Today’s homebuyers settle in for the long haul

On average, how long do most of today’s buyers expect to own their home?

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More difficult news for today’s homebuyers: not only are prudent buyers facing higher interest rates and overpaying due to historically low inventory and stubborn seller pricing, but the home they buy today may very well become their prison for years to come for lack of a key to its resale.

Zillow forecasts the time it will take for a mortgaged homebuyer purchasing a median-priced home at the end of 2023 to be able to sell at a profit — and thus be able to purchase a replacement home. The report accounts for forecasted home price changes, closing costs, fees, home maintenance and interest.

Nationally, the average homebuyer will be able to sell at a profit in:

  • 13.5 years when they put 3% down;
  • 12.5 years when they put 10% down; and
  • 11.25 years when they put 20% down.

Here in California, the timeline to sell at a profit is a bit shorter, averaging for homebuyers with a 5% down payment:

The quicker timelines for these California metros comes down to the historically strong pace of home value growth here, which Zillow forecasts to continue.

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For our readers, a couple of caveats are needed to digest these figures. These timelines are projections into the future based on what has happened in the past forty years. The first 30 years through 2013 experienced the exuberance of price-enhancing activity delivered by the Federal Reserve dropping interest rates and pumping cash into the economy to support the resulting increased pricing. A mathematical abstraction.

The recent period of 2013 through today introduces the need for a further warning about these pricing projections – we have entered a half cycle of some 30 years of rising interest rates. Following the zero-bound year of 2012 interest rates, a pivot point, FRMs will trend towards increase. Thus, pricing increases for property will be left without the artificial enhancement of ever lower long-term interest rates, a given as we move through the next 20 years or so.

Another point which is both regressive and progressive in application to property pricing is our “California property pricing premium.” It’s around 1.5% annually and other states do not have this phenomena. This Cal premium is in addition to consumer inflation of around 2%-3% as maintained by the Federal Reserve through very short-term interest rates on which the ARM rate is established (not FRM rates).

Justifiably, the California Pricing Premium exists just because. We have a geography condition that is golden in attraction and at the same time very expensive to spread into in terms of both infrastructure and site development. Thus, support remains for the faster profitability for California locations, particularly along the coast and in adjoining valleys.

The insertion here is to expect the trajectory of increasing interest rates to gradually dampen forward real estate price increases divined by projection, as above, to not more than the annual 3.5% average increase — the 2% consumer inflation plus 1.5% Cal Price Premium – over the next couple of decades. The 10% annual averages are, well, history from a now inapplicable period.

Thus, the imprisonment before escape by sale of property and recovery of cash down payment and mortgage reduction, plus annual compounded interest on that amount, will be longer than in the past decades of declining interest rates ended in 2013.

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Reduced turnover = fewer agents

When homeowners need to stay in their home longer to recover their investment as having been worthwhile, turnover decreases and home sales volume lags. That financial need alone dampens the price a seller can demand and receive. But longing for 2021 pandemic conditions — lowest ever mortgage rates without support from the mortgage-backed bond (MBB) market and sparse inventory for selection — to juice up profits is to wait for the next Black Swan event. The Fed as the “lender of last resort” is often overlooked for what happened to FRMs in 2021.

Most homebuyers plan to stay put more than a few years when buying anyway. But for real estate agents, brokers and mortgage loan originators (MLOs) who rely on fee-producing transactions for a living, the prospect of fewer sales to go around poses significant challenges to their business models. Big brokerage offices will be the first line of zombie operations to fold. Already, independent brokers are fast, becoming associated to develop synergy for creating deals.

Frankly, the swell in home sales in 2021-2022 inflated agent numbers, a siren song for green agents looking for a quick buck. Now that sales have slowed dramatically — down roughly 40% from the 2021 peak — the number of active agents will spiral, with new agents dragging down even more experienced agents with them.

Watch for home sales volume to continue trailing in 2024. Then, real estate speculators returning by end of year 2025 will provide a “dead cat bounce” during the ongoing sales slump, with a sustainable recovery taking off with the return of end user homebuyers around 2026-2027.

In the meantime, to avoid becoming a statistic, the agents who survive the down years will get creative to seek out those buyers who are willing and able even in a recession. Huge down payments or all cash, when buying housing for the long haul at today’s best price has stability as its merit.

They can also find additional streams of income within the real estate industry, such as becoming a:

Subscribe to Quilixfirsttuesday’s weekly agent and broker newsletter, to track the housing recession’s path in California.

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