As home prices continue to decline in greater Los Angeles County, more would-be buyers are making offers on distressed properties with the idea of “scoring a deal,” as Dataquick president John Walsh so aptly phrased it in his company's recent report. But is now really a good time to buy real estate in LA?
The answer really depends upon the buyer’s situation and motives. Do you want a place to live or an investment that will turn a quick buck. If it’s the latter, forget about it. After all, that's what got us into the real estate mess in the first place -- a lot of people buying homes at prices they really couldn’t afford long term. We couldn’t resist the bubble buying frenzy that, feeding upon itself, inflated LA real estate values with no end in sight. Risk takers kept getting rewarded and conservative shoppers kept wondering if they’d be locked out of the American Dream forever. But as any tech stock investor will tell you, no bubble lasts forever.
Experts say LA home prices will continue to decline somewhere near low double digit percentage points. Let’s say LA home prices continue to decline by another 20%. That would put the median home price somewhere around $250,000, based on a combination of LA, Orange County and Riverside median prices today. Not a bad price to pay to own a home in LA.
However, some experts also say that as prices do down, mortgage rates will go up in 2009. The logic is, rates will rise as values begin to level out, sending demand for mortgage bonds and mortgage rate securities up. Since these bonds and securities drive mortgage rates, not the Fed Funds Rate, no amount of Fed rate lowering will stop the interest rate rise. After all, it’s already at the lowest rate ever.
Even if interest rates rise to 7.5 percent, this would only increase the monthly payment by about $300/month on a home that today would cost about $1752/month at the current LA County median price of $300,000. So the bottom line is, if the experts are right, then we’re pretty close to the bottom. Close enough that, based upon projected LA home price declines and mortgage rate increases, your mortgage bill may continue to go down in 2009, but not by a lot.
Should you buy a home in LA now? If you think you’ll still have a job for the next several years as the economy continues to tank, and you really want to put down roots, why not? If you have income doubts, wait it out a bit longer to see how your situation turns out. The macroeconomists will boo this advice, but from personal experience, the safe road usually wins out in the long run. Just ask your friendly neighborhood tortoise who bought a house when prices were low, and refused to buy a bigger, more expensive home during the bubble buying frenzy.
