows competing brokers to split commission fees between the office that lists the home for sale and the one that finds the buyer.
Because office exclusives keep sale listings out of MLS, it gives a brokerage office a better chance to keep the entire commission, normally 6% of the sale price. Real estate attorneys said office exclusives may violate industry ethics if they are not in the seller’s best interest.
The reasons behind the housing shortage are both regional and national, real estate analysts said.
In Southern California, there has been a slowdown in new home construction, sparked in part by citizens groups fed up with the congestion that accompanies real estate development.
“Housing construction in developed areas is way down,” said Joel Singer, economist for the California Association of Realtors. “The no-growth element is clearly a factor.”
The battle lines have been drawn in the cities of San Diego and Los Angeles, where angry voters have overwhelmingly approved growth-limitation initiatives in recent years. Proposition U limited commercial building in Los Angeles, while Proposition A curbed development in northern San Diego.
Home resales have also been retarded by a booming renovation market, particularly in coastal cities where modest houses sit on expensive land. Many owners have opted to expand and upgrade their homes rather than move to a more expensive house.
“Major (home) rehabilitations are at an all-time high,” said Goodkin, the San Diego consultant. “We’re looking at rehabs costing in the six figures.”
Real estate economists also note the housing scarcity has been exacerbated by a declining mobility nationally among baby boomers, products of a population bulge whose oldest members are well into their 40s.
“We’re becoming an older nation and getting more sedentary,” said John Tuccillo, chief economist for the National Association of Realtors, a Washington-based trade group.
Veteran real estate observers say that today’s shortage of resale housing reminds them to some extent of the late 1970s, when home demand in Southern California reached white-hot levels and sent real estate prices into the ozone.
According to real estate agent Knox, a home in San Pedro that cost $200,000 a year ago is probably worth $265,000 today. Homes with 1,500 square feet of space in Cypress that sold for $180,000 six months ago now fetch $210,000, Century 21 agent Hairabedian said.
Times staff writer Leslie Berkman contributed to this report from Orange County.
