Are you stuck in “Rate Prison”?—Let me loosen the handcuffs and set you free

In the last six to eight months, you’ve heard me talk ad nauseam about high rates, low supply, and how they’re combining to reshape the housing market across the country, across California, and especially here in greater Los Angeles. 

But what you haven’t heard me discuss—at least not in detail—are the inherent outcomes of the golden handcuffs people are wearing. 

The nobody market 

This is no longer a seller’s market or a buyer’s market—this is a nobody market.

Buyers are at a huge disadvantage for obvious reasons:

• Low supply
• Elevated prices
• +7% Interest rates
• Multiple competing offers—not the insanity of 2021, but many listings are still getting several bids

Sellers are at a huge disadvantage for less-obvious reasons:

• Fewer buyers
• Fewer competing offers
• More offers with contingencies
• +7% interest rates—unless you’re downsizing and can pay all-cash with the proceeds from your sale, you’re going to need a mortgage 

For sellers in particular, I don’t know that I’ve ever seen a market this strange. On the one hand, appreciating home values for the last decade means a sale will net substantial profits. But on the other hand, higher interest rates and prices might make buying a new home unaffordable—especially for those looking to upsize. 

Consequently, many of the (hopeful) sellers I talk to are now “rate prisoners” who feel stuck between a rock and hard place. So, rather than risk the unknown and sell, they’re deciding to stay put.

(The irony of which is, they’re only further impeding the fluidity of the market and exacerbating the supply shortage in greater LA, which is keeping prices higher than they should be…alas, I digress).

Weighing the options

For homeowners, it’s all about calculated risk right now—you’ve got to weigh your options. The two biggest considerations are:

• What’s your financial situation?

Are you in your prime earning years or are you a retiree? Are you sitting on a pile of cash that you can use to lower the amount you need to borrow and offset a higher monthly payment to the bank?

• Where are you trying to live next?

Do you need to upsize or downsize? Are you staying local or are you moving somewhere that comes with a lower cost of living? 

As you evaluate your answers to these two primary questions, you may come to realize that selling isn’t out of the question even in this environment—and that’s the first step to unlocking your golden handcuffs.  

Do you need to sell?

There is, of course, a subset of homeowners for whom the aforementioned two questions don’t really matter: those who need to sell. 

Divorcees, widowers, the elderly (stairs, assisted living, etc.)—any current homeowners who fall into one of these categories might be forced by life to bite the proverbial bullet and sell, despite unfavorable market conditions. 

People in this category are going to supply a BIG slice of the existing inventory pie that comes online in the next few years…unfortunately the pie itself won’t be that big. 

(Sidenote: My advice if you’re thinking about buying and know someone who might be in the “need-to-sell” camp—talk to them 1-on-1 and see if you can do an off-market deal.)

Empty nesters and growing families

You’ll notice that I didn’t say anything about empty nesters or growing families in the previous section and for good reason—they won’t always need to sell. 

What I mean is this, they’re often going to rent rather than sell. 

Young families in their prime earning years are often moving from owned apartments or condos to single-family homes. When the time to upsize comes, they’ll do everything in their power to turn their existing home into an income property, while buying a standalone single-family home that better suits the growing number of persons in their household.

Similarly empty nesters who’re looking to downsize are often in a financial position where they’re not obligated to sell—especially if they’re moving from an area with a high cost of living (e.g. Newport Beach, CA) to an area with a lower cost of living (e.g. Flagstaff, AZ). 

While not all of the empty nesters and growing families will be able to keep their current homes, many will, which means their supply will go into the rental market which is already seeing supply rise and prices fall for both short-term and long-term rentals. 

An unnatural housing cycle

For reasons already discussed, we’re in the throes of an unnatural housing cycle.

The normal housing cycle is about a decade—people stay in their home for seven to ten years, before they decide to upsize, downsize, or relocate to a new region. 

That isn’t going to happen this time around.

Due to the current environment, people are more inclined to just “make it work” for the time being. They’re accepting the circumstances for what they are and investing in additions or renovations, rather than listing their current home and moving to a new one. 

I expect current homeowners to extend the average cycle by about 20% to 30%. So, instead of moving every seven to ten years, the average homeowner is going to stay where they are for the next eight and half to thirteen years. 

Financing is fickle

Unless you’ve got a LOT of cash on hand, you’re going to sell your existing property first or take out a loan from a bank to get a new home.

Unfortunately, getting the financing for trading homes is really difficult right now—the lending market is tight. Bridge loan options are few and far between. 

For that reason, a lot of deals I’m seeing right now are layered with “contingent upon sale” language. Meaning, the deal falls through if the buyer can’t sell their existing home in a certain amount of time. 

And, trust me, the deals are falling through. While there are still lots of buyers out there, many have pulled back due to the high interest rate environment…

Which is making selling harder…

Which is making getting the cash to buy harder…

Which is making selling harder…

You see the pattern here, don’t you? 

Don’t take my word for it…

“New listings and signed contracts for single-family homes took a dive in Los Angeles County in July.

There were 2,093 contracts signed in July, a 14 percent decline from June when 2,392 new contracts were signed. There was a 20 percent decline in a year-over-year comparison with July 2022 when L.A. real estate was in the middle of a bonanza market, according to a recently released Douglas Elliman report.

New listings also declined in L.A. County. In July, there were 1,976 new listings, a 6 percent decline from 2,096 new listings in June. There was a 39 percent decline in a year-over-year comparison.

The decline in new listings and signed contracts is not entirely an L.A. story. Orange County and San Diego County had similar declines in signed contracts and listings, according to the report.”

What’s going to happen next…

Supply isn’t going to catch up with demand any time soon because home builders are being measured in construction (they’re still scarred from 2008) and many existing homeowners are staying put. 

Rates might come down a little in the next six to twelve months, but with inflation still not below the Fed’s target rate of 2% and a tight labor market, I don’t expect to see rates below 3% for several years. 

Which means mortgage rates aren’t going to get back below 3.5% to 4% for a long, long time…maybe five years…maybe ten. 

So, a lot of people are going to stand pat in their current homes and a lot of buyers are going to pull back. Rental supply will increase far more rapidly than demand (with over 500,000 units coming online) which will crush margins for landlords—especially newer landlords who acquired their rental property in the last three years. 

What you should do

Be honest with yourself and take stock of your situation. If you can afford to sell and buy, go for it. If you can’t, don’t. 

Timing the market is impossible, so if the money is there and you can make the numbers work, there’s no point in not going for that new home right now. But, if you decide to sell your current home and buy a new one, understand that things won’t happen as fast as they did two or three years ago.

Buyers are fewer and more cautious. Similarly, the supply of available homes for you to buy is more limited. Which is to say, you should expect to accept some contingencies on both the sell side and the buy side.  

As always, I’m here to serve you and my door is always open. No question or request is too silly—if you’ve got something burning in your mind, I want to hear it.  Shoot me an email at ShannonShue@KW.com or give me a call at 310-853-0335. Tell me a little bit about your situation and what you’re really looking for—from there, I can make a recommendation that best suits your needs. 

-Shannon