Well… it happened. The Fed made an aggressive move last week, raising rates .5% – the largest rate hike since 2000. This move was meant to fight inflation, which is at a 40 year high. The action by The Fed sparks an interesting conversation about the future of the real estate market. Check out our latest YouTube video below where Brad and Josh are answering the question everyone is asking right now.
Real estate has always been a tremendous hedge against inflation: you purchase a home with your current income and as the “world” becomes more expensive, wages increase, etc…your debt service (assuming you purchased with a fixed rate mortgage) remains the same.
On the other side of the coin, the rate hike obviously makes it more expensive to borrow. Here is an example:
Let’s assume you purchased a home for $1,250,000 with 20% down in December 2021, when the rate on a jumbo loan was 3.125%. Your monthly principle and interest payments on the $1,000,000 of mortgage debt would be $4,283.75.
Today, that “same” $1,000,000 of mortgage debt may come with an interest rate of 4.875%, which bumps up your principle and interest payment to $5,292.08 per month.
A difference of $1,008.33 per month.
SO WHAT DOES THIS MEAN? As stated in last month’s newsletter, we believe the insane Seller’s market that resulted from the pandemic is beginning to normalize and the real estate market will become less competitive as interest rates increase. However, Los Angeles housing supply remains tight, and we are STILL in a Seller’s market.
Good properties are still very much in demand, but we believe the steep increases in prices over the past few years will taper. That is not to say that we believe prices will drop in the near future, but rather, they will not increase so dramatically. The additional expense of higher interest rates will certainly put downward pressure on pricing, but lack of inventory appears to be the real issue.
We like to put the REAL in real estate and pride ourselves on being real estate advisors above all else, so give us a call or send us an email with any questions you might have.
We are also excited to share with you our new listing in SANTA MONICA, and we continue to add more videos to our YouTube channel, Keyes to LA, covering a range of topics including what a $2 million home looks like in Los Angeles and a sneak peek at a new construction listing in Eagle Rock coming to market this summer.
Click HERE to read more in our May Newsletter.