The market is crazy. So far, the experts’ predictions have been happening with low interest rates, low inventory, thus high prices. As we continue through the second month of the year, I was thinking about what major factors will be contributing to real estate in 2021 for Los Angeles. The two I came up with are what I call the “Two A’s.” They are Affordability and Appraisal.
Let’s start with Affordability. The cost of construction continues to rise along with the price of land, making it mathematically impossible to build a practical house with a resale under $1,000,000. You can check out my past article, Let’s Breakdown the Basic Cost of Building a Home in Los Angeles, where I discuss it more in depth. The only work around is through Small Lot Ordinance projects (classified as single family homes but on a practical basis think of them as detached townhomes), which I discuss in my article, The Greatest Value for a New Home in L.A. Because of this, people will be making moves to stay within budget. This might be to the suburbs (such as the San Fernando Valley) where you get more for your money, or even into areas such as Ventura County where you are close enough for the commute but get more bang for your buck. Because of the low interest rates increasing buying power, homes are getting sold in a weekend, with bidding wars to drive prices up. This is going to be a challenge for would be home buyers, especially Millennials where many are well established in their careers, have their student loans and other debts under control (hopefully) and starting families. They are primed to buy a home as that would be the natural next step. This also means that condos might see a bump in business as (1) more come to the market for the move up buyers and (2) they are the only affordable option for many. You can still buy a condo all in with less than $20,000 down. Don’t believe me? Check out this article I wrote, How to Buy in Los Angeles with Less than $20,000.
The second “A” is Appraisal. For those who don’t know, an appraisal is an evaluation of value for a property. This is usually required by the lender who sends an independent 3rd party to physically go to the home and compare it to others in the area to determine a value. With home prices going up, some appraisers are going to struggle with getting to the contract price. Appraisers are going to become quite the “bad guy or gal” as they will be breaking the bad news to their buyers that there are no comparable sales to support such a price. That’s why many buyers are waiving their appraisal contingencies or willing to pay $X above the appraised value. If they genuinely want the house, they may have to pay extra for it.
This year is going strong for many and a challenge for others. It will certainly be interesting to see what happens. There are also other factors such as big tech giants like Zillow making moves and we will see how the Biden Administration holds up when it comes to housing. These will all play a role going forward and will be shaping housing for at least the next year if not permanently.
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