In December, as expected, the Federal Reserve raised its benchmark interest rate by half a percentage point and signaled more tightening next year as it continues to battle high inflation. It’s a fight that’s expected to slow our economy and raise unemployment.
The half-point increase brings the federal-funds rate up to a range of 4.25% – 4.5% (the highest level since 2007).
The central bank has raised rates from a level of near zero in March to try to dampen inflationary pressures in the wake of the pandemic. In new projections, Fed officials penciled in 5.25% as the top end for its benchmark rate. That’s higher than their September forecast of 4.75%. Powell himself said it was impossible to know if a recession would occur, and if one does, how long it would last or how deep it would be. Higher borrowing costs are expected to depress our economy in 2023. The median forecast among Fed officials is for tepid growth, at an annual rate of 0.5%. That’s down from the prior forecast of a 1.2% growth rate. Their forecast sees a slightly stronger growth rate returning in 2024. Officials project the unemployment rate will rise to 4.6% in 2023 from 3.7% in November. As a result, Fed officials project steady declines in inflation, starting with a drop to 3.1% in 2023 and then moving to a more normal 2.1% by 2025.
Home Prices Fall All Over Southern California
In a related story, Southern California home prices fell in November, marking the fifth time in six months that prices declined amid a broad slowdown in the housing market. The six-county region’s typical home price dropped 0.9% from October to $815,911 last month, according to data released by Zillow.
The typical price, (which Zillow defines as roughly the average of the middle third of the market), is now 6.3% below the peak reached in May. Home values are broadly falling for the first time in a decade because borrowing costs have exploded this year and priced many people out of the market. Mortgage rates have more than doubled to the mid-6% range, a result of high inflation and the Federal Reserve’s attempts to fight it. In individual Southern California counties, home price declines from the peak range from a 3.5% drop in San Bernardino County to an 8.6% drop in Orange County. In our own Los Angeles County, prices are down 7%. The declines aren’t enough to offset the rise in borrowing costs, even though mortgage rates have come down from recent highs of just over 7%.
For example, if in November someone bought the typical priced home in L.A. County, and received the prevailing mortgage rate of 6.5%, their monthly payment would still be $360 more than if they bought the typical priced home at May’s peak since rates were lower then, according to a Zillow analysis that assumed 20% down payment in both cases. Many analysts expect home prices will keep falling in 2023. Here is how home prices changed last month in each of the six Southern California counties.
- In Los Angeles County, the typical home price fell 0.5% from October to $842,752 last month. Prices are now 6.3% lower than the county’s peak reached in May.
- In Ventura County, the typical home price rose 1.2% from October to $837,891 last month. Prices are now 3.9% lower than the county’s peak reached in May.
- In Orange County, the typical home price fell 3.4% from October to $1,014,194 last month. Prices are now 8.6% lower than the county’s peak reached in May.
- In Riverside County, the typical home price fell 0.5% from October to $599,428 last month. Prices are now 4.6% lower than the county’s peak reached in June.
- In San Bernardino County, the typical home price fell 0.6% from October to $523,830 last month. Prices are now 3.5% lower than the county’s peak reached in June.
- In San Diego County, the typical home price rose 0.1% from October to $877,278 last month. Prices are now 7% lower than the county’s peak reached in April.
Foreclosures Increase By 64 Percent in November
ATTOM Data Resources released its November 2022 “Foreclosure Market Report,” which shows there were a total of 30,677 U.S. properties with foreclosure filings (i.e. default notices, scheduled auctions or bank repossessions) – up 57 percent from a year ago. Nationwide, one in every 4,580 housing units had a foreclosure filing in November 2022.
States with the highest foreclosure rates were again: Illinois (one in every 2,401 housing units with a foreclosure filing); Delaware (one in every 2,736 housing units); New Jersey (one in every 2,916 housing units); South Carolina (one in every 3,195 housing units); and Wyoming (one in every 3,237 housing units). Lenders repossessed 3,770 U.S. properties through completed foreclosures (REOs) in November 2022, up 64 percent from last year.
States that had the greatest number of foreclosure starts in November 2022 again included: California (2,244 foreclosure starts); Texas (2,114 foreclosure starts); Florida (1,709 foreclosure starts); New York (1,575 foreclosure starts); and Illinois (1,243 foreclosure starts). Those major metropolitan areas with a population greater than 1 million that had the greatest number of foreclosure starts in November 2022 included: New York, NY (1,593 foreclosure starts); Chicago, IL (1,028 foreclosure starts); Houston, TX (685 foreclosure starts); Miami, FL (657 foreclosure starts); and Los Angeles, CA (642 foreclosure starts).
How Much Do You Need to Earn to Afford a House?
The Los Angeles Times reports that the annual income needed to buy a home in Los Angeles skyrocketed past $220,000 this fall, with higher mortgage rates and inflation cutting deeper into household incomes. That means the ability to own a home is a goal inching further and further away from more families and households in Los Angeles (where the median annual household income in 2020 was only $65,000).
In sharp contrast, the yearly salary needed now to buy a median-priced home in L.A. (and comfortably make the mortgage payment) is now $221,592, up nearly 41% from last year, according to Redfin.
Across the U.S., home buyers need to earn $107,281 a year, or 45.6% more, in 2022 compared with the previous year to buy a typical home. Meanwhile, home prices have remained relatively steady, meaning that those who can still afford a home need to readjust their budgets, while others have been priced out of the market altogether. The biggest spike has been in Florida, where the average mortgage payment increased more than 73%, and where an annual salary of $131,535 is now needed to afford a home. The salary needed to buy a median home increased to $128,892 in Miami as well, a rise of more than 63% in a single year. In 93 metro areas analyzed, Redfin found all of them needed at least a 30% salary increase to buy a median-priced home. Prospective home buyers in at least half those areas needed to make a minimum of $100,000 a year.
After practicing law for 35 years (specializing in real estate litigation), Lloyd Segal assumed the leadership of the Los Angeles County Real Estate Investors Association in 2017 from the late Phyllis Rockower. Lloyd is an author, real estate investor, mentor, public speaker, and LANDLORD. He is the also the author of four real estate reference books, including “Stop Foreclosure in California” (Nolo Press), “Stop Foreclosure Now” (American Management Association), “Foreclosure Investing” (Regency Books), and “Flipping Houses” (Regency Books). The Los Angeles County Real Estate Investors Association is the oldest (1996) and largest investor group in California. In his role as President, Lloyd is busy expanding LAC-REIA’s events and programs for members and real estate investors. For more information, visit www.LARealEstateInvestors.com.