Ah...The Crystal Ball

Ah...The Crystal Ball

How many times a day am I asked to predict the future of real estate in my area. Family, friends...the lady in line at Starbucks behind me....it seems everyone asks me what real estate is going to do in the coming week, month, year. Now even Active Rain is asking me via Praful Thakkar's "Crystal Ball Contest." 

The good news? They see us as experts in our field. The bad news...it really does take a Crystal Ball. Maybe not a Crystal Ball, but at least the ability to read the tea leaves.

So much depends upon the reaction of the stock market and economy after the policies of President Trump start becoming reality. We've seen a strong reaction to his election, but that is mostly optimism and anticipation of new policies. Once they become reality, we'll see. 

I want to emphasize that this is NOT a political post and I will delete inflammatory comments.

The real estate market is primarily affected by interest rates. The Fed has already started to inch rates higher and has indicated that we can expect more hikes in 2017. If the economy heats up faster than sustainable, then we will see interest rates move more quickly to head off inflation. 

Why does this matter to real estate? Don't people still want to buy homes?

Of course they do, but interest rates paid on their mortgage have a direct effect on how much they can qualify for in a loan...how much they can spend on a home.

Some areas are less affected by this than others. Frankly, in high end communities like Laguna Beach and Newport, it seems that home prices don't matter at all; the buyers seem to have all the money they need to get what they want.

But in most of the country, it does matter. Home prices cannot rise higher than the area's income can sustain. If a larger portion of the monthly payment must be used for interest, the buyer can afford to spend less on the purchase price...and prices must drop. 

So....this is my explanation....but not a prediction, right?

I live and work in a small bubble. Southern California seems less affected by the small increases or decreases in interest rates, but that could change. Even the job loss that much of my state is seeing due to our anti-business state government doesn't seem to affect my real estate market. 

So..what's my prediction? I think we could be affected emotionally by what happens nationally. So let's see what happens January 20th...and the weeks that follow and I'll be back with more tea leaves.