Today, the successful Southern California home-bidders formula seems to start out offering perhaps 10% over the homes list price, slapping down beaucoup bucks as the down payment, waiving the appraisal contingency (no requirement that the property has to appraise at or above the sale price), closing the transaction faster than you can blink and of course adding an escalation clause (I will see your other offers of X and raise mine by Y).

The inventory shortage is driving prices over the brink.

There are now 15% fewer listed homes for sale in Los Angeles County than one year ago, 44% fewer Orange County listings, 62% fewer San Bernardino County listings and a staggering 66% fewer Riverside County listings, according to Steve Thomas of Reports on Housing.

Listed properties were on the market an average of 57 days in the four counties last year. Now, it takes just 23 days on market prior to going into escrow — 60% faster, Reports on Housing numbers show.

California homeowners pay on average $1,663 per month for principal and interest mortgage payments, second highest in the country (Hawaii is highest) due to the state’s notoriously high housing prices, according to Lending Tree.

Home prices are popping nationally as well. This week the Federal Housing Finance Agency announced home prices increased 12% from January 2020 to January 2021.

Case-Shiller’s numbers showed an 11.2% year-over-year increase for the same timeline, stating in its press release the U.S. hasn’t seen a gain like this since February 2006.

When will home prices stop leap frogging? When will this insanity end, and how will it end? Are we talking about a price collapse or a soft, easy and tolerable landing?

I asked five experts for their observations. All five say, it depends.

How long will it take the vaccination efforts across the country to stop the pandemic? How will the economy respond to the federal stimulus package? Are more households looking to buy to get out of congested, virus-prone areas? How will the stock market perform?

But most importantly, will mortgage rates keep rising?

“The main reason for increased demand for housing is the historically low mortgage rates,” said Raymond Sfeir, director of the Anderson Center for Economic Research at Chapman University.

For example, Sfeir noted, the 30-year conventional mortgage averaged 12.7% in the 80’s, 8.12% in the 90’s, 6.29% in the 2000’s and 4.09% in the 2010’s. Rates averaged just 3% over the past 12 months.

“A major slowdown in activity in the housing sector will occur once mortgage rates reach the 4% level,” he said.

Lending Tree Chief Economist Tendayi Kapfidze expects a significant slowdown if rates hit 4.5% to 5%.

“Dramatic interest rate increases could trigger a bubble,” he said. But if rates climb slowly, that bubble will “deflate rather than pop.”

The California Association of Realtors home affordability index is currently at 27%, according to Jordan Levine, CAR chief economist.

That means just 27 out of 100 of households can afford the median home price. That’s still better than its 2007 affordability index of just 11%.

“Affordability is going to slow demand at some point,” said Levine. “Home prices are growing faster than income.”

Todd Teta, Attom Data Solutions chief product and technology officer, said a new coronavirus surge, more bad economic news, a stock market crash or an increase in the number of homes for sale could “have a cascading impact that could burst the bubble.”

But Ed Pinto, director at the American Enterprise Institute, said the housing market is in a boom, not a bubble. Nonetheless, he worries about speculative pressures in today’s market and wonders if rising national debt could trigger an international financial crisis.

“The U.S. has $7 trillion, $8 trillion, $9 trillion on its federal balance sheet,” he said. “What if it can’t roll over its debt?”

All that leaves us with more questions than answers.

Perhaps the best indicator is the National Association of Realtors pending home sales number. With 30-year mortgage rates at their highest level since June, pending sales – that is, those in escrow — slipped by a whopping 10.6% in February.

A wake-up call?

Freddie Mac rate news: The 30-year fixed rate averaged 3.18%, 1 basis point higher than last week. The 15-year fixed rate averaged 2.45%, unchanged from last week.

The Mortgage Bankers Association reported a 2.2% decrease in mortgage application volume from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $548,250 loan, last year’s payment was $45 more than this week’s payment of $2,365.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with 1-point cost: A 30-year FHA at 2.375%, a 15-year conventional at 2.125%, a 30-year conventional at 2.75%, a 15-year conventional high-balance ($548,251 to $822,375) at 2.375%, a 30-year conventional high-balance at 2.99% and a jumbo 30-year fixed at 3.125%.

Eye catcher loan of the week: A 30-year jumbo fixed-rate with 10.1% down payment, no mortgage insurance at 2.99% at 1.5 point cost.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

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