Forget sky-high mortgage rates — Southern California buyers flush with cash have pushed home prices to an all-time record.
The price for a typical home across the six-county region in March was $869,082, a 9 percent increase from a year earlier, the Los Angeles Times reported, citing figures from Zillow.
That’s 1 percent higher than the previous record in June 2022.
With interest rates clocking in the upper 6 percent range, the monthly mortgage payment on the average home now tops $5,500, after a 20 percent down payment.
Home prices hit a record high despite the high cost of borrowing because of too few homes for sale and a wealth gap with some buyers holding bags of cash who can bypass the soaring rates.
When interest rates first spiked in 2022, buyers retreated, inventory piled up and home prices fell. Then the would-be sellers stalled, with many deciding they didn’t want to move and give up their sub-3 percent mortgages for costly loans.
Inventory plunged and enough buyers returned to send home prices back up, according to the Times. The new buying pool: wealthy first-timers who aren’t forsaking a low-cost mortgage.
Others are keeping their old home and buying another.
Or they’re selling their old home and shoving their considerable equity into down payments well over 20 percent.
“People who have cash are not paying too much attention to interest rates,” Alin Glogovicean, an agent with Redfin who specializes in northeast L.A. He estimates a third of his deals include all-cash buyers, with another third plunking down at least 50 percent to launch a mortgage loan.
At least two-thirds of the buyers with down payments of at least 30 percent aren’t investors, he said, but people who want to live in the home — often professionals such as architects who have saved, liquidated stock portfolios, built up equity or received help from family.
Some are willing to break retirement nest eggs, an ill-advised strategy, according to financial experts.
Some 23 percent of Los Angeles County homes sold in February were bought with all cash, up from 16 percent in 2021, according to Redfin.
Across the region, home prices have set records in Orange, San Bernardino, San Diego and Ventura counties. In Los Angeles and Riverside counties, prices are less than 1 percent from their all-time highs.
Only 11 percent of households in Los Angeles and Orange counties could afford a median-priced house during the fourth quarter, the smallest number since the housing bubble of the mid-2000s, according to the California Association of Realtors.
While the number of listed homes has risen, inventory is still tight and expected to remain slim, according to forecasters. Rates may dip, but are expected to remain elevated.
Going forward, that may mean prices won’t soar but also won’t fall much — if at all, especially because incomes for many households are growing.
“We are going to continue to see robust price growth, but nothing near where we were in the pandemic,” Orphe Divounguy, a senior economist with Zillow, told the Times.
If interest rates plunge, homes would become more affordable, but a new wave of buyers could flood the market and put more upward pressure on prices.
To help housing truly become more affordable, Divounguy said, there must be housing construction and continued income growth. “The way out of this is not going to come from mortgage rates,” he said.
Across the state, home construction fell last year, with fewer building permits from the previous year, according to the Times, though there are signs of a turnaround in single-family construction of for-sale homes.
— Dana Bartholomew
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Southern California home prices hit a record in March amid sky-high mortgage interest rates, a combination that’s creating the most unaffordable housing market in a generation.
The average for the six-county region reached $869,082 in March, according to Zillow. That’s up 9% from a year earlier and 1% higher than the previous all-time high in June 2022.
With rates hovering in the upper 6% range, the mortgage payment on the average home now tops $5,500 — if you can put 20% down.
“It’s bananas,” Tommy Kotero, a 43-year-old refinery worker, said last weekend after touring a dated, $899,000 house in north Torrance with visible cracks in the ceiling and walls. “The asking prices for what we are getting is crazy.”
How home prices hit a record despite the high cost of borrowing is a tale of too few homes for sale, combined with a wealth gap that has equipped some buyers with reams of cash that negate the effect of high rates.
When interest rates first soared in 2022, buyers backed away en masse, inventory swelled and home prices dropped.
Then potential sellers all but went on strike, with many deciding they didn’t want to move and trade their sub-3% mortgages for a loan at more than double that rate.
Inventory plunged and enough buyers returned to send home prices back up. Many of these buyers are well-heeled first-timers who aren’t ditching a low-cost mortgage.
Others are holding on to their old home and buying another. Still more are selling their old home and turning their considerable equity into hefty down payments well over 20%.
“People who have cash are not paying too much attention to interest rates,” said Alin Glogovicean, a real estate agent with Redfin who specializes in northeast L.A.
He estimates that in about one-third of his deals a buyer is paying all cash. Another third put down at least 50%, with a mortgage on the rest.
At least two-thirds of the buyers with down payments of at least 30% aren’t investors but people who want to live in the home, he said. They are professionals such as architects and Hollywood types who have saved, liquidated stock portfolios, built up equity or received help from family.
Some are willing to dip into retirement savings — a strategy many financial experts advise against.
Nationally, similar trends are afoot, according to a Zillow survey, with the share of home buyers putting at least 20% rising, as well as those who received help from family and friends.
In all, 23% of L.A. County homes sold in February were bought with all cash, up from 16% in 2021, according to Redfin.
For those without access to a spare half-a-mill, times are tougher.
According to the California Assn. of Realtors, only 11% of households in Los Angeles and Orange counties could reasonably afford the median-priced house during the fourth quarter, the smallest number since the housing bubble of the mid-aughts.
At that time, risky lending practices allowed people to buy homes they couldn’t really pay for. Today, lending standards are far tighter, which economists say should prevent a similar collapse in prices if there’s another recession.
Across the region, home prices have now set records in Orange, San Bernardino, San Diego and Ventura counties. In Los Angeles and Riverside counties, prices are less than 1% from their all-time highs.
Agent Alicia Fombona of United Real Estate Pacific States works across the Southland — from the coast to the Inland Empire. Amid high rates and high prices, she said, one strategy that’s growing more popular is co-borrowing: family and friends coming together to buy a house or duplex to keep payments somewhat affordable.
“Everybody needs a place to live and there is not enough housing for everybody,” Fombona said.
More homes are starting to come onto the market, but inventory is still tight and expected to remain so, according to forecasters. Rates may drop somewhat but are expected to remain elevated.
That combination could create a scenario in which prices don’t soar but also don’t drop much — if at all, especially because incomes for many households are growing.
“We are going to continue to see robust price growth, but nothing near where we were in the pandemic,” said Orphe Divounguy, a senior economist with Zillow.
If rates fell considerably, it would immediately make homes more affordable, but a new crop of buyers probably would flood the market and could put even more upward pressure on prices.
To help housing truly become more affordable, Divounguy said, there must be continued income growth and more housing construction.
“The way out of this is not going to come from mortgage rates,” he said.
In California, construction headed in the wrong direction in 2023, with building permits falling from the previous year, though lately there are signs of a rebound in single-family construction, which is mostly for-sale homes.
Some Californians, however, are on a timeline.
Kotero, the buyer looking in Torrance, currently rents a house in the city with his wife, Rikah, and their four children. But he said they need to find a new place by summer because the landlord is moving back in.
They’d like to buy and stay in Torrance for the schools but so far have struck out — even though Kotero makes $160,000 as a manager at a local oil refinery.
He said he and his wife were recently outbid, despite stretching their budget to offer $1 million for a house listed for $900,000.
Unlike others, the Koteros don’t have hundreds of thousands in cash to meaningfully offset high rates. Instead, Rikah, who currently stays home with the children, is thinking of looking for a job.
“If we are realistically looking to buy a home in Torrance, there’s no way around it,” Kotero said.
When you lease a vehicle, you never really own it — the dealer does. So you might think that you have no equity in the vehicle.
But you’d be wrong.
In fact, if you are currently leasing a car, even if you are just a year in and have several years to go, you might be able to get out of the lease and walk away with several thousand dollars.
So how is this possible?
An auto shortage means higher prices for used cars
The fallout from COVID-19 continues to cause supply chain shortages in multiple industries. With steel and computer chip shortages, the automotive industry has not been immune.
That means fewer new cars rolling off assembly lines and thus a larger demand for used cars. The problem? Dealerships cannot keep up with this demand.
Megan Stewart of Cincinnati recently purchased a new Toyota RAV4, but the dealer was so desperate for used cars, there was an unusual stipulation to the deal.
“When I went to buy a new RAV4, the dealership would only make a deal if I agreed to trade in my 2015 Honda Civic,” Stewart says. “They said they couldn’t handle the loss of a single vehicle on their lot, given the major shortages going on.”
And that’s no isolated incident. In January 2019, there were just under 3 million used cars available in the U.S. And earlier this fall? It was down to 2.3 million for a loss of nearly 33 percent.
To put it bluntly, “dealers are hurting for inventory,” says Kyle Johnson, senior editor for The News Wheel.
To make up for the massive deficit of used cars, dealerships have resorted to emailing lessees with whom they are currently under contract, offering to end the lease early and pay a pretty sum for a buyout. San Francisco’s ABC 7 told a story of a woman offered $6,000 to end her lease early.
How to make money off your leased car
The amount of money you pay for a leased vehicle over the duration of the contract is typically the difference between the car’s initial value and the estimated residual value at the end of the lease term. In that sense, you are merely renting a vehicle from a dealership, and at the end of the contract, the dealership intends to sell the vehicle as a used model.
But what’s happening right now is that leased vehicles are worth considerably more than they were originally estimated to be at the end of their terms. As a lessee, even though you don’t own the vehicle, you hold all the power because that increased equity belongs to you … if you handle the end of the lease strategically.
According to Cars Direct, the top five selling cars of 2018 are being sold used for 40 percent more than what would have been expected pre-pandemic. For example, a 2018 Nissan Altima has a nearly 50 percent market value increase, which translates to a more than $6,000 jump. Think about that if you are turning in a 2018 Altima this year.
The No. 1 advice we can give: If you are currently leasing a car, do not just turn it in at the end of a lease as originally planned.
You will be leaving money on the table if you do. Instead, explore one of these options for making money off your leased car:
1. Sell the lease to a third party
An option that lessees have long exercised during their leases has been selling their leases to a third party, like Carvana, Vroom or CarMax. For example, you could take your leased 2020 Honda Pilot and sell the vehicle — lease agreement and all — to CarMax. You’d immediately stop making payments, and you’d have a nice check if the vehicle was able to fetch enough money to cover the rest of your payments and then some.
And because of the huge demand for used cars, your lease vehicle should easily be able to command a large amount of that “and then some” cash when you sell it to a third party.
However, directly in response to the used car shortage, many lenders (branches of the automakers themselves) have begun to put a stop to this, legally prohibiting lessees from selling their contracts to third parties. Instead, they either have to return the vehicle to the dealership or buy it from the dealership at the end of the lease.
As of right now, Leasehackr is reporting that the following lenders are prohibiting third-party lease sales:
- Acura Financial Services
- BMW Financial Services
- Ford Credit
- GM Financial
- Honda Financial Services
- INFINITI Financial Services
- Lincoln Automotive Financial Services
- Mercedes-Benz Financial Services
- MINI Financial Services
- Nissan Motor Acceptance CompNY
- Southeast Toyota Finance
- Volvo Car Financial Services
- Tesla Finance
We expect this list to grow as the used car shortage continues.
2. Buy the car and sell it
Don’t let automakers have the final say. An easy enough way around the prohibited third-party lease sales is to simply buy the car from the dealership at the end of your lease and then turn around and sell it to whomever you want.
In fact, this gives you more earning potential. Once you own the car, you can see what CarMax or Carvana will pay for it, but you can also try to sell it privately for even more money.
To determine how much your vehicle is worth, try out Kelley Blue Book, which can estimate the value of your car based on model, year, features and condition. You can also check out dealer websites to see how much similar vehicles are selling for.
The beauty of buying the leased vehicle from the dealer at the end of your lease is that they can’t jack up the price. Check your lease agreement for the lease buyout wording; in it, the dealership should have spelled out exactly what you will pay to buy the car from them. This is called the guaranteed purchase option price.
A word of caution: You will need to pay sales tax and title fees when purchasing the leased vehicle, and if you can’t immediately sell the car, you need to be okay with the money you spent to buy out the lease being unavailable until the vehicle sells.
A second word of caution: This strategy applies to a lease buyout at the end of a lease contract. Early buyouts typically do not have guaranteed purchase option prices, meaning the dealer can charge you more for the vehicle. There may also be an early buyout fee.
3. Sell the lease back to the dealer
If you’re fortunate, you may not have to do much work at all. Don’t scoff when your dealer calls asking to buy you out of a lease early. Take a look at the offer, calculate what you think you could make trying to sell the vehicle on your own and determine if just simply selling the lease to the dealer is the right move.
Chances are good you may leave a little money on the table this way, but it’s certainly much less of a hassle to just sell to the dealer than buying the vehicle and selling privately.
Alternatively, you could try other nearby dealerships that sell vehicles of the same make. They may offer you more than the dealer from which you leased the vehicle. That’s the beauty of driving a leased vehicle in this shortage; you have the power to start a potential bidding war.
“Prices are way up,” confirms Johnson. “That car you leased a while back could actually net you a nice profit if you find a dealership that wants to come to the table and strike a deal with you.”
What to consider before selling your leased car
Now is a great opportunity to make some quick and serious cash by selling your lease. But before you sign on the dotted line, consider a couple of caveats:
You may be without a car
If you are not part of a multicar family and do not have access to affordable and efficient public transportation, getting rid of your vehicle may not be the right move.
New and used vehicle prices are at record highs
If you do sell and need to replace the vehicle with something new, be ready to pay those premium prices that you were charging when selling your lease. What goes around comes around.
In fact, some experts say that taking advantage of dealership incentives for ending leases is a bad idea for this very reason. “My recommendation would be: don’t do it,” says Kyle MacDonald, Director of Operations at Force by Mojio. “No matter how much you can earn in the moment, with the state of the market right now, there’s no guarantee you’d be able to find a replacement easily.”
MacDonald does offer one exception: “If you’ve already locked down a new car to purchase, in that case, ending a lease a month or two early may be worth the cash incentive.”
You leased that car because you liked it
Finally, consider if you’re ready to part with the car. At the end of the day, you work hard for a paycheck that affords you nice things. If a car to you is just a way to get from point A to point B and you couldn’t care less what make and model you’re sitting in, sure, end the lease.
Timothy Moore covers bank accounts for The Penny Hoarder from his home base in Cincinnati.