Gen Z borrowers accounted for 13.2% of all mortgage originations in third quarter of 2023, up from 9.6% in the same period the year prior, according to the Transunion’s Credit Industry Insights report released on Thursday. While millennials remain the largest cohort obtaining mortgages, Gen Zers are aging into traditional homebuying ages. All the generations except for Gen Zers saw their share of the market decline in the quarterly report.

Overall originations, however, continued a decline from the heady days of the COVID-19 pandemic. Transunion reports that only 1.2 million mortgages, both purchases and refinances, were originated in Q3 2023. That’s a 22% decline from the 1.5 million mortgages originated in the same quarter 2022.

“Persistently high mortgage rates remain a significant headwind in the mortgage market, particularly affecting demand for refinance,” said Satyan Merchant, a Transunion senior vice president, in a press release. “Purchase originations will continue to drive the mortgage market over the next several quarters, as demand for refinance will depend on mortgage rates falling significantly below current high levels.”

The good news is Q3 2023 saw the smallest year-over-year decline in the past seven quarters, indicating the mortgage origination market may be near its bottom. And Q3 2023 numbers nearly mirrored the second quarter of 2023 numbers, both just about 1.2 million originations.

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JLL’s U.S. retail outlook report for third-quarter 2023 stated that 145 million square feet of retail space has been demolished in the past five years. What has been the result of this change?

The reality is we are in a sub-5% vacancy environment right now. There’s literally no new space to lease. At the same time, there is a significant amount of retail demand for growth and expansion, and that is putting a lot of upward pressure on rents.

This year, we’ve seen rent growth in retail, something that hasn’t been achieved for a really long time. Compounding that is just the lack of new retail construction. If you go back to the 2006 through 2008 time frame, we were delivering about 150 million square feet of new retail space each year. But in the past couple of years, it’s been closer to 15 million square feet.

Do you see retail construction increasing this year?

In the short term, the answer is no. There are limited construction starts that are permitted and approved, or are already in the ground for 2024 and 2025. Given that there has been a reset in land values over the past 12 to 18 months, perhaps there will be an increase in retail construction. But it will have to be in 2026 and beyond. Costs have significantly increased, so it’s just really hard to make the economics work for new retail construction in primary and secondary market locations.

What do you see for the retail sector in 2024?

Rents are going to continue to rise in 2024, but the growth in retail is going to slow down a bit. I think we are still coming out of the pandemic-fueled environment, with retailers having great balance sheets and a lot of pent-up demand from consumers. But the consumer is coming under a little more pressure today, so I think that retail is going to continue to be really healthy, but consumers will be less exuberant and more realistic in their buying.

How will retailers handle the lack of new space?

Healthy retailers are going to be looking for creative ways to expand their footprint. They may retrofit vacant spaces that aren’t their typical prototype in order to build new stores. They may go into secondary and tertiary markets where they otherwise might not have gone before. You are likely to see some consolidation of retailers and that, perhaps, will create some opportunities either for expansion or addition through subtraction. If rates cooperate and we are in a lower interest rate environment — and given the amount of new capital that wants to be in retail — there is going to be a ton of investment activity in the retail space.

The JLL retail report showed that malls were still suffering due to negative absorption in 2023. What do you see happening with malls this year?

What’s happening in the mall space is continued bifurcation between models that are thriving and properties that require reinvention. The best-in-class, fortress-style malls are actually seeing increased productivity and really strong same-store sales growth. In most instances, the best of the best assets are performing as well, if not better, than they ever have.

How are malls reinventing themselves?

In some cities, you continue to see multifamily developments at malls. You will also see more medical offices. Malls are sort of living, breathing organisms, and I think they drive a lot of traffic. So, they have the ability to sustain and generate other uses at the mall as well.

A lot of the better-quality malls have more outward-facing food, beverage and entertainment elements to them. It’s not just pass through a door and enter a cavernous mall space today. There is a lot of activity in terms of repositioning and redevelopment, including creating exterior spaces around entrances. It is not just an inward-facing product anymore. ●

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The danger is that the current high interest rate environment will make refinancing the loans on devalued properties difficult and expensive, resulting in waves of defaults and more pain for everyone involved. A lot of numbers have been bandied about concerning the volume of loan maturities, but according to the Mortgage Bankers Association (MBA), of the $4.6 trillion in existing commercial real estate loans, about $2.6 trillion will mature in the next four years.

This issue became real in February 2023 when Canadian real estate conglomerate Brookfield walked way from $784 million in loans connected to two office towers in downtown Los Angeles. At the time, media outlets reported that Brookfield had made it clear months earlier that it might not be able to refinance debt obligations on the properties. Brookfield was described as a bellwether for where the office market was headed — and it wasn’t alone. That same month, Columbia Property Trust defaulted on about $1.7 billion in debt tied to seven major properties.

The defaults by two high-profile landlords helped to solidify a sense of foreboding, which has continued to this day. In this issue of Scotsman Guide, in fact, author Rob Finlay writes about the refinancing problem (“Scale the Wall of Maturities” on Page 30) and discusses what mortgage originators can do to help mitigate the impact.

What’s unclear is how large this massive wave of refinancing needs will be. Yes, the default rate is up and there have been a few high-profile cases, but the disaster has yet to hit commercial real estate on a wide scale. Is it possible it won’t?

Jamie Woodwell, the MBA’s vice president of research and economics, explains that there are aspects of this problem that industry watchers need to keep in mind. This includes the fact that loan maturities are spread over a long period of time, in a wide variety of industries and in every geographic location, so the results will be as varied as the properties in question.

Other factors may help to lessen some of the damage, or at least spread it out. For instance, Woodwell found that of the $4.6 trillion in commercial real estate debt, nearly $2 trillion is for multifamily properties, a relatively strong sector with typically longer loan terms than other asset classes. Less than 10% of multifamily debt was set to mature in 2023, but there will be more in later years. For instance, about 16% of current multifamily debt will be due in 2032 when the economy is bound to look much different than today.

Woodwell remembers when the MBA began creating its lending survey during the global financial crisis of the late 2000s. There were worries then, too, about a wall of maturities combined with limited capital availability.

“One of the key takeaways that we found then, that I think continues to be true today, is that commercial mortgages tend to be a relatively long-lived asset,” Woodwell says. “You have an awful lot of loan types out there and, among them, commercial mortgages tend to be longer in nature. So, even now in the peak of 2023, with the greatest volume of maturities in our survey, it’s still only 16% of the total outstanding balance.”

Inflation was also reported to be falling quickly at the end of 2023 and Federal Reserve members have said that rate cuts are in the offing. Such a move would greatly lessen the sting of refinancing.

That’s not to say that commercial real estate isn’t stressed. Property values have cratered, with Capital Economics recently estimating that overall commercial real estate values fell 11% in 2023 alone and are expected to shed another 10% this year. The office sector, alone is expected to lose another 20% in 2024.

Woodwell says there’s a great deal of uncertainty about where property values stand. But it’s clear that delinquencies are on the rise. Woodwell points out that, through the first 10 months of last year, delinquencies rose in all asset classes, with the office delinquency rate exceeding those of hospitality and retail for the first time since the onset of the COVID-19 pandemic. “We are seeing stress in the market,” Woodwell says. “Pretty much every capital source has reported an increase in delinquency rates.”

One sector that may do better than expected is retail. Capital Economics expects retail valuations to increase by 6% per year through 2028. Plenty of retail sites remain under stress, but Chris Angelone, the co-leader of JLL’s national retail group, believes that poorly run operations have already been flushed out, so the owners now in place at the better-performing malls are often the best operators. Lenders would be loathe to take back those properties when quality operators are already in place.

“I think, generally speaking, that lenders are going to work with their borrowers on performing assets,” Angelone says. “But obviously, the valuations are going to be much different than before.” ●

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“To remain competitive, originators also need to embrace the role of technology in streamlining the lending process.”

Whether working with multifamily properties in city centers, suburbs or more rural settings, it is crucial for commercial mortgage brokers to be aware of market trends and to tailor financing solutions that align with the evolving needs of borrowers and lenders. By delving into the details of a project, originators can better meet the demands of today’s dynamic markets.

Financing strategies

One of the most important issues for commercial real estate investors is to develop the right financial strategy. Mortgage brokers must be adept at crafting financing strategies that not only meet the financial needs of borrowers but also align with the risk appetite of lenders. From government-sponsored programs to bridge loans, traditional bank loans and other products, the array of financing options can be overwhelming.

The government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, are quasi-governmental entities that guarantee third-party loans and purchase loans on the secondary market. Loans guaranteed by the GSEs tend to offer attractive terms such as competitive interest rates, higher leverage and favorable underwriting standards. Borrowers who qualify for GSE loans benefit from lower costs and extended repayment periods.

While GSE loans are popular, not all borrowers qualify. Traditional bank loans, even though the underwriting tends to be more stringent, can provide alternatives. But these mortgages often come with higher interest rates and lower leverage. For borrowers who may not meet GSE or bank loan criteria, the exploration of alternative financing vehicles such as private equity or nonbank lending institutions becomes essential. These options may offer more flexibility but often come with higher costs.

Consider a scenario where a small-scale multifamily development project doesn’t meet the criteria for a GSE or bank loan due to its size. In such cases, commercial mortgage brokers can showcase their ability to address diverse financing needs by guiding clients toward alternative financing solutions, such as private loans, crowdfunding or community development programs.

Risk mitigation

A paramount consideration in multifamily housing finance is risk mitigation. Originators must conduct comprehensive due diligence on both the property and the borrower. This includes an evaluation of the property’s location, local market conditions and potential for income generation. Protecting a client’s investment and minimizing potential risks requires a proactive approach.

For instance, consider a multifamily project that’s located in an area prone to natural disasters. Implementing risk mitigation strategies — such as being prepared for how underwriters will assess a property, securing robust insurance coverage, incorporating resilient building materials, and conducting thorough feasibility studies of the property and geographic area — can enhance the project’s ability to withstand unforeseen events.

In a real-world scenario, a 50-unit apartment complex faced significant challenges. It was the borrower’s first venture into property management, so lenders had concerns about the efficiency of the operation and the future satisfaction of tenants. These concerns left lenders worrying about the long-term value of the asset.

Strategic approach

With this particular deal, a mortgage originator who was equipped with a strategic approach to risk mitigation recommended forming a partnership with an experienced property management firm. The strategic partnership contributed to improved tenant satisfaction, resulting in lower turnover rates and increased lease renewals.

Daily operations were streamlined, ensuring timely maintenance, rent collection and adherence to regulatory requirements. A rigorous tenant screening process was implemented to identify potential challenges. Historic data from the property management firm demonstrated successful tenant retention, efficient operations and increased property value over time.

The proactive screening process led to a reduction in tenant-related issues, fostering a more stable and harmonious community within the multifamily complex. Continuous improvement encouraged the borrower to invest in ongoing education and training in property management practices. In time, the borrower developed a proficiency in property management, addressing initial challenges and building a solid track record. Over a three-year period, the property’s annual appreciation rate grew from 5% to 20%.

By leveraging historic data, introducing proactive measures and fostering a commitment to continuous improvement, the broker helped the borrower reach his goal while also contributing to the long-term success of the multifamily project. It underscores the importance of comprehensive risk assessment, as well as the power of data-driven decisionmaking, to ensure the viability and profitability of a multifamily investment.

Regulatory landscape

Beyond strategic planning, commercial mortgage originators must also be aware of the regulatory environment. The multifamily housing sector is subject to a complex regulatory system that varies across jurisdictions.

Originators have to stay informed about local, state and federal regulations that govern multifamily housing developments. It is imperative that properties are always in compliance with zoning laws, building codes and environmental regulations.

For instance, consider a scenario where a neighborhood opposes the development of apartments. This resistance might stem from concerns about increased traffic or noise, or changes to the community’s character.

In such cases, effective communication and collaboration with local authorities, community leaders and residents become crucial. Providing examples of successful resolution strategies, such as community engagement initiatives or modifications to project plans, can shed light on the navigation of regulatory challenges.

In another regulatory context, understanding the intricacies of affordable housing tax credits and how they can be used to incentivize multifamily development in certain areas can be instrumental. By incorporating such details, mortgage originators can highlight their expertise in navigating complex regulatory landscapes.

Changing technology

To remain competitive, originators also need to embrace the role of technology in streamlining the lending process. The integration of digital tools for loan origination, document processing and communication can enhance efficiency and reduce turnaround times.

Consider a scenario in which a mortgage company adopts artificial intelligence (AI) systems to streamline the initial stages of the loan application process. Through AI-driven chatbots or virtual assistants, prospective borrowers can engage in real-time conversations to share basic information, such as income, credit history and property details. This not only expedites the data collection process but also provides a more user-friendly and accessible experience for applicants.

Furthermore, the integration of blockchain technology in document processing can revolutionize the verification and validation of financial documents. Blockchain’s decentralized and secure ledger system ensures that all parties involved — including borrowers, lenders and regulatory bodies — have access to the same unalterable information. This significantly reduces the risk of fraud and errors in document handling, leading to a more transparent and trustworthy lending process.

Communication is another critical aspect of the lending journey. The use of cloud-based collaboration tools allows mortgage brokers to communicate seamlessly with clients, underwriters and other stakeholders. For instance, adopting a secure platform for document sharing, virtual meetings and real-time updates ensures that all relevant parties are on the same page throughout the lending process. This enhances communication efficiency while also contributing to a more collaborative and transparent client experience.

Economic perspective

Like technology, the economic landscape plays a pivotal role in the success of multifamily housing projects. Mortgage originators must be aware of economic indicators, interest rate trends and overall market conditions.

For instance, during an economic downturn, originators might proactively advise clients on interest rate locks to secure favorable terms. Providing examples of past economic scenarios and the corresponding strategic decisions made can offer valuable insights into the importance of economic considerations in multifamily finance.

During the Great Recession, the real estate market faced unprecedented challenges. Multifamily projects were particularly vulnerable as tenants faced financial hardships. In this tumultuous environment, a savvy mortgage broker advised a client to pivot from high-end luxury apartments to affordable housing.

By utilizing historic data that indicated a surge in demand for affordable housing during economic downturns, the originator guided the client through a strategic shift. The result was not only a successful weathering of the recession but the establishment of a profitable portfolio of affordable housing units.

● ● ●

Mortgage originators who successfully navigate the multifamily landscape understand the intricacies of market trends, employ strategic financing approaches and mitigate risks. They also stay abreast of regulations, leverage technology and factor in economic considerations. To be competitive, originators need to embrace these insights and craft innovative solutions that contribute to the growth and success of multifamily housing projects. ●

The post Be the Master of Multifamily Housing appeared first on Scotsman Guide.

“The wall of maturities represents a critical crossroads for the commercial mortgage market, impacting both borrowers and originators.”

This impending wall of maturities has far-reaching implications that will disrupt the financial landscape. It will potentially lead to a shortage of financing options, an increase in defaults and a decline in commercial property prices. While this problem is serious, there are strategies that commercial mortgage brokers and borrowers can employ to mitigate the cash-flow and financing challenges that lie ahead.

Looming crisis

This phenomenon of maturing loans within a concentrated time frame arises for several reasons. Key factors include a surge of originations during the low interest rate environment of the early 2010s, a tendency among borrowers to lock in favorable rates with longer maturities, and the cyclical nature of the commercial real estate market.

As a result, these loans are now reaching maturity simultaneously, coinciding with a period of higher interest rates and economic uncertainty brought about by hawkish monetary policy. The wall of maturities represents a critical crossroads for the commercial mortgage market, impacting both borrowers and originators.

With so much market turbulence, looming defaults and few deals transacting, one of the most significant concerns is the valuation gap. Lenders are minimizing proceeds and prospective buyers are seeking discounts for asking prices.

There is little middle ground for borrowers to account for debt-service-coverage ratio stresses, leading to reduced loan-to-value ratios and a potential decline in commercial real estate prices. Morgan Stanley estimates that commercial property values could plummet by as much as 40% from their recent peak, which would have a cascading effect on the industry.

Lender reaction

It’s important to note that the impact of these maturities are likely to vary depending on the type of asset. For example, office properties are expected to be hit harder than industrial or multifamily properties.

Responding to the rising default risks, banks are setting aside substantial provisions for loan losses. This approach could make them more cautious about lending money in the future, creating tighter lending conditions. Even the government-sponsored enterprises, Fannie Mae and Freddie Mac, are likely to be impacted, which will further complicate the refinancing of loans.

In response to the increased risk of default, lenders may impose higher spreads on interest rates and become stricter with underwriting requirements. This will restrict leverage and make it more challenging for borrowers to meet the necessary criteria, potentially exacerbating the financing crunch.

For borrowers, current loans with impending maturities also raise concerns regarding stresses tied to increased escrow and cash-reserve costs. As financing becomes scarcer and more expensive, the strain on borrower cash flow and liquidity adds another layer of complexity to the situation.

Mitigate challenges

Mitigating the cash-flow and financing challenges posed by these impending maturities requires a multifaceted approach. Mortgage brokers should communicate openly with borrowers and offer advice to help them successfully navigate the financial risks while also reducing risk to the lender.

First, consider cash-flow management. Borrowers have begun deferring payments and distributions to investors and equity holders to preserve cash, making it easier to meet other financial obligations. Additionally, selling noncore assets (such as vacant properties or underperforming assets) can help raise necessary funds.

Next is asset optimization. To enhance the value of their properties, borrowers must continually evaluate benchmark data for their respective markets. Making capital improvements to properties can increase their values and make them more attractive to potential lenders. Offering competitive rents, strategic marketing and exceptional customer service can further fortify a property’s position in the market.

The third is debt optimization. The dramatic shift in interest rates calls for a fresh approach to debt optimization. Instead of maximizing loan amounts at low rates, borrowers must focus on minimizing new infusions of equity and limiting capital calls to investors. With today’s higher-for-longer rate environment, as well as general uncertainty for both the short and long term of the yield curve, being proactive is essential as continued rate volatility will keep borrowers on their toes.

Running sensitivity analyses based on the forward curve can help borrowers assess their options effectively. If feasible, borrowers should consider fixed-rate loans with shorter terms or cash infusions to buy down interest rates. If permissible, they can seek to extend terms with their existing lender. The latter approach should be tailored to the loan type and lender, with borrowers presenting a compelling case to justify the extension.

Take action

The key to navigating the situation is proactive planning and preparation. Borrowers and brokers should start taking action now to prepare for the impending challenges. Here are a few steps they can take.

• Seek rescue capital. In some cases, borrowers may need to secure rescue capital or new equity investors. This infusion of funds can help address financial shortfalls and provide a lifeline to properties that face financing challenges.
• Plan and prepare. The impending wall of maturities will arrive swiftly, so planning and preparation are critical for borrowers and brokers. As lenders and servicers grapple with increasingly imminent extension and modification requests, maintaining open lines of communication and demonstrating consistent effort will be essential.
• Be realistic. It is crucial to have a realistic outlook on the future of an asset and the owner’s sources of funds. Loan extensions, discounted payoffs and principal paydown options may not be readily available without a well-thought-out plan.
• Stay informed. With attractive loan options limited, mortgage originators should keep clients informed about terms and rates. Defeasance consultants and third-party specialists in debt markets, hedging and interest rate derivatives can help clients create individualized strategies that take their personal circumstances and risk tolerance into account.

● ● ●

These oncoming maturities are a critical challenge facing commercial mortgage originators and their clients. The potential consequences, from a drop in commercial property prices to a reduction in lending options, are severe and should not be taken lightly. But with proactive planning and the adoption of effective strategies, mortgage brokers can help borrowers mitigate the risks and emerge from this challenging period with their financial stability intact. ●

The post Scale the Wall of Maturities appeared first on Scotsman Guide.

One reason for this is the homeownership gap between Black and white families, with homes accounting for so much personal wealth. The homeownership rate for Black families is about 45% compared to nearly 75% for white families.

“If the cost of compliance is too high, we are going to see banks cutting growth again to stay below that threshold.”

The National Association of Real Estate Brokers (NAREB), a network of Black real estate professionals, recently released its 10th annual State of Housing in Black America (SHIBA) report. NAREB president Courtney Rose Johnson spoke to Scotsman Guide about the report and her group’s Building Black Wealth Tour, which includes events in 100 cities on April 13 to highlight Black homeownership potential.

The Black homeownership rate reached nearly 50% before the Great Recession. Will it surpass this mark in the near future?

It’s definitely possible, but some things would have to change. First, we have a tremendous housing inventory shortage. Our ability to be able to place a buyer in a home that’s affordable is a challenge.Second, there’s a lot more education and financial literacy that has to happen. The SHIBA report has shown continuously that there are over 2 million potential Black mortgage-ready homebuyers. Why haven’t they purchased? Is it the downpayment? Is it that they don’t know that they’re mortgage ready?

Federal policies helped to create this situation and you’re calling for federal policies to fix it. What are you hoping happens?

We all know a lot of discrimination was basically policy driven. So, we’re asking, for example, for Fannie Mae and Freddie Mac to look at their pricing grids and move toward more accurate, up-to-date credit-score models. Using just one type of credit-score model is not necessarily advantageous for Black and brown borrowers. If you look at the average African American, the VantageScore versus FICO is usually higher because of some of the things that VantageScore uses.

There’s a lot of things that the federal government could do to increase housing stock. How are cities using their Community Development Block Grants? Can some of the regulations, zoning and building requirements in certain cities be made more flexible? A lot of things that can happen from the government side would make homeownership more achievable for us.

Are you surprised that housing is not more of a conversation in an election year?

Housing affects everybody. As the pricing goes up around the country, the conversation about affordable housing isn’t just about low- to moderate-income families. I like to use the phrase “workforce housing,” meaning somebody that goes to work every day — teachers, firefighters, police officers, etc. — being able to buy housing in their price range. Housing production, interest rates, all these things are not just affecting Black and brown communities but affecting all of the communities out there.

Another worrisome issue is the number of homes purchased by Black borrowers that are vulnerable to climate change, right?

This is our second year in a row bringing this issue up. There’s a map in the report that shows the Black population in the country is in more highly populated areas in the South, Northeast, etc. Those same areas fall along the coastline, areas more susceptible to flooding and things of that nature. So, it’s something we are very conscious of as we push to increase homeownership. We’re also focused on home preservation, setting up Black homeowners in situations where they can sustain themselves as global warming and environmental challenges increase.

What are you hopeful for in the future?

We have launched the NAREB Building Black Wealth Tour as a response to the State of Housing in Black America. We’ve also launched the NAREB Black Developers Academy to help our members that are real estate developers scale and increase their production to be able to help with the housing shortage. We’re excited that Black consumers are coming out to get the information to figure out how they can become homeowners. ●

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Its beauty encompasses ski-ready slopes, alpine lakes, sandy beaches and glittering skyscrapers. And it’s a cultural center, where stars are born and trends are set. But for the average Californian, the cost of living is too high. Only 15% of households could afford a median-priced home as of third-quarter 2023, according to the California Association of Realtors. Consequently, California has the second-lowest homeownership rate among all states, trailing only New York.

More construction is desperately needed, but zoning issues, expensive fees, high material costs and scarce land make it difficult for developers. New zoning rules and approval processes have been implemented since Gov. Gavin Newsom took office in 2019, but most changes focus on multifamily buildings in an attempt to ease the state’s rental affordability crisis.

The number of new homes built reached a 15-year high point in 2022, but demand still isn’t being met. State officials say 180,000 new units per year are needed, with about 123,000 built in 2022. About half of those were single-family homes. The state wasn’t on track to meet that number in 2023. From January through November, 53,000 permits were authorized for new single-family homes.

Californians are getting creative to achieve homeownership, despite the challenges and a more expensive mortgage market. Many buyers are choosing to put down more money, with help from family or local downpayment assistance programs. Those who can are paying in cash or buying down interest rates. And many are choosing to “house hack.”

House hacking came to prominence several years ago, and renting out extra bedrooms to help pay the mortgage has become a relatively common practice. But Californians are leading the charge on a different kind of house hacking: the construction of accessory dwelling units, or ADUs.

Zoning changes in 2017 made it much easier to add ADUs to single-family lots in California, and construction of these units grew from 1,100 in 2016 to 20,600 in 2022 — or nearly 17% of all units built that year. ADUs are faster and less expensive to build than traditional homes.

These units can be financed with home equity loans and cash-out refinances. In October 2023, the Federal Housing Administration (FHA) property rehab financing program was updated to allow more ADUs to qualify. Additionally, FHA underwriting will now recognize both existing and anticipated rental income from ADUs to qualify borrowers. California even has a grant program to help lower-income homeowners build ADUs.

This trend may not solve the housing crisis in California, but ADUs can help homeowners afford their mortgage while raising their property value. Even if they’re not being rented, ADUs are a good option for homeowners looking to create multigenerational housing for family members without sacrificing privacy or space in their home. ●

Home sales in California, which slowed significantly in the second half of 2022, rebounded slightly in the second and third quarters of 2023 before falling again. According to the California Association of Realtors (CAR), the seasonally adjusted annual rate of existing single-family home sales in the state totaled 223,940 in November. This was the lowest rate recorded since the Great Recession and represented a 5.8% year-over-year decrease.

Bolstered by a lack of supply, median home prices rose last year. In January 2023, the median price was $751,330, the lowest since first-quarter 2021, according to CAR data. Prices wobbled but rose throughout the year to reach $822,200 in November.

Despite overall growth in home prices, California’s most expensive markets saw the most dramatic declines in the nation, according to a SmartAsset analysis of Zillow data. The Bay Area cities of Dublin, San Francisco, Palo Alto and Fremont were the four cities most impacted, with home values dropping by an estimated 13% to 15% during the year ending in May 2023.

What the Locals Say

The Greater Sacramento market has definitely slowed down in the past year, but it’s still a healthy market, in my opinion. We have a lack of resale homes on the market, but there’s a lot of new home construction in the area. Unlike the Bay Area, we have more land availability, so we have more developers who are taking some of the agricultural lands and expanding out. Our boundaries are pushing out, and we’ve got a lot of opportunity and a lot of growth.

Right now, I would say the majority of homes being purchased are new construction. They have more inventory and there’s more building going on. On the resale side, I would say it’s slowed down, but it’s still a very hot market. If homes are priced right, they’re selling in 10 to 15 days. The market is still strong, but new home construction is stronger than resale.

I’m seeing people from the Bay Area and other states that are wanting to move out of those locations. They want larger homes, larger yards, more community. We have that affordability compared to a lot of major cities in the United States. We have the ability to be outdoors all year round, with accessibility to Lake Tahoe, the Bay Area, San Francisco and Southern California. It’s a lot safer than a lot of other cities, and you have community support and that small-town feel.

3 Cities to Watch

ANAHEIM

Due to its status as an entertainment destination, Anaheim has an economy that differs from many of its Southern California neighbors. Disneyland generates billions of dollars each year for the regional economy. This once-affordable Orange County market saw a 14.2% increase in median home sales prices during the year ending in September 2023, the biggest uptick in the nation. The metro area’s median price is now $1.1 million, while the median price in the city is $875,000.

CHULA VISTA

The San Diego metro area is pricey, with households in nearly every city and suburb paying more than half of their income on major homeownership expenses. The exception is Chula Vista, the bayside city that’s south of San Diego and just north of the Mexican border. On average, homeowners here allocate 48% of their income to mortgage and real estate tax payments, with a median asking price of $725,000 and a median household income of $96,200.

BERKELEY

The Bay Area has seen home values tumble in the past year after prices shot up 36% from 2020 to 2022. Berkeley is no stranger to this phenomenon as the city’s estimated average home value fell by more than 11%, or $183,000, during the year ending in May 2023. But the highly desirable suburb, home to the University of California at Berkeley, was slightly more insulated than some of its more expensive neighbors, which saw prices plummet by as much as 15%.

Sources: Bankrate, California Association of Realtors, California Department of Finance, CalMatters, Forbes, John Burns Research and Consulting, KSWB-TV, Los Angeles Times, Office of Gov. Gavin Newsom, Orange County Register, San Francisco Chronicle, SmartAsset, The Real Deal, The Sacramento Bee

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The government-sponsored enterprise recently performed a study on conforming-loan borrowers with credit scores of at least 740 and a loan-to-value (LTV) ratio from 75 to 80% who took out a mortgage for a home purchase or refi of a single-family home.

Focusing on points purchases that bought permanent interest reductions throughout the life of the loan, Freddie Mac found that 58.8% of purchase mortgage borrowers paid discount points last year, up from 31.3% and 53.6% in 2021 and 2022, respectively. Even more paid for discount points on refis, with 82.4% opting to purchase points on cash-outs and 59.9% buying them on non-cash-outs.

Notably, refinance borrowers also opted for more points. Purchase borrowers typically paid for 0.99 points on their loans, while non-cash-out borrowers paid for 1.16 points and cash-out borrowers opted for 1.76 points.

Even with so many taking advantage of points, though, Freddie has found that the interest rate differential between those who do and those who don’t comes out to be very small. Through November 2023, the average effective rate on purchase mortgages for borrowers who didn’t buy discount points was 6.69%. For borrowers who did pay for points, the average effective rate on purchase mortgages was 6.86%.

The finding that borrowers who opted against points had a lower effective rate than those who did is surprising, and Freddie warns that it cannot conclude a negative relationship between discount points and interest rates because its study “[did] not control completely for borrower observed and unobserved attributes.” But the results of the study nevertheless imply that discount points may not be all that they’re cracked up to be, and with interest rates on their way down again, it will be interesting to watch whether homebuyers stay on the discount points bandwagon.

Another takeaway from the analysis was that, while Freddie focused on borrowers with LTVs between 75 and 80% and credit scores above 740, the likelihood of paying points was higher for borrowers of lower credit quality last year. In fact, it’s a recent trend that higher credit quality borrowers are paying fewer points compared to all borrowers as a whole. From 2018 to 2021, borrowers that matched the profile used by Freddie and its study bought a similar average amount of points as the purchase borrower pool as a whole. But starting in 2022, borrowers with higher credit qualities diverged, paying about 0.06% fewer points on average than all purchase borrowers.

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That’s according to the company’s Real House Price Index (RHPI), which measures the price changes of single-family homes adjusted for how income and interest rate changes affect consumer buying power. The index jumped 11% year over year in November, driven by an annual uptick of 0.6 percentage points in the 30-year fixed mortgage rate and a 7.7% year-over-year rise in nominal home prices.

Adjusted consumer homebuying power, according to the RHPI, decreased 3.3% yearly as median household earnings simply haven’t kept up with gains in prices and rates. Taking the adjustment in consumer homebuying power into account, house prices are 7.7% above their 2006 housing boom peak.

“For homebuyers, holding prices constant, the only way to mitigate the loss of affordability caused by higher mortgage rates is with an equivalent, if not greater, increase in household income,” said Mark Fleming, chief economist at First American. “Even though household income increased 3.4% since November 2022 and boosted consumer house-buying power, it was not enough to offset the affordability loss from higher rates and rising nominal prices.”

Even with mortgage rates remaining heightened for some time now, it’s the impact of persistently buoyant home prices that has stood out to Fleming.

“Nationally, house prices reached their peak in May of last year before gradually declining to a low point in November 2022. Since then, house prices have resumed an upward trend as housing demand continues to outpace supply,” said Fleming. “Despite affordability challenges driven by elevated mortgage rates, November 2023 data indicates that home prices reached a new peak for the tenth month in a row.”

During November, prices had declined from their recent peaks in just 15 of the top 50 markets tracked by First American. And even in those cooling markets, prices have still heated up over the past year.

Take Sacramento, for example. California’s capital is among the cities with starkest price drops between peak to November. Home prices dropped over 8% from April 2022 until early 2023, but home prices in Sacramento have regained an upward trend since. In November, the housing market in Sacramento was overvalued by approximately $217,000, per First American’s data.

Inventory woes, exacerbated by the lock-in effect spurred on by high rates, continue to keep the price needle fixed firmly upward.

“While the general expectation was that a higher mortgage-rate environment would prompt house prices to adjust downward, the lack of housing supply has kept a floor on how low prices can go,” Fleming said.

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A Q4 2023 survey from the real estate marketplace found that 21% of homeowners are considering selling their homes within the next three years, up from 15% one year prior.

Moreover, the survey found that the share of homeowners considering selling their home was virtually the same whether the interest rate on their mortgage was above or below 5%. Consider that just six months prior, homeowners with rates above 5% were almost twice as likely to consider selling than those with rates below that threshold.

More homeowners, even those with low rates, are apparently warming to the idea of selling, and the current mortgage rates, which remain above 6.5% even though they’ve eased of late, appear to be shrinking as a barrier, at least psychologically.

An increase in homeowners deciding to list their houses is helping relax ongoing supply woes, though the drip is slow. Per Zillow’s figures, inventory grew annually in December for the first time since April. Inventory levels, according to Zillow data, are now 36% below pre-pandemic averages — not an ideal level, but closer to equilibrium than the 46% deficit in May 2023.

The recent easing of rates has helped on the buyer side as well, with monthly mortgage payments on a typical home now at $1,790, or $143 less than they were in October, according to Zillow. Taking the national average into account, it’s the first time since April last year that a new mortgage with a 20% downpayment eats up less than 33% of the median household income.

“Buyers found significant savings as rates fell. But mortgage rates are fickle things, as we’ve seen in recent weeks, and they’ll play a massive role in determining appreciation and affordability — especially for first-time buyers — going forward in 2024,” said Skylar Olsen, chief economist at Zillow. “Fortunately, rate lock appears to be wearing off for some homeowners, who show encouraging signs that they’re ready to come back to the market.”

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