Home prices in Rancho Palos Verdes, San Pedro, and the rest of the South Bay neighborhoods in Los Angeles are beginning to see an increase after a year of declining prices due to rate increases. Although housing prices were trending downward, the lack of supply in the real estate market caused competition to heat up amongst buyers who were competing for less and less inventory, which is why prices have been increasing despite the higher rates.
There are several factors that contribute to home values and housing costs. Some contributing factors can be relatively easy to identify and interpret, such as mortgage interest rates. Others can be more difficult to simplify, such as the economy and its influences. But for conversational purposes, here’s a general perspective on some key aspects that can influence real estate affordability for the average American.
The overall state of the economy, including factors like GDP growth, inflation rates, and income levels, will play a crucial role in determining real estate affordability. If the economy grows steadily and incomes rise in line with or outpace housing costs, affordability may improve. However, if wage growth lags behind housing prices, which it has for decades, affordability could become even more challenging in the future.
The pandemic saw a major shift in a number of industries, even causing some workers to change careers. Automation is another big shift we will be experiencing in the future. If enough jobs fall to automation, we could start to talk about some type of universal income, but I believe we are still far from that.
Examples of economic factors:
Population trends and demographic shifts can impact real estate affordability. If there is a significant increase in the population, especially in urban areas, demand for housing could rise, potentially driving up prices. However, it is also possible that demographic changes, such as an aging population or changes in household sizes, could moderate demand.
Examples of population trends:
Interest rates play a crucial role in determining housing affordability. Lower mortgage rates can make homeownership more accessible by reducing monthly mortgage payments. We saw historically-low interest rates from 2015 – 2021 which ranged roughly from 2% – 5%. It was a great time to buy and there were many buyers in the real estate market during this time. However, if interest rates rise significantly, it could put pressure on affordability, particularly for first-time homebuyers.
Since interest rates began to increase in early 2021 we have seen a significant reduction in the number of buyers in the market. But even with fewer buyers looking to buy a home, demand is still high, and in some cases stronger than before, because some sellers are deciding to not move due to the higher rates and that is contributing to the housing supply shortage.
Although rates are much higher than they have been in recent years, many lenders are offering great incentives to get buyers into homes, including down payment assistance for qualifying buyers.
Examples of rate and financing trends
The availability of housing and the pace of construction will influence affordability directly.
If the housing supply, made up of both new construction and existing homes for sale, fails to keep up with buyer demand, prices may increase. Factors such as land availability, zoning regulations, construction costs, and government policies can affect the rate and cost of new housing construction. Aside from that, new construction in areas that are developed and void of vacant land can require demolition and removal of buildings, increasing time and costs. Having said that, the majority of the housing inventory that is available for sale comes from private homeowners.
Often, these homes go up for sale when someone is moving to another home, which is usually a new purchase with a mortgage. If interest rates are high, some homeowners that are wanting to sell their home may choose to wait for rates to improve, which can cause a shortage of homes for sale.
With the rise in popularity of working from home, expensive office space in big cities is sitting vacant. Some cities, like Los Angeles, are considering changing the zoning of these office buildings to convert them into residential units.
Examples of housing supply
Government policies and regulations, at both the federal and local levels, can impact real estate affordability. Measures such as tax incentives, subsidies, zoning reforms, and affordable housing programs can influence the affordability landscape.
examples:
Considering these factors, it is difficult to imagine real estate affordability for the average American significantly improving unless one or more of the 5 topics above sees drastic changes. We are still recovering from the pandemic and constantly reevaluating our day-to-day values, such as how we live, work, and play.
Some could argue that changes have already started, especially when considering what is happening with office buildings with so many people working from home. However, it is not hard to see the power struggle between ‘new’ ways and ‘old’ ways of doing things, as many employers are calling their employees back to the office after going remote. Americans, especially younger ones, want a good life balance when looking at real estate, and it is playing more and more into their overall decisions for a home. With so many factors at play and potential changes coming, it will be very interesting what the housing market looks like in the next 5 years!
Want to know when it is the best time to buy real estate? see our post here.
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