2005 OUTLOOK

During this early quarter of the New Year, market conditions remain very similar to the last quarter and it still continues to be a seller’s market.

The Federal Reserve raised short term interest rates by a quarter of a point for the sixth time since June 2004 and indicates that it will remain on a continual credit tightening course. The affordability for homes in the United States fell to a four year low in 2004 as a surge in prices offset lower mortgage rates. During the end of the last quarter prices appeared to stagnate due to having a little more inventory on the market, allowing buyers a chance to shop around a bit and not rush to over bid. Economists continue to speculate that the housing bubble is still the biggest risk to the U.S. economy and forecast that it is not going to continue in 2005; however, many experts inside the housing industry reject the threat that the bubble is waiting to pop. Real estate prices are generally propelled by low interest rates and high demand, and in California the demand continues to be very strong.

The climate of the residential income market (apartment buildings) generally follows the trend of the housing market. While home prices still remain higher in California than the rest of the nation, so do rental rents. A person must earn at least $50,000 a year to pay for a two bedroom apartment in the Los Angeles area and closer to $60,000 a year to pay for a two bedroom apartment in Santa Monica. Apartment sales that have been greatly heated up by projected “market” rents need to take into consideration those overall rental projections may just be too high in comparison to wages remaining too low.

Current interest rates for 5 or more residential units for 30-year loans are starting at around 4.6% for an adjustable loan and for a 15-year fixed are at around 7.7%. Lenders will quote you an LTV (Loan to Value– the actual loan amount) from 65% to 70%, but realistically with prices being so high in relation to the income, the actual loan amounts are closer to 40% to 60%.

The Santa Monica landlord community was historically made up of primarily “mom and pop” (individual) owners, many of whom had immigrated to the United States from other countries. Now the community has shifted to ownerships by LLCs (Limited Liability Companies), which is a group of individuals investing together to form a partnership in order to pay top dollar with the projection of upside in the rents being a reality one day. The ownership of some of the larger complexes is being purchased by REITS (Real Estate Investment Trusts) and Corporate Pension Funds. The landscaping of what was once a beach community continues to evolve dramatically, and not just on the exterior surface. The word “community” is probably no longer an accurate description.

Offers to purchase will often name the buyer “and /or assignee.” Who is the assignee? The assignee will often be someone other than the buyer, a group of buyers, which may or may not still include the original buyer or a partnership named on behalf of the buyer who appeared on the original purchase offer. It is advisable to counter this offer allowing the Seller the reasonable right to approve the assignee and also to review and approve the financial records of same.

All cash offers with no loan contingencies are quite common. The buyer may still try to obtain a loan during the escrow period. However, having a loan in place prior to closing is not a condition of the transaction and the buyer is still under contact to purchase the property for all cash. This is another reason to verify that the buyer has all the actual funds committed to purchase prior to entering into a purchase agreement.

The theme still continues to be the same, it’s a Seller’s market and it’s great to be a Seller in a Seller’s market. Alas, the question still remains to be the same and that is “how long will it continue?“