One of the questions many clients ask, given the recent slight rebound in property prices, is whether they should sell now or wait for higher prices. With the recent jump in interest rates, and the likelihood that rates will continue to rise, the answer to this question may be that this is likely the last, best opportunity to sell before prices decline further.
Mortgage rates bottomed recently at 3.31 percent last November but since have spiked to 4.58 percent as of last week, which represents a 127 basis-point increase, or a 38 percent jump. Although mortgage rates are still low on a historical basis, this increase was enough to stifle refinancings and new home sales. In fact, new home sales fell off a cliff, plunging 13.4 percent last month.
Wells Fargo, the largest mortgage lender in the United States, last week sent 60-day layoff notices to 2,300 people in its mortgage division across the country.
"The main driver is less refinancing volume than we saw last year and even early this year," said Tom Goyda, a spokesman for Wells Fargo Home Lending.
It's clear that they see this segment of the industry slowing and are reducing staff accordingly.
Median home prices for Santa Barbara County hit a low of $296,590 in March 2009. Although this data is very volatile, we can clearly see a positive trend since that low, with median prices for the county now at $598,680 (in July, according to the California Association of Realtors). Again, although the data series is volatile, this represents a 100 percent increase from the low.
Given the historical appreciation potential for Santa Barbara real estate, many property owners are reluctant to sell, even with the recent increase in prices. This reluctance could explain why inventories are about half what they were only one year ago. Tight inventories have contributed to rising prices, multiple offers on some properties, and fast closings. At least in the sub-$1 million price range, it is a seller’s market, to be sure.
Affordability is still relatively attractive in the context of historical Santa Barbara housing costs. Rates remain historically quite low, and prices, although they've increased significantly from the lows, are still well below the peak prices we saw in 2007 (median prices reached a high of $878,125 in July 2007). Banks have also loosened their lending requirements, although only slightly, from the super-stringent stance they had immediately following the financial crisis of 2008 and 2009. Loans are available for qualified buyers, and rates are low enough to offer monthly payments that buyers can still afford, given current prices. Unfortunately this is likely to change shortly.
If interest rates continue to rise, which is the most likely scenario, mortgage rates will also rise, and monthly mortgage payments will also rise, assuming home prices do not change. This means that, again assuming prices do not change, fewer and fewer buyers would be able to afford to buy homes. This is, of course, not how it usually works. What usually happens is that, as rates rise, home prices fall, which in turn keeps mortgage payments from getting so high that buyers can no longer afford to purchase a home. It follows that home prices, given rising mortgage rates, should enter another period of declines.
There are still many homeowners who bought their properties at or near the peak of the market and who are under water on their mortgages. Many of these homeowners would like to sell and need to sell, but have been waiting for the right time, and have been holding out hope that prices will continue to rise. The recent increase in prices locally has no doubt been a godsend. It's always difficult to make a decision to sell any asset that would result in a material loss, but sometimes this is the best course of action, if it is reasonable to expect prices to fall in the future. Unfortunately I believe this is the situation we face today in the local real estate market.
Interest rates are rising both because the Fed has pushed rates down artificially through its bond-buying program (QE3 or quantitative easing round 3) in which they have been buying $85 billion per month in long-term bonds. The threat of the removal of these purchases from the market has been enough to scare investors into selling bonds, offsetting the bond buying of the Fed, and pushing rates higher. Once the Fed begins to taper off its bond buying, the pace of the rise in interest rates may increase, and we should definitely see rates rise much further from current levels. Given the reaction we've already seen with new home sales dropping dramatically, and the slowing of mortgage refinancings mentioned above, it seems likely that downward pressure on home prices is inevitable.
For potential sellers who have been contemplating selling their properties, the recent bounce in local prices may represent the best chance for selling that we will see in the coming few years. Rates remain relatively low, prices have risen from the lows, and inventories are very low. These conditions may not remain for long and properties — even in Santa Barbara — can take time to sell.