On the mind of nearly every homeowner thinking of selling and every person thinking of buying a home, whether it's Palos Verdes homes or real estate around the South Bay, is how inflation, interest rates, and the high likelihood of a significant real estate price correction will affect their net proceeds when selling and their monthly ownership expense when buying. Continue reading below video
I've been thinking about this a lot and I've finally come up with some objective data that you can consider whether you're selling or buying Palos Verdes homes or real estate around the South Bay. We have to make some assumptions when modeling scenarios, so I had to do some extensive research to find this data for you.
One question that I had to answer for myself is what the typical home purchase looks like in Palos Verdes. What is the typical financing in a transaction? I researched title company records and discovered something that surprised me. Of all the sales of Palos Verdes homes in the last 6 months, nearly 29% of the homes were purchased for cash! The chart below demonstrates the standard deviation chart for only the financed transactions because any discussion about "averages" is pointless without the perspective of the probability distribution for the amount financed in a transaction.
Assumptions for the "Is it better to wait for a real estate correction before buying Palos Verdes homes or should you buy now?" question
In this analysis then, I will base my calculations on a transaction with a loan equal to 61% of the purchase price, the average loan amount in a transaction for the purchase of Palos Verdes homes.
The best case scenario for interest rates was a few months ago when you could get a loan for around 3.25% (sometimes less, sometimes more depending on your credit rating and other factors). Current rates are about 5.5% (Rate sheet from Sheila Azadi at Wells Fargo on October 7. 310-493-5751 sheila.Azadi@wellsfargo.com
It's probable that the real estate market correction's catalyst will be the Fed overcorrecting by raising interest rates too much. There is ample evidence of this historically as they always seem to reach for that "sledge hammer" to the economy. Many articles exist evidencing the projection that the Fed will continue on the path to higher interest and I believe we may see 7-8% interest rates for 30-year fixed-rate mortgages in the coming year. I will assume a 7.5% rate.
The real estate market here for Palos Verdes homes and for South Bay real estate, will not correct as much as it did in the debacle of 2008 when banks over-leveraged and gave out "zombie loans" to those who had no business getting a loan. Banks are much better capitalized now. Homeowners have much higher equity positions in their homes. Foreclosure rates were four times greater in 2008 than now. The correction of 25-45% (depending on specific locations in the South Bay) that occurred during that period, will not be repeated, in my studied opinion. Rather, I believe this next correction will be on the order of 20-30%. I will assume since I have to pick a number for my model below, that this next correction will be 25%. This article further explains why the next correction will not be as deep as the last correction
The next assumption for this analysis is the sale price. I will be using a home sale price of $2,200,000 which is the median sale price for Palos Verdes homes in the 3 months.
When you look ONLY at the numbers it's very clear that it's worth waiting. The lower the loan-to-value ratio, the more it pays to wait. However, real life is not always "just about the numbers" as displayed here. There are tax advantages to owning a home, there is the pride of ownership to owning a home, and there is value in being the ruler of your castle than beholding to a landlord as you throw away money in rent. All of these factors come into play. And on top of all that, if you look back over nearly a half-century of real estate price cycles, you could have purchased a home at ANY peak of ANY cycle and if you waited 10-12 years or so, you would have made money.
Is it worth trying to time the market?
And what's absolutely certain is that you will never be able to time your purchase at the exact bottom of the market. Let's face it, there are a lot of people much smarter than me and much smarter than you who get it wrong all the time when it comes to timing the bottom or the top of ANY market. So being realistic, the "ideal" scenarios played out here are highly likely not going to happen for you.
That all being said, please take a look at the spreadsheet below and when you've thought about it, use the "CONTACT US" tab at the top right of this screen to send me a note with your questions. In the meantime, I hope this analysis helps you and that you can confidently conclude you have me as a reliable, truthful resource to help you. There’s no “right” answer for everybody, every person’s situation and motivation for buying and/or selling is different. I urge you to be a critical thinker and make a decision that’s right for you.
If you’re a homeowner thinking of selling, what does this information do for your timeline?
Looking forward to having a conversation with you about real estate!
| Using Average LTV Ratio for Palos Verdes homes sold in last 3 months | ||
| "Now" | "After Correction" | |
| Price | $2,200,000 | $1,650,000 |
| Interest Rate | 5.50% | 7.50% |
| Loan Amount (61% of Purchase Price) | $1,342,000 | $1,006,500 |
| Principal+Interest+Property Taxes Monthly Payments | $9,727 | $8,619 |
| Monthly Payments are $13,296 higher per year if you wait to the bottom of the correction | ||
| Price Savings by waiting for the bottom of the market | $550,000 | |
| Number of years you must own before the savings in price isn't worth it | 42 | |
| Using 80% LTV Ratio for Palos Verdes homes sold in last 3 months | ||
| "Now" | "After Correction" | |
| Price | $2,200,000 | $1,650,000 |
| Interest Rate | 5.50% | 7.50% |
| Loan Amount (80% of Purchase Price) | $1,760,000 | $1,320,000 |
| Principal+Interest+Property Taxes Monthly Payments | $12,101 | $10,881 |
| Monthly Payments are $14,640 higher per year if you wait to the bottom of the correction | ||
| Price Savings by waiting for the bottom of the market | $550,000 | |
| Number of years you must own before the savings in price isn't worth it | 37 | |
| Using 80% LTV Ratio for a $1.2MM home | ||
| "Now" | "After Correction" | |
| Price | $1,200,000 | $900,000 |
| Interest Rate | 5.50% | 7.50% |
| Loan Amount (80% of Purchase Price) | $960,000 | $720,000 |
| Principal+Interest+Property Taxes Monthly Payments | $6,600 | $5,897 |
| Monthly Payments are $8,436 higher per year if you wait to the bottom of the correction | ||
| Price Savings by waiting for the bottom of the market | $300,000 | |
| Number of years you must own before the savings in price isn't worth it | 36 | |
