Southern California home buyers, already bedeviled by an acute shortage of houses for sale, have received more bad news in recent days as interest rates on fixed-payment home mortgage loans have climbed above 11% in their second major surge this year.
Fixed-rate mortgages have increased 1 to 3 percentage points since mid-March, boosting housing costs sharply. The monthly payment on a $100,000 mortgage loan, $823 at an interest rate of 9.25%, increases to $972 when the interest rate is 11.25%.
"This is bad timing" for anyone buying a home, said Robert K. Heady, publisher of Bank Rate Monitor in North Palm Beach, Fla.
The rate increases come when a lack of homes on the Southern California resale market has ballooned the value of choice residential real estate and has left many would-be home buyers and real estate brokers frustrated and angry.
It is a market that has, as Venice real estate broker Richard Rosenthal described it, "put smiles on the face of the sellers, pain on the face of the buyers and has brokers tearing their hair out."
The latest interest rate spurt on mortgage loans has accompanied Friday's increase in the discount rate to 6% from 5.5% and the boost in the prime rate to 8.75% from 8.25%. The discount rate is what the Federal Reserve charges on loans to U.S. financial institutions; the prime rate is the benchmark rate that banks charge their best customers.
The average annual percentage rates on fixed-rate loans by large California lenders exceeded 11.1% in early September, according to a weekly Times survey. Those rates averaged less than 10.8% at the end of August. The Veterans Administration has also raised the maximum rate for its federally backed home mortgages to 10.5% from 10%, its third increase this year.
Rates on fixed-payment mortgages surged toward--and in some cases pushed through--11% this spring, but then leveled out between 10% and 11% through most of the summer. The latest surge seems certain to accelerate the trend toward consumer use of adjustable-rate home loans, which have low introductory interest rates, and to take business away from mortgage lenders who specialize in fixed-rate financing.
"We're just sitting around waiting for what's going to happen next," said George Francis, senior vice president of Metmor Financial, one such Los Angeles mortgage lender.
Would-be home buyers in California are also being plagued by a surge in the value of residential real estate.
According to real estate industry figures, the median price of a California home reached an all-time high of $141,599 in July, 13% higher than it was just six months ago. Borrowers need an annual income of almost $45,000 to qualify for loans on homes in this price range, according to the California Association of Realtors.
The July median sale price was $143,220 in Los Angeles, $168,656 in Orange County and $128,333 in San Diego. (The median price means that half the homes are selling for more than that and half are selling for less.)
With prices escalating, would-be buyers are falling increasingly behind in their ability to afford homes. Less than a third of the state's households could afford to buy an existing median-priced home in July, the Realtors association said in its latest monthly survey.
The shortage of homes in Southern California is largely a regional phenomenon that, some real estate experts say, reflects in part the impact of powerful "slow-growth" movements. Housing supplies are normal or even in excess in most of the country.
Real estate observers in Southern California said there has not been a similar shortage in years. The California Association of Realtors confirms that inventories of existing homes for sale have not been this low since the trade group began keeping such figures five years ago.
"From San Diego to Santa Barbara, you're seeing less homes for sale on the market any time since 1979," said Sanford Goodkin, a real estate consultant in San Diego.
Onslaught of Bidding Wars
Single-family housing construction in California fell nearly 18% in July contrasted with the same period a year ago, the Construction Industry Research Board said. The slower the pace of new-home construction, the fewer homes that are eventually available for resale.
The market conditions have meant unexpected windfalls for sellers, some of whom are receiving multiple offers well above their asking prices. Rather than having to negotiate, sellers are seeing the prices of their homes driven up in bidding wars.
"I've seen sales where homes have sold for as much as $40,000 above the list price," said Barbara Knox, a real estate agent for Merrill Lynch Realty in Palos Verdes.
Despite the rise in interest rates, Orange County builders and brokers said they have not seen a slowdown in sales, which have been exceptionally brisk. They added, however, that home buyers are increasingly turning to variable-rate mortgages, which offer lower interest rates than the fixed-rate variety, to help them qualify for home purchases.