“Home sales have been stable for several months, neither rising nor falling in any meaningful way,” NAR chief economist Lawrence Yun said. “Mortgage rate changes will have a big impact over the short run, while job gains will have a steady, positive impact over the long run. The South had a lighter decline in sales … [Read more…]
Federal student loan payments resuming on Oct. 1 will negatively affect consumer loan asset quality, including credit card, auto and, to a lesser extent, residential mortgages. However, the overall effect will be modest, according to a Moody’s Analytics report.
On Oct. 1, repayments are due to restart on Department of Education (DOE) federal student loans (Direct Student Loans), which began accruing interest again on Sept. 1.
In total, 24 million borrowers whose payments were suspended since the onset of the COVID-19 pandemic will owe an average of $275 per month when federal student loan payments resume, per Moody’s Analytics estimates.
“As the interest burden on student debt increases, we expect the additional financial obligation will modestly strain borrowers’ ability to pay,” Moody’s analysts said in a report.
According to the analysts, job market conditions remain the primary driver of consumer loan performance. In August, the unemployment rate was 3.8%, compared to 3.5% in July. Although it’s a low rate by historical standards, unemployment is at its highest level since February 2022.
“Although student loans are non-dischargeable in bankruptcy, their priority in a consumer’s debt repayment hierarchy is low relative to the other major consumer debt classes,” Moody’s analysts said.
They added: “Borrowers are much more likely to prioritize servicing mortgage or auto loans and even credit cards since they stand to lose their house or car or access to credit or credit card rewards if they fall behind on such consumer loans.”
The report included data showing that delinquencies in major consumer debt classes are rising but are still at low levels.
For mortgage debt, the share of performing loans that were 30 or more days delinquent went from less than 2% in Q3 2021 to about 2.5% in Q2 2023. Credit card delinquencies jumped from 4% to about 7% in the same period. Meanwhile, auto loans rose from about 5% to 7%.
No one can predict the future of real estate, but you can prepare. Find out what to prepare for and pick up the tools you’ll need at Virtual Inman Connect on Nov. 1-2, 2023. And don’t miss Inman Connect New York on Jan. 23-25, 2024, where AI, capital and more will be center stage. Bet big on the future and join us at Connect.
It’s been nearly 30 years since so few homeowners were seriously delinquent on their mortgages, but that trend could come under pressure if early-stage delinquencies continue to creep up, according to a sneak peak at August numbers released Friday by data aggregator Black Knight.
Black Knight’s first look at its August data showed 448,000 homeowners were seriously delinquent in August, meaning they hadn’t paid their mortgage in 90 days or more. That’s the lowest level since June 2006, after a 4 percent drop from July and a 25 percent decline from a year ago, when about 600,000 homeowners were seriously delinquent.
The number of homes in active foreclosure was also down 24 percent in August compared to pre-pandemic levels, falling by 5,000 from July to 215,000. That’s the lowest level since March 2022 after foreclosure moratoriums put in place during the pandemic were lifted.
At 3.17 percent, the overall delinquency rate improved from 3.21 percent in July, and is nearly a full percentage point below the average for August from 2015 through 2019.
But Black Knight said the number of homeowners who were in the early stages of delinquency (30 or 60 days behind on their payments) has increased for three months in a row, suggesting that delinquency rates may be nearing a bottom.
“We don’t necessarily think that serious delinquencies are going to begin to rise – that population is still improving at a relatively healthy clip,” a Black Knight spokesperson told Inman via email.
Foreclosure starts were also up by 21 percent from July to August, but at 31,900 were still 21 percent below pre-pandemic levels.
The five states with the highest percentage of seriously delinquent borrowers were all in the Southeast: Mississippi (2.12 percent), Louisiana (1.76 percent), Alabama (1.43 percent), Arkansas (1.20 percent) and Georgia (1.15 percent).
Black Knight — which is now part of Intercontinental Exchange Inc. following an $11.9 billion acquisition that closed Sept. 5 — will release its more in-depth Mortgage Monitor report on Oct. 2.
Monthly payments at record high
The last Black Knight Mortgage Monitor report found that due to rising mortgage rates and home prices, buyers purchasing a home in July were facing average principal and interest payments of $2,306 a month, the highest on record and a 60 percent increase from a year ago.
Equity insulates many from foreclosure
But rising home prices have also given many homeowners a comfortable equity cushion that could allow them to avoid foreclosure if they have trouble making their monthly payments, as they’d be able to sell their homes and walk away with some cash.
When the Black Knight Mortgage Monitor last tackled that subject in depth, the report found mortgage borrowers had more than $16 trillion in equity in June, or an average of $199,000 per household.
At $10.5 trillion, tappable equity – the amount that can be safely cashed when refinancing, while still leaving a 20 percent equity cushion – was within $434 billion of record 2022 peaks.
Editor’s note: This story has been updated to clarify that Black Knight expects that the overall delinquency rate may rise, not serious delinquencies. Historically, sustained increases in short-term delinquency rates can push up the serious delinquency rate.
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Email Matt Carter
While the good news about housing keeps flooding in, one piece of negative data jumped out at me today.
The latest Zillow Negative Equity Report released today revealed that nearly one out of every five (18.6%) Las Vegas homeowners with a mortgage owed double what their home was worth as of the end of the fourth quarter.
In other words, if their home’s present value is $100,000, their mortgage balance is somewhere around $200,000.
For most people, this would signal being past the point of no return. After all, most of us have enough trouble paying off a mortgage when we’re above water, so the thought of owing double is daunting, even with a kick-butt mortgage rate.
Of course, if you stick around long enough, home price appreciation should do some of the heavy lifting, but it’s still a big ask for struggling homeowners.
While I cherry-picked a bad piece of data, it should be noted that 26.7% of Vegas homeowners were in this position one year earlier, so it’s not nearly as bad as it was.
And only 8.9% of underwater homeowners are delinquent on their mortgage payments, down from 9.9% a year earlier.
So yes, things are getting better…at the same time, the 200%+ loan-to-value (LTV) ratio bracket was the most prominent in Sin City.
In other words, if you went door to door and asked Vegas homeowners with mortgages what their LTV was, most would say 200%+.
The second largest distribution for Vegas homeowners was the 80-100% LTV tier (15% of borrowers), followed by the 100-120% LTV tier and under 40% tier, both at 13.8%.
3.8% of American Mortgagors Owe More Than Double Home’s Worth
If we expand the data to the whole of the United States, 3.8% of Americans with mortgages owed more than double what their homes were worth at the end of 2012.
That’s pretty scary, though the majority of U.S. homeowners with mortgages (26.6%) have LTV ratios south of 40%.
And 72.5% have a LTV somewhere below 100%, meaning they’re not the proud owners of an underwater mortgage.
If you look at the graphic below, you’ll notice that the LTV distribution is improving in every category, thanks to continued home price appreciation.
The low-LTV brackets are rising, and the high-LTV brackets are declining. All good news…
Overall, Zillow noted that the negative equity rate dropped to 27.5% in the fourth quarter from 28.2% a quarter earlier, and is now well below the 31.1% rate seen at the end of 2011.
As a result, nearly two million homeowners were able to get below the 100% LTV mark in 2012, though 13.8 million remain underwater.
Still, roughly one-third of all homeowners own their homes free and clear because they don’t have a mortgage.
Where’s the Inventory?
Zillow also has a nice little chart detailing how many homeowners will be “freed from negative equity” in 2013.
Using this data, we can guess which metros will see an increase in housing inventory, as that many more borrowers will finally be able to list their homes and move on to greener pastures.
The company expects 72,696 homeowners in Los Angeles to get above water in 2013, making it the leading metro in terms of total numbers.
Nearby Riverside is expected to “free” 62,407 homeowners, which represents a 21.2% decrease in the negative equity rate there, the second largest percentage decrease behind Sacramento (-21.3%).
In hard-hit Vegas, only 8,435 homeowners are expected to get above water this year, which represents just a 4.3% decline in negative equity.
And in Chicago, negative equity is actually forecast to get worse, with 7,019 more homeowners going under in 2013.
But overall, 999,601 homeowners should be “freed” in 2013, thanks in part to Zillow’s 3.3% home appreciation estimate.
This all reminds me of a post I wrote back in 2010, which claimed some real estate markets wouldn’t see a return to peak home prices until 2039.
In other words, while there is plenty of good news, it’s going to take a while to undo this mess.
Read more: How to refinance with negative equity.
By David Piscatelli
Fed’s inflation fight tightens the U.S. housing supply and makes home buying even more difficult
Conventional wisdom dictates that U.S. inflation will continue to decline as the Federal Reserve keeps interest rates high. This action, which makes loans more expensive for businesses and consumers, should lead to less spending, less consumption and higher unemployment.
Or at least that’s Econ 101. Yet both consumers and investors have acclimated to the current market environment. Moreover the key driver of inflation — housing — cannot be adequately contained through the Federal Reserve’s usual tactics.
In fact, the Fed’s policies have created a Catch-22 in the housing market by creating “golden handcuffs.” Instead of easing consumer demand, the Fed’s actions unintentionally restricted U.S. housing supply, resulting in a stalemate between home buyers and sellers. Homeowners who locked into historically low mortgage rates before and during the pandemic are now reluctant to sell, which in turn is increasing the likelihood of persistent higher inflation.
The case for this condition to persist , which the market is mostly failing to consider, continues to grow stronger as the odds of a recession fade. This should be an alarm bell and a potential opportunity for investors to redeploy at least part of their capital into hard assets to serve as a hedge against inflation risk.
The recession that never was
Many economists have predicted that a recession would hit the U.S. Their reasoning was sound: aggressive monetary action by the Federal Reserve, investor dissatisfaction with inflation, loss of consumer confidence and reductions in home asking prices — all points that were hard to argue against.
Yet most of the key ingredients needed for a recession have not materialized. Investors have acclimated to inflation, consumer confidence is growing and the housing market has, by and large, entered a period of stalemate where prices remain high due to lack of supply.
In fact, the only relevant argument in the recession camp that remains is the Fed continuing its aggressive posture against inflation — now considered the fastest monetary policy tightening cycle in more than 40 years. Such action continues to lead many to speculate that recession is imminent, and the only questions left to answer are “when,” and “how deep it will be?”
Housing prices obey the laws of supply and demand
Housing is perhaps the most consequential category that makes up the Consumer Price Index (CPI), which markets track every month as a core measure of inflation.
The undersupply of housing in the U.S. is grounded in years of underbuilding and is not the result of a single federal policy, war, or external event. If anything, the power to create more housing supply rests with state and local governments, which often require working through a patchwork quilt of differing zoning and land-use regulations.
The high estimate of the country’s current housing shortage is pegged at about 7.3 million units, while the most conservative estimate shows it to be about 1.7 million. While the true shortage is most likely somewhere inbetween, the bottom line is that the United States faces a textbook housing shortage that cannot be solved overnight. Worse, the Fed’s current policies are making the prospect of home ownership even more difficult.
Nobody wants to move and reset their loans at much higher rates.
Central bank measures designed to clamp down on inflation by making borrowing more expensive (which theoretically should drive down the costs of homes), are having the opposite effect. This is because homeowners, who locked in historically low mortgage rates before and during the pandemic, are now reluctant to sell their home.
Simply put, nobody wants to move and reset their loans at much higher rates. Would-be sellers are therefore sitting on the sidelines, which has unintentionally created an even greater shortage in supply. Meanwhile, potential buyers, who cannot afford higher mortgage rates, are incentivized to rent instead.
To end this stalemate, the Fed would need to start cutting interest rates, which it has stated is unlikely this year. But if inflation is being driven by the cost of housing, as demonstrated in the Consumer Price Index, more attempts to tame inflation via rate hikes suggests homeowners will only become more entrenched as supply dwindles further As the labor market continues to prove surprisingly resilient, homeowners, and by extension everyday consumers, don’t seem to mind waiting it out.
Read: Nouriel Roubini says a return to 2% inflation is ‘mission impossible’
Also: Most long-term investors can ignore the Federal Reserve’s latest move
The case for hard assets
Seasoned investors know that during times of rising interest rates, restrictive credit and prolonged inflation, more investments flow into “hard” asset classes such as real estate. This hedging strategy is used almost like an insurance policy by investors to preserve capital from the depreciating effects of inflation. And according to research, it works. For example, a Stanford University study found that residential real estate is historically an investment haven during inflationary periods. Even during the inflation of the 1970s, home prices increased relative to the size of the economy. This is because housing is typically tied to consumer prices and rises with inflation.
With housing assets so closely tied to inflation, as well as to the laws of supply and demand, investments in this hard asset class deserve due consideration. Strong economic growth, coupled with the one-two punch of resilient consumer spending and near record-low unemployment, is good news. It also means the Fed won’t be lowering rates soon. Housing will remain a key driver of inflation, and future rate-hikes will further entrench homeowners and push more would-be buyers into renting.
To achieve a return to 2% inflation, U.S. policymakers would be wise to work with state and local governments to incentivize development, which would drive down the greatest expense for most Americans. But even with decisive action, fixing the fundamental housing shortage that is responsible for sustaining stubbornly persistent inflation will be a longer process than most investors realize.
David Piscatelli focuses on research, economic analysis and strategy at Avenue One, a property technology service platform and marketplace for institutional owners, buyers and sellers of residential homes. Views of the writer do not necessarily reflect the views of Avenue One.
More: Meet the brave Americans buying and selling their homes, despite stubbornly high interest rates
Plus: 9 ways home buyers can stretch their dollars even though mortgage rates are high
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If you think home prices are too expensive, you wouldn’t be the only one.
A new analysis from First American revealed that housing affordability is the lowest it has been in more than three decades.
In other words, it hasn’t been this expensive to purchase a home since the 20th century.
The title and settlement company’s Real House Price Index (RHPI) determines house-buying power using median household income, mortgage rates, and home prices.
And they found that real house prices, adjusted for these factors, were up nearly 17 percent year-over-year in July.
Blame Higher Mortgage Rates and Home Prices for a Lack of Affordability
As for why housing affordability continues to erode, it’s a combination of factors.
The first and most obvious issue is markedly higher mortgage rates, with the 30-year fixed mortgage now priced above 7%, assuming discount points aren’t paid.
Per Freddie Mac, rates on this most-popular loan program are up about 1% from year-ago levels. First American pegs the annual change at a higher 1.4 percentage point increase.
And if we zoom out a bit more, this key interest rate was in the 3% range to start out 2022.
So interest rates alone have wreaked havoc on housing affordability and home buying power.
Just consider a loan amount of $400,000 at a 3% rate versus 7% rate. We’re talking about a monthly principal and interest payment of $1,686 vs. $2,661.
That’s nearly $1,000 based on the interest rate increase alone. Then you have to factor in higher property taxes, higher insurance premiums, and so on thanks to a higher purchase price.
Yes, despite higher interest rates, nominal home prices have also risen year-over-year.
While people logically think there’s an inverse relationship with home prices and mortgage rates, this isn’t always true.
Per First American, nominal home prices (not adjusted for inflation) were also up 4% year-over-year.
This means a prospective home buyer faces both a higher purchase price and a significantly higher mortgage rate.
And though household income increased 3.7% since July 2022, it wasn’t enough to offset the higher costs associated with the jump in rates and rising nominal home prices.
Real Home Prices Are Now Above the 2006 Peak
If you recall the year 2006, you might remember that home prices peaked and then began to fall.
Back then, unsustainable home price gains were fueled by exotic financing.
Many home loans were underwritten via stated income or no documentation at all, while the products offered may have been option ARMs and other adjustable-rate mortgages.
Additionally, the typical down payment was at or close to zero, while the loan-to-value (LTV) ratio was often 100% when it involved a mortgage refinance.
In other words, home prices were too high, borrowers had little to no skin in the game, and many weren’t even qualified to be homeowners.
Without the widespread use of loose underwriting, home prices would not have been able to continue rising as high as they did.
As we know, the housing bubble burst set off the Great Recession, leading to double-digit home declines and scores of short sales and foreclosures.
Today, unadjusted home prices are 53.7% above those during the peak in 2006, while real prices are 0.7% higher than that housing boom peak.
While this might be reason to worry, consider the new mortgage rules that were born out of that crisis.
The Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule) essentially outlawed much of what I just mentioned.
Borrowers today must be fully qualified when taking out a mortgage, and the vast majority are going with a 30-year fixed-rate mortgage.
Gone are the days of stated income underwriting and negative amortization. That makes the current situation more of an affordability crisis than a housing bubble.
It is driven more by a lack of supply than it is loose financing, with not enough inventory to meet demand.
Housing Is Overvalued Nationally, But Some Markets Remain Affordable
As noted, the July 2023 Real House Price Index (RHPI) increased about 17% from a year ago.
This meant the median sale price was roughly $345,000, while the median house-buying power was just $337,000.
Since house-buying power is below the median price, it means housing is overvalued. In an ideal world, it should be at or below the median.
However, that applies to the national median price of real estate. Only 24 of the 50 top markets tracked by First American are overvalued by this measure.
Granted, it has worsened over time, as only 15 markets were considered overvalued last July.
At the moment, San Jose, California is the most overvalued metro, with the median sale price nearly $1,440,000 and consumer house-buying power just $700,000.
San Francisco and Los Angeles were also quite overvalued by this measure, though to a lesser degree.
Meanwhile, some undervalued markets still exist, if you can believe it. The metros of Detroit, Philadelphia, and Cleveland are undervalued by roughly $126,000.
How Do We Fix the Unaffordable Housing Market?
We know home prices are out of reach for many, but how do we fix it? Well, the Real House Price Index (RHPI) takes into account home prices, mortgage rates, and incomes.
So if you want housing to be more affordable, you need relief via those three elements.
This means either mortgage rates need to fall, home prices have to come down, or incomes must increase.
Or you get some combination of the three, such as a 1% drop in mortgage rates and a pullback in prices, which boosts affordability.
The problem at the moment is mortgage rates might be higher for longer, and home prices are pretty sticky due to a major lack of inventory (why are there no homes for sale?).
Incomes also don’t look to be increasing by a material amount, making it difficult for prospective buyers to get in the door.
One exception is new home sales, which have relied heavily on temporary and permanent mortgage rate buydowns to tackle the financing piece.
But there are only so many new homes for sale, and such sales only typically account for 10% of the overall market.
This explains the current housing market dynamic. Ultimately, there aren’t many existing homes on the market, not a ton of demand, and not a lot of sales.
And until something changes, this will likely be the status quo.
Read more: Why are home prices so high right now?
So, you’re considering purchasing a home? There’s a lot to think about—there’s lots of mortgage buzzwords and industry lingo to decipher. It can all be very overwhelming, especially for first-time home buyers.
One of the main decisions you need to make regarding your mortgage is selecting a fixed-rate or an adjustable-rate mortgage. Fixed-rate mortgages charge the same fixed interest rate for the duration of the loan. Adjustable-rate mortgages, on the other hand, have rates that fluctuate over time.
It’s important to understand how each type of mortgage works and how interest rates can impact your mortgage payments. Keep reading to learn more.
- Interest rates for fixed-rate mortgages remain constant over the life of the loan.
- ARM mortgages start with a lower fixed-rate period before switching to variable rates that are assessed regularly.
- Deciding if an ARM or fixed-rate mortgage is right for you depends on your specific situation.
In This Piece
How Adjustable-Rate Mortgages (ARM) Work
Interest rates with an adjustable-rate mortgage, also referred to as an ARM, are variable—meaning they can change over time. Typically, ARMs start with a fixed-rate period, such as one, three, five, seven, or 10 years. After this initial period, interest rates adjust annually based on the current index. Your mortgage agreement details these terms.
When shopping for an ARM, you’ll notice that many types are listed as a ratio, such as 1/1, 3/1, 5/1, 7/1, 10/1 and more. The first number represents the number of years the mortgage will remain at the fixed-rate amount. In the example above, this would be one, three, five, seven, or 10 years.
The second number indicates how often the rates are adjusted after the initial fixed-rate phase is over. In most cases, this number is one, to represent one year. This means that rates are adjusted annually for most adjustable-rate loans.
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Fortunately, many ARM agreements also include a cap for interest rates. For instance, one of the most common types of ARM is 5/1 with a 2/6 cap. This notation means the mortgage has a five-year fixed-rate period, after which the rates will reset every year. Interest rates, however, can’t increase more than 2% in any given year and not more than 6% in total over the life of the mortgage.
During the initial fixed-rate period of your mortgage, your monthly payments remain exactly the same. However, once this period is over, your monthly mortgage payments are likely to change from year to year depending on interest rates.
How Fixed-Rate Mortgages Work
Unlike an adjustable-rate mortgage, interest rates with a fixed-rate mortgage remain constant throughout the life of the mortgage. One of the best benefits of a fixed-rate mortgage is that your monthly payments remain exactly the same until the loan is paid in full. However, the amount of principal paid each month may fluctuate.
A disadvantage of fixed-rate mortgages is the potential for interest rates to decrease dramatically over the course of the loan. However, you can choose to refinance your mortgage, if you qualify, to take advantage of these lower rates.
ARM vs. Fixed-Rate Mortgage: Example Mortgage Payments
The table below can help you better understand the difference between mortgage payments for ARMs and fixed-rate loans.
|Type of loan||5/1 ARM||30-year Fixed-Rate Loan|
|Monthly payments||$2,623.71 per month during the initial five-year fixed-rate period (payments will adjust annually thereafter)||$2,840.81|
As you can see, initial interest rates are typically much lower for ARMs than for fixed-rate loans. However, after this initial phase, these rates can increase, which will also increase monthly payments. Use our convenient mortgage calculator to determine how much you can expect your monthly payments to be per month for an ARM and a fixed-rate mortgage.
Is an ARM or Fixed-Rate Mortgage Better?
There are advantages and disadvantages to both adjustable-rate and fixed-rate mortgages. For example, fixed-rate mortgages are easier to budget because monthly payments remain the same throughout the life of the mortgage. This can be a huge advantage for homeowners who are concerned about increasing rates.
However, if interest rates decline over the course of your loan, you’ll be stuck paying a higher amount. It may be possible to refinance your mortgage to take advantage of these lower rates. However, you must still have the right credit score to buy a home.
On the other hand, a great advantage of ARMs is that they typically offer lower initial interest rates. Oftentimes, homeowners have lower monthly payments during this initial phase vs. those opting for fixed-rate loans. The disadvantage is that interest rates could spike during the fixed-rate phase. If this happens, homeowners could face significantly higher mortgage payments at the end of the initial fixed-rate period.
Why Would You Choose an Adjustable Rate Over a Fixed Rate?
Adjustable-rate mortgages are an attractive offer for many first-time home buyers. First, they offer lower interest rates for the first several years, which results in lower monthly payments. Secondly, many first-time home buyers only plan to stay in their homes for several years before upgrading to larger houses.
In these cases, an ARM loan can be an ideal option because they’re likely to move before the end of the fixed-rate phase or soon after. This option allows them to enjoy lower interest rates until they’re ready to upgrade.
Tips for Choosing
Ultimately, selecting an ARM or a fixed-rate mortgage is a personal decision that depends on your specific situation. However, if you’re trying to choose between these two options, here are some factors to consider.
How Long Will You Be in the Home?
The first thing you want to consider is how long you plan to stay in your new home. If your plans are to remain in the home for only several years, an ARM may be the best option. For instance, if you plan to stay in your home for less than seven years, a 7/1 ARM will allow you to take advantage of lower interest rates until you sell the home.
If, on the other hand, this is your forever home, and you have no plans on moving in the near future, a fixed-rate mortgage that offers consistent monthly payments may be the better option.
How Frequently Does the ARM Adjust?
You also want to check the details of the loan and determine how often ARM rates will adjust. For example, a 7/1 ARM offers 7 years of ARM rates at the fixed rate, then the interest rates readjust every year afterward. Rates on a 7/6 ARM will readjust every six months. If this is too much fluctuation for your budget, you may want to consider a fixed-rate mortgage.
What Are Interest Rates Like?
Another thing you want to consider is the current state of interest rates and predictions for future increases or decreases. When interest rates are low, investing in a fixed-rate mortgage can help you lock in these lower rates. Alternatively, when interest rates are high or rising, it may make more sense to select an ARM, with hopes that these rates will come back down before the initial fixed-rate period ends.
How Much Can You Afford Now?
ARMs typically offer lower monthly payments during the first few years. This can be an attractive option for those just beginning their careers and planning to increase their earnings in the future. An adjustable-rate mortgage allows you to take advantage of lower monthly payments now and risk possible higher payments when you have more wealth.
Can You Afford a Payment Increase?
It’s important to recognize that as interest rates with an ARM adjust, so will your monthly payments. Make sure you can budget these shifts. Even if ARM caps are in place, monthly payments can increase quickly, especially with a six-month adjustment frequency. If you’re uncertain of your ability to maintain higher monthly payments, you may want to choose a fixed-rate mortgage.
Understand Your Options
Fixed-rate and adjustable-rate mortgages are both good options for home buyers. The important thing is to understand the difference between these two choices and to evaluate your specific situation. When you factor in these issues, you can better determine which option is right for you.
When it comes to the Los Angeles housing market, the numbers speak volumes.
As we navigate the contours of 2023, the Los Angeles housing market continues to dominate conversations, not just among locals but also among potential buyers, sellers and investors nationwide. Recent data shows a complex narrative: a market that is both competitive and costly, while simultaneously in a state of flux.
While the towering home prices persist in their upward trajectory, a marked reduction in the volume of homes actually changing hands year-over-year offers a nuanced and intriguing subplot.
Climbing the million-dollar ladder
As of July 2023, the median sale price for a home in LA sits at an astonishing $1 million. This represents a 4.3% elevation since the previous year.
To place this figure in a broader frame, the median sale price in Los Angeles is a whopping 132% higher than the national average. But it’s not just the overall home prices that have climbed; even the cost per square inch is inflating. The median price per square foot has ascended to $627, a 2.0% increase from last year.
In the Los Angeles housing market, homes don’t linger. The average home is sold after a mere 37 days on the market, a slight but meaningful increase from 35 days in the prior year. This suggests that while the market remains fiercely competitive, it is not a feeding frenzy. On average, homes in Los Angeles receive three offers.
However, adding a layer of complexity, the number of homes sold in July 2023 reached only 1,477, plummeting 18.8% from the same period last year. These numbers indicate a fascinating conundrum: Although the demand is astronomical, supply is staggering behind, making it predominantly a sellers’ market — but with intriguing twists.
How competitive is the Los Angeles housing market?
Measuring competition in any market is complex, but when it comes to the Los Angeles housing market, there are some quantifiable indicators. According to the Redfin Compete Score™, the market ranks as “somewhat competitive.” The average home here is sold for approximately 1% above the listing price.
Migration and relocation trends
The Los Angeles housing market isn’t solely affected by prices and competition; it’s also swayed by the tides of migration. Between June and August 2023, a considerable 81% of LA homebuyers expressed intentions to remain in the metropolitan area, affirming their loyalty to the City of Angels.
Conversely, 19% are looking to spread their wings and fly to other destinations, with Las Vegas, San Diego and Bakersfield topping the list. However, Los Angeles continues to exert its magnetic pull, drawing in new residents chiefly from San Francisco, followed by Chicago and New York.
LA’s housing market at a glance
The Los Angeles housing market of 2023 is an intricate choreography of rising prices, intense yet waning competition and fluctuating migration patterns. For prospective buyers, the city’s market poses challenges, but they are not insurmountable walls. Sellers, too, need to navigate carefully. The diminishing number of homes sold indicates a potential saturation point or perhaps signs of buyer fatigue.
For everyone involved — whether you’re an investor eyeing long-term gains, a first-time buyer looking to plant roots or a seller aiming to capitalize on high prices — knowledge is power. Staying abreast of the ongoing trends and dynamics in the Los Angeles housing market is not just advisable; it’s imperative. After all, in a market as multifaceted as this, understanding the lay of the land can make all the difference.
The Los Angeles rental market
While the focus has largely been on home buying and selling, the rental sector adds another complex layer to the Los Angeles housing market. As one of the most sought-after places to live in the country, it’s no surprise that Los Angeles’ rental rates are a significant talking point as well.
Average rent and annual changes
The average rent for a studio apartment in the City of Angels hovers at $2,421, marking a 3% increase from the prior year. One-bedroom apartments haven’t been left behind in this upward trajectory, clocking in an average rent of $2,905, which also reflects a 3% annual increment. Two-bedroom apartments, meanwhile, cost an average of $3,894, but have seen a more modest annual growth of 1%.
This data paints a picture of a rental market that, much like its home-owning counterpart, experiences its fair share of challenges and costs. Apartments in Los Angeles are not for those hunting for bargains, with the average rent ranging between $2,421 and $3,894.
The Los Angeles rental market shows an overwhelming skew towards the higher-end. While 0% of apartments rent in the $501-$1,000 range, a staggering 80% of them command a rent north of $2,100. This underscores the upward pressure on the cost of living in Los Angeles and speaks volumes about the limited affordability.
When it comes to neighborhoods, Bel Air tops the list for studio apartments with an average rent of $3,695. On the other hand, areas like Beverly Grove and Westwood Village have seen decreases in average rent by 11% and 14% respectively. Silicon Beach, however, is bucking the trend with an 18% annual increase, echoing the tech boom that the area is experiencing.
For those looking for more budget-friendly options, South Park, South LA and Crenshaw offer average one-bedroom rents ranging from $1,650 to $1,900, compared to the Los Angeles average of $2,905 for a one-bedroom.
Comparing Los Angeles to nearby cities
In terms of rent, Los Angeles still commands a premium compared to other nearby cities. For instance, a studio apartment in Santa Monica averages $3,540 with a 6% annual increase, while the same in Long Beach costs $2,850 but has soared by 37% in the past year. Glendale stands at $2,755 for a studio, with an 8% rise.
Understanding the trends
The fluctuating rental rates over the past year indicate a market that’s anything but static. For instance, studio rents went from $2,302 in September 2022 to peak at $2,422 in July 2023 before slightly reducing. Similar patterns are observed for one-bedroom and two-bedroom apartments, showing the market’s elasticity and potential volatility.
The Los Angeles rental market at a glance
The rental landscape in Los Angeles is a vital part of the overall housing market, influencing and influenced by similar factors like location, demand and economic status. Whether you’re a potential tenant eyeing the city’s ritzy neighborhoods or someone seeking more affordable options, the Los Angeles rental market provides a plethora of choices — albeit at a generally high price point.
For individuals and families not yet ready to commit to homeownership, or those who prefer the flexibility that renting provides, understanding the dynamics of the rental market is as crucial as grasping the trends in home buying and selling.
When you’re ready to enter LA as a local, there will be an apartment waiting for you on Rent.
Rent prices are based on an average from Rent.’s multifamily rental property inventory as of July 2023.
Other demographic data comes from the U.S. Census Bureau.
The rent information included in this article is used for illustrative purposes only. The data contained herein do not constitute financial advice or a pricing guarantee for any apartment.
What a difference a few months make in the real estate market. Last summer, home prices were selling on the cheap in many cities across the nation.
Fast forward to spring, and the housing market kind of “sucks.” There’s really no other way to put it.
First off, there’s no inventory. This has been an issue for a while now.
Put simply, there’s just very little out there for an individual or family looking to buy a home, at least in the areas they might want to live.
Sure, there are those properties that have been on the market for months, but there’s a reason they’ve been on the market for months.
And yes, you can probably go to a new community built by a mega home builder and find a house, but it’ll likely be on the fringe of a major city next to empty dirt lots and tractors.
Bad Inventory Rising
- Because there is a shortage of homes to buy
- Prospective sellers are able to list their duds
- Knowing that buyers are becoming increasingly desperate
- And may overlook flaws or simply settle as a result of the slim pickings available
Now that the housing market is heating up and the media is (rather obnoxiously) getting on board, inventory is finally rising. Let’s call it an inevitable timing thing.
You see, there is real hope in the housing market. And while hope is good for some, it’s not good for buyers, just sellers who finally see the light after so many years in the dark.
Their real estate agents are giving them the green light to dump their properties while avoiding the lengthy short sale process and nasty credit score ding.
Today, these would-be sellers are able to push the values just that little bit more to sell them as standard sales, instead of going the formerly popular short sale route.
After all, a short sale made sense when there was no hope of getting out unscathed, but now that things are looking up, why not hang on a touch longer and avoid the negative ramifications of selling short?
Unfortunately, this means the individual on the other end is picking up the slack at an inflated price, instead of snagging a deal.
Competition Is Extremely Fierce
- Not only are the available homes often less desirable
- But the competition for these properties is much higher than normal
- Making the housing market a really bad place to be as a buyer
- Since no one wants to overpay for a home they don’t even love
Factor in the intense competition and you’ve got a double whammy on your hands.
We’re talking inflating the listing price to make it a standard sale, then receiving multiple bids that often push the final sales price above the original ask.
In other words, today’s buyers are acquiring properties with the future home price appreciation already built in.
And that assumes prices actually do increase – it’s not a foregone conclusion, just a rosy expectation at the moment.
I’m also seeing a lot of the notoriously bad properties rear their ugly heads again. Many of these homes sat on the market for months without a single offer, but now they’re going into escrow in a matter of days.
Something is definitely wrong with this picture. I don’t care how low mortgage rates are…
I’ll Wait for Another Dip
- The housing recovery won’t feature home prices that go up in a straight line
- Just like the downturn ebbed and flowed despite ultimately declining
- There might be windows if you’re patient and keep an eye on things
- But do expect home prices to keep on rising, and know that it’s okay to just hold off if you don’t find something you truly love
If I wanted to buy a home, I’d hang on and wait for the temporary madness to come to an end. There’s clearly a bubble mentality in the air again, with everyone and their mother bullish on housing.
Whenever that’s the case, it makes for a rather ominous situation. The increase in inventory involves a ton of previously underwater homes that no one wanted, even at lower prices. Or homes that were taken off market and abruptly thrown back on the MLS.
So why would you buy these same homes today at a significant premium? Because a magazine cover said, “Housing Is Back?”
The economy is still in tatters and things don’t exactly appear bright. If anything, a looming stock market crash seems to be on the horizon.
No, the sky isn’t falling, and housing is indeed on the mend after so many off years. But I do see the current cycle as an unsustainable period of growth that will likely unravel as the year goes on.
It’s going to be a bumpy road to recovery, not just a bottom followed by a surge back to new highs. We’ve seen this optimism in past years, only to watch the wheels fall off time and time again.
If you see something you love, go for it. If you’re worried about the missing the boom, you might want to sit down and reassess the situation.
Read more: Buying a home during a seller’s market.
Because commodities are raw materials — e.g. grain, oil, precious metals — the price of commodities fluctuates constantly owing to changes in supply and demand, which are in turn influenced by climate and weather patterns, workforce issues, global economic trends, and more.
While this can make it risky to invest in commodities, the volatility of this market also creates opportunities for traders, who try to take advantage of price swings.
In addition, although commodities can be traded on the spot market, they’re often bought and sold via derivatives like futures and options contracts, which can add to the higher risk level of this market.
Commodities are basic materials like agricultural products (meat, grains); energy sources (coal, oil, natural gas); and precious metals (copper, gold, nickel), which can be traded between producers and buyers.
In other words, commodities are the raw materials from which countless products are made: e.g. corn is a key ingredient in consumer staples; nickel is required for many technology products.
Commodities are differentiated from other types of securities by the fact that they’re basically interchangeable. One stock is clearly quite different from another, and is valued differently based on the company, the product, the market, and so on. But one barrel of oil is essentially the same as any other barrel of oil.
In addition, there are certain minimum standards, or basis grades, that ensure a common level of quality for most commodities. Basis grades may change from year to year, but once in place, all traded commodities must meet them.
• Meat (e.g. pork, beef)
• Grains and other agricultural products, including: corn, wheat, rice, coffee, cocoa, cotton and sugar
Technological advances have arguably added other commodities, such as internet bandwidth and cell phone minutes. Foreign currencies, indexes, and other financial products are also sometimes considered commodities.
There are two types of commodities investors, generally speaking.
• Producers who sell the raw goods on the spot market of a commodity, and buyers who need it to produce or manufacture certain goods. These trades typically involve futures contracts for specific quantities of the commodity involved for an agreed-upon price (e.g. an airline buying 500,000 barrels of oil for $90 a barrel).
• Traders who buy and sell commodities contracts, or options on underlying commodities, but don’t take delivery of the actual raw material. They are simply trying to profit from the volatility in different commodities markets, adding to commodity risk.
💡 Quick Tip: When people talk about investment risk, they mean the risk of losing money. Some investments are higher risk, some are lower. Be sure to bear this in mind when investing online.
These are some of the reasons investors wonder whether investing in commodities is high risk.
Unlike other stock market assets, commodities are generally traded on futures markets. Futures are pre-arranged agreements between traders who promise to buy or sell a given commodity for a specific price at a specific time in the future — hence the name.
Futures offer both the buyer and seller the opportunity to earn money, if the conditions are right. If the overall value of a commodity rises, the buyer makes money because they get it at the agreed-upon price, which may be lower than market value.
If the value of the commodity falls, the seller makes money because they’re still selling the commodity at the agreed-upon price, which is likely higher than market value.
However, because commodity prices are so volatile, changing on a weekly, and sometimes even daily basis, futures trading is highly risky to both parties involved.
Example of Commodities Risk
In many cases one trading party is going to lose money on the deal — though the set price of futures does allow traders some level of guarantee as to how much the seller or producer stands to lose.
For instance, let’s say a farmer negotiates a futures contract to sell her harvest of wheat. The buyer agrees to buy a specified amount of wheat at a specific price point.
If the value of wheat rises by the time the farmer harvests the crop, the buyer will get a good deal since he’s paying the price they’d already agreed upon (which was set based on the value of the wheat at the time of the negotiation). The buyer can then turn around and sell the wheat at a higher price, earning a profit.
On the other hand, if the value of wheat has fallen by the time the farmer sets out to harvest her yield, she is spared financial devastation by the guaranteed price bottom. Rather than losing out on her profits entirely, she’ll earn whatever the agreed-upon price was.
Meanwhile, the buyer is on the losing end of the contract, and now has a quantity of wheat that is worth less than what they must pay for it, per the agreement.
Why Invest in Commodities?
Given the risk involved with investing in commodities, what motivates investors to trade them?
For one thing, investing in commodities gives investors the opportunity to diversify their portfolio with a whole new class of assets — one that generally performs in opposition to the stock market itself. (That is, when the stock market is bearish, commodities tend to increase in value.)
Furthermore, diversification can be a useful risk-management tactic, and investing in commodities may be a way to round out a portfolio based on more traditional investments like stocks and bonds.
Commodities do also have some characteristics that give them a unique advantage in the world of investments. Because they’re often traded via futures contracts, there’s a guaranteed sale price and date. For those willing to take on the risk of being on the losing end of the contract, the potential to gain a specified amount can be appealing.
Benefits of Investing in Commodities
Commodities can add diversification to a portfolio which can help with risk management. Since commodities have low correlation to the price movements of traditional asset classes like stocks and bonds they may be more insulated from the stock volatility that can affect those markets.
Supply and demand, not market conditions, drive commodities prices which can help make them resilient throughout a changing business cycle.
Trading commodities can also help investors hedge against rising inflation. Commodity prices and inflation move together. So if consumer prices are rising commodity prices follow suit. If you invest in commodities, that can help your returns keep pace with inflation so there’s less erosion of your purchasing power.
However, none of these benefits negates the risks involved with investing in or trading commodities.
💡 Quick Tip: Newbie investors may be tempted to buy into the market based on recent news headlines or other types of hype. That’s rarely a good idea. Making good choices shouldn’t stem from strong emotions, but a solid investment strategy.
Disadvantages of Investing in Commodities
The biggest downside associated with commodities trading is that changes in supply and demand can dramatically affect commodity pricing, which can directly impact your returns. Commodities that seem to go up and up in price can also come crashing down in a relatively short time.
There is also a risk inherent to commodities trading, which is the possibility of ending up with a delivery of the physical commodity itself if you don’t close out the position. You could then be on the hook to sell the commodity.
In addition, commodities don’t offer any benefits in terms of dividend or interest payments. While you could generate dividend income with stocks or interest income from bonds, your ability to make money with commodities is based solely on buying them low and selling high.
How to Invest in Commodities
If you’re interested in how to trade commodities, there are different strategies to consider.
Trading Commodities Stocks
If you’re already familiar with stock trading, purchasing shares of companies that have a commodities connection could be a relatively easy first step. Trading commodities stocks is the same as trading shares of any other stock. The difference is that you’re specifically targeting companies that are related to the commodities markets in some way. This requires understanding both the potential of the company, as well as the potential impact of fluctuations in the underlying commodity.
For example, if you’re interested in gaining exposure to agricultural commodities, you might buy shares in companies that belong to the biotech, pesticide, or consumer staples industries.
Or, you might consider purchasing energy stocks or mining stocks if you’re more interested in those commodities markets.
As you would with any other stock, you need to consider your portfolio’s current asset allocation, and whether adding certain commodity stocks to the equity portion is in line with your goals.
Recommended: What Is Asset Allocation?
Futures Trading in Commodities
As noted above, a futures contract represents an agreement to buy or sell a certain commodity at a specific price at a future date.
So, for example, an orange grower might sell a futures contract agreeing to sell a certain amount of their crop for a set price. A company that sells orange juice could then buy that contract to purchase those oranges for production at that price.
This type of futures trading involves the exchange of physical commodities or raw materials. For the everyday investor, futures trading in commodities typically doesn’t mean you plan to take delivery of two tons of coffee beans or 4,000 bushels of corn. Instead, you buy a futures contract with the intention of selling it before it expires.
Futures trading in commodities is speculative, as investors are making educated guesses about which way a commodity’s price will move at some point in the future.
Trading Commodities ETFs
Commodity ETFs (or exchange-traded funds) can simplify commodities trading. When you purchase a commodity ETF you’re buying a basket of securities, as you would when buying any type of ETF. These can target a picture type of commodities, such as metals or energy, or offer exposure to a broad cross-section of the commodities market.
A commodity ETF can offer basic diversification, though it’s important to understand what you own. For example, a commodities ETF that includes options or commodities futures contracts may carry a higher degree of risk compared to an ETF that includes commodities companies, such as oil and gas companies, or food producers.
Recommended: How to Trade ETFs
Investing in Mutual and Index Funds in Commodities
Mutual funds and index funds offer another entry point to commodities investing. So investing in a commodities mutual fund that’s focused on water or corn, for example, could give you exposure to different companies that build technologies or equipment related to water sustainability or corn production.
Even though these funds allow you to invest in a portfolio of different securities, remember that commodities mutual funds and index funds are still speculative, so it’s important to understand the risk profile of the fund’s underlying holdings.
A commodity pool is a private pool of money contributed by multiple investors for the purpose of speculating in futures trading, swaps, or options trading. A commodity pool operator (CPO) is the gatekeeper: The CPO is responsible for soliciting investors to join the pool and managing the money that’s invested.
Trading through a commodity pool could give you more purchasing power since multiple investors contribute funds. Investors share in both the profits and the losses, so your ability to make money this way can hinge on the skills and expertise of the CPO. For that reason, it’s important to do the appropriate due diligence.
Most CPOs should be registered with the National Futures Association (NFA). You can check a CPO’s registration status and background using the NFA website.
Stock Market Risks
While commodity risk is a factor when considering investing in commodity futures, it’s important to understand that all investments carry risk. For instance, stocks can gain and lose value as the companies that issue them perform well or poorly. It is always a possibility to lose all of the money put into a stock market investment in the case of a serious market decline or recession.
Of course, some market volatility is totally normal — and even healthy. And while nobody can predict the market perfectly, some tendencies can be seen over time.
For instance, while there’s no direct correlation between interest rates and stock market performance, in the past when interest rates go up, stock market performance tends to decline. That’s because companies, like individuals, can be priced out of taking loans they need for the continued growth and performance of their businesses, which may mean they have less money left over to reinvest or count as profit.
And during major global crises, like the recent outbreak of the novel coronavirus, markets can sometimes experience major turbulence and downturns.
The reality of risk is no reason to forego investing entirely, as investing is still one of the most powerful ways to grow wealth.
Managing Commodity Risk Through Diversification
Diversification means maintaining a variety of different asset types and classes — e.g. stocks, bonds, commodities, and other securities — and also ensuring that the investments within a given class come from different companies and industries.
That way if (and when) market volatility comes calling, investors will have their eggs in a variety of baskets, which may help mitigate the risk of steep losses if a single sector becomes too volatile.
Keeping a diverse portfolio can mean investing in stocks from a wide range of different companies with different attributes.
For instance, investors might choose small-cap, mid-cap, or large-cap stocks, which define companies based on the overall value of their market capitalization (the total cash value of outstanding stock the company has on the market). Investors may also choose to invest in companies from different industries, such as technology, renewable energy, communication or healthcare.
Along with including a multiplicity of company and stock types, investors can also pad out their portfolios with additional asset types, like government bonds or — you guessed it — commodities.
Because these assets sometimes perform in opposition to the market, they can be a good way to balance stock investments.
One easy way to get a lot of diversification with a relatively small amount of effort is to invest in ETFs and mutual funds.
Diversifying With ETFs and Mutual Funds
ETFs and mutual funds are slightly different, but operate in largely the same way: they’re baskets of assets, like stocks and bonds, that allow the investor to purchase a small piece of a wide swath of the market with a single buy.
ETFs, or exchange-traded funds, can be bought and sold just like shares of stock, and may track a well-known existing index like the S&P 500. ETFs can contain a range of different asset types, including commodities as well as stocks and bonds, and generally offer low expense ratios, since they may not be actively managed and don’t require as many trade or brokerage fees.
Mutual funds are similar to ETFs in their diversity of assets, but unlike ETFs, mutual funds are only bought and sold once per day, at the end of trading. Mutual funds are also often actively managed by a third party, which may offer some comfort to investors, but does tend to carry a higher expense ratio than would be found on a similar ETF.
Commodities trading is a high-risk strategy that may work better for investors who have a greater comfort with risk, versus those who are more conservative. Thinking through your risk tolerance, risk capacity, and timeline for investing can help you decide whether it makes sense to invest in commodities.
Fortunately, there are a number of ways to invest in commodities, including futures and options (which are a bit more complex), as well as stocks, ETFs, mutual and index funds — securities that may be more familiar.
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