Buyer Home Purchasing Power

Purchasing Power: An increase in interest rates by 1% translates to an 11% drop in the home a buyer is able to afford.

The experts and prognosticators may have had their timing off, but they collectively understood that it was not a matter of “if” interest rates would rise, but “when” they would rise. With the massive manipulation of the monetary policy by the Federal Reserve, the United States has been in economic, uncharted waters, making the art of forecasting rates not an exact science.

At this point, the pressure on interest rates to rise is real. But, after more than a decade of extremely affordable rates, everybody has become accustom to these affordable levels. It is time for a brief history lesson:

  • 1981 = 18%
  • 1990 = 10%
  • 2000 = 8%
  • 2007 = 6.5%
  • Today = 4.5%

Yes, 3.5% is a better rate; however, 4.5% is still a very low rate in historical context. Buyers should not wait for another drop. Instead, they should cash in on today’s mortgage rates. These low levels are an absolute gift based upon the economic history book.

Buyers must understand that the longer they wait to purchase, the greater the risk that rates will rise. As they rise, a buyer’s purchasing power erodes considerably the higher then climb. If mortgage rates climbed by 1% from where they are today, buyers looking for a $2,500 monthly payment would see their purchase power drop from $616,750 to $550,375; that’s a $66,375 drop in purchase price. For buyers looking for a $3,500 monthly payment, it drops from $863,500 to $770,500, a drop of $93,000. And, for buyers looking at a $4,500 monthly payment, it drops from $1,110,125 to $990,625, plunging by nearly $120,000.

Keep in mind, 5.5% is still a very low rate. The trouble is there are younger buyers in the marketplace who have never experienced rates above 5%. The housing market is not going to implode. It will not be the end of the world. But, it will eat into affordability and purchasing power. That 1% increase in mortgage rates will result in an 11% drop is what a buyer is able to afford.

With an improving economy, the new tax law, trade reform, and a new infrastructure plan, expect rates to rise. Buyers should not sit on the sideline and wait for them to drop. If they do, they will watch their purchase power crumble.

Choosing a Neighborhood

Location is most likely the one feature that adds most value to any real estate property. Therefore, much consideration should be given to the neighborhood where that home is located. Here are some items to consider:

Property Taxes

Property taxes can play a huge role in your overall cost of living. In California, we have Proposition 13, so property taxes have caps on how much they may go up each year. But there may be special taxes associated with the property above the base rate. It may be a good idea to check out the Orange County  Tax Collector site ; they provide an interactive map with multiple layers for your use.

Safety and Crime

Before you sign on the dotted line, search sites like and CrimeReports to get a sense of the safety level of a particular neighborhood. As with all homebuying decisions, determining what level of crime you feel safe with is all part of the process of choosing a neighborhood.

Topography and Geography

Geographic features like views and privacy can add value, but they may also include additional costs and/or considerations. Are you in a special flood zone or a seismic zone that could impact your insurance costs?


School zones come to mind when thinking of location, especially if you have children (or plan to have them soon), as they tend to affect home values. If schools are important to you, evaluate the schools in your neighborhood and which homes fall into which district. Additionally, there may be community centers or parks that increase the value of the neighborhood.

If you are targeting Mission Viejo, I have a great site where you can check out the schools, homes, parks, etc. in the area. Check it out here.

There are other things to consider when choosing a home and and neighborhood such as current and future property values, access to area amenities, public transportation, hospitals, etc. I can help you research your target neighborhood so you can make the best decision possible as a home buyer.

Orange County Real Estate Market Data January 2018

The first months of the Orange County Real Estate market is shaping up to be very short on supply on long on demand. While this may ease up a bit heading into summer, right now the numbers are indicating a hit seller’s market.

In just two weeks, demand has increased 22% while supply has only increased 2%. To understand why the market is changing so rapidly, let’s dust off that old Econ 101 book that details supply and demand. When there is a lot of supply and very little demand, prices fall, which favors buyers. When there is very little supply and tremendous demand, prices rise, which favors sellers.

Since 2012, the supply of homes on the market has been severely constrained and demand, propped up by historically low interest rates, has been through the roof.

Here are some interesting data points:

  • The active listing inventory increased by 67 homes in the past two weeks and now totals 3,774. Expect the inventory to increase from now through mid-Summer. Last year, there were 4,320 homes on the market, 546 more than today.
  • There are 25% fewer homes on the market below $500,000 today compared to last year at this time and demand is down by 28%. Fewer and fewer homes and condominiums are now priced below $500,000. This price range is slowly disappearing.
  • Demand, the number of pending sales over the prior month, skyrocketed in the past two weeks by adding an additional 317 pending sells, up 22%. The average pending price is $902,385.
  • The average list price for all of Orange County remained at $1.8 million over the past two weeks. This number is high due to the mix of homes in the luxury ranges that sit on the market and do not move as quickly as the lower end.
  • For homes priced below $750,000, the market is HOT with an expected market time of just 40 days. This range represents 37% of the active inventory and 59% of demand.
  • For homes priced between $750,000 and $1 million, the expected market time is 55 days, a hot seller’s market (fewer than 60 days). This range represents 17% of the active inventory and 20% of demand.
  • For homes priced between $1 million to $1.25 million, the expected market time is 68 days, a slight seller’s market (between 60 and 90 days).
  • The expected market time for all homes in Orange County dropped from 77 days to 64 in the past two weeks, a slight seller’s market (60 to 90 days). From here, we can expect the market time to drop dramatically through mid-February.

I would advise sellers to jump in to sell any time from now until May for best results, and buyers should remain patient, ready to write a great offer and diligent in their home search if they want to achieve success.

Tips on Writing Your Offer So a Seller Listens

There are all types of sellers, all types of buyers and all types of properties. Each scenario is going to be different. But if you are a buyer who has found a nice home you really like, and it is listed by a seller who takes some pride in their property, here are a few things to think about and take into consideration if you want the seller to take you and your offer seriously.

  • It all starts with the first showing of the property. If you want to make a good impression on a seller, show up on time, leave the home the way you found it, and follow any specific showing instructions.
  • If the seller is present, take your lead from the seller. If they are staying in the background, don’t bother them. If they seem like they want to show you their property, allow them to do so. Try not to ask any personal or financial questions and keep the comments positive and brief.
  • Let your agent speak to the seller’s agent to try and determine any special circumstance or motivation of the seller. See if the seller’s agent will disclose to your agent any deal-breakers for the seller in terms of length of escrow, etc. Perhaps you can make them very happy with special terms if they will budge more on price.  How, other than price, can you make things easier on the seller? Think: give and take.

The last thing you want to do to a seller who has a lovely home is insult them or get them upset with you or any offer you write.

  • Sellers are just like you, and need to make a move, and the stress is no fun.  If you can’t meet their price, or it is obvious their price is too high, submit your best or almost best offer in terms of price in hopes of starting a back and forth conversation with them.
  • The offer itself and the manner it is presented should also reflect respect and professionalism to the seller. It should be complete and neat. The buyer’s agent should communicate honestly and courteously with the seller’s agent. The seller doesn’t want to open escrow with someone who may seem “flaky.”
  • If the offer price is low compared to list price, the buyer and their agent should respectfully submit recent sales to validate the price offered.
  • It may help to write a very short letter of introduction to the seller. Discuss this with your agent who may have insight into whether or not it may be a good idea in your particular instance.
  • Be prepared to wait for the seller to get back to you, especially if the price offered may appear low to the seller.  Sometimes sellers take things personally; the last thing you want to do is to get a seller upset so that they just don’t want to work with you or even respond to your offer.

Bottom line is you want to put your best face forward on any offer you present and with any initial dealings with the seller; especially if it is a seller’s market. Often, your initial offer will stick with the seller; they will form an opinion of you as a buyer and may not budge from it even if you sweeten the offer later. First impressions matter! Show them you are serious, you are motivated, willing to work with them and be flexible where you can.

Best of luck!