Fixed-Mortgage Interest Rates Surge : Woes Mount for Home Buyers, Brokers
Southern California home buyers, already bedeviled by an acute shortage of existing houses for sale, have received more bad news in recent days as interest rates on fixed-payment home mortgage loans have soared well above 11% in their second major surge this year.
“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 are coming at a time when a lack of homes on the Southern California resale market has ballooned the value of choice residential real estate and 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 shortage of existing homes in Southern California is largely a regional phenomenon that has appeared in recent months and, according to some real estate experts, reflects in part the effect of powerful “slow-growth” movements that have emerged in recent years. Housing supplies are normal or even in excess in most of the country.
Real estate observers in Southern California say they have not witnessed a shortage like this in years. And the California Assn. 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.
Fixed-rate mortgage loans have now increased two to three percentage points since mid-March, a rise that has boosted housing costs sharply. The monthly mortgage payment on a $100,000 loan, $823 at an interest rate of 9.25%, will increase to $972 when the interest rate rises to 11.25%.
The latest interest-rate spurt accompanied last 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 soared past 11.1% in early September, according to a weekly Times survey. Those rates averaged less than 10.8% at the end of August. The Veteran’s 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 mortgage loans 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 that specialize in fixed-rate financing.
“We’re just sitting around waiting for what’s going to happen next,” said a chagrined 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 Assn. of Realtors.
Median Prices
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 of the homes are selling for more than that and half are selling for less.)
With prices escalating, would-be buyers are falling further and further 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.
Adding to the problem is the fact that single-family housing construction in California fell nearly 18% in July compared to the same period a year ago, according to the Construction Industry Research Board. The slower the pace of new-home construction, the fewer homes there are that are eventually available for resale.
The market conditions have meant unexpected windfalls for sellers, who 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.
Though home resales have been robust and the regional economy strong, the inventory shortage has unnerved real estate brokers and 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 veteran real estate broker in Riverside County.
“Three of the last five homes I’ve had, sold even before the “For Sale” sign went up,” said Cary Hairabedian, a Century 21 real estate agent in Cypress.
The tight market has caused some hard feelings between competing brokers as the scarcity has become worse. One increasingly common practice is a controversial tactic known as the “office exclusive.”
These are sale listings that are excluded from the multiple listing service--which is the brokers’ shared list of existing homes for sale. The computerized multiple listing service allows competing brokers to split commissions between the office that lists the home for sale and the one that finds the buyer.
Because office exclusives keep sale listings out of the multiple listing service, it gives a brokerage office a better chance to keep the entire commission, normally 6% of the sale price. Office exclusives may violate industry ethics if they are not in the seller’s best interest, real estate attorneys warn.
The reasons behind the housing shortage are both regional and national in nature, real estate analysts say.
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,” Joel Singer, economist for the California Assn. of Realtors, said. “The no-growth element is clearly a factor.”
The battle lines have been clearly 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 north San Diego.
Home resales have also been retarded by a booming market in renovation, particularly in coastal cities where modest houses sit on expensive land. Many owners now prefer 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 that the housing scarcity has been exacerbated by a declining mobility nationally among baby-boomers, products of a population bulge whose oldest members are now well into their 40s.
“We’re becoming an older nation and getting more sedentary,” said John Tuccillo, chief economist for the National Assn. 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.
