In the Washington Post last week, writer Emily Badger wrote about an interesting situation occuring in Los Angeles. Second units on single family lots are becoming increasingly popular in cities that have limited housing options with dramatically rising prices.
Those that were given permission to build won’t be given certificate of occupancy, therefore they can’t be added to public services, like the power grid. This has left some with living off of extention cords to the main house. All this after a lawsuit was brought against the city
Proponants say it can ease housing shortages and yeild more affordable houseing that won’t cost the city anything. It have help aging baby boomers and still-at-home millennials too.
Protesters say that these 2nd homes (LA’s rules stating can be no larger than 1200 sqft) change the feel of single family home neighborhoods. There will be too many people and less parking. They also fear more people in smaller homes would create a kind of affordable housing among expensive LA real estate.
The city of Los Angeles says that the issues should be resolved by the years end but many people still hang in limbo until that happens.
A GREAT article by fellow Realtor Jay Kalinski! If you you are thinking of buying or selling the near future, read this article!
As predicted, the Federal Reserve raised interest rates in December, and conventional mortgage rates have increased from 3.625 percent on Nov. 4 to 4.375 percent as of the writing of this article (an increase of 0.75 percentage points). In 2017, economists predict a couple more interest-rate increases to the Fed funds rate, which will likely spur increases in conventional mortgage rates as well.
To a homebuyer in the Boulder Valley, what do these projected mortgage-rate increases actually mean? The effect may be bigger than you would think.
The 1 Percent = 10 Percent Rule
As a rule of thumb, for each 1 percent increase in mortgage rates, your buying power decreases about 10 percent. To understand the import of this, it is helpful to use a couple of examples that buyers in the Boulder Valley might face:
Scenario 1: Looking in Longmont
A couple would like to buy an average single-family home in Longmont, which costs about $400,000. They have about $80,000 (or 20 percent) saved as a down payment and meet with a lender, where they learn that they qualify for a maximum principal and interest payment of $1,600 per month.
If the current interest rate is 4 percent, then their monthly principal and interest payment would be about $1,528, and they would qualify to buy the house. (They could qualify up to $420,000 in the case of a bidding war.)
If, however, the interest rate increased to 5 percent, then the monthly principal and interest would increase to $1,718, and they would not qualify to buy the home. In fact, at this new interest rate, they would qualify to purchase only a $377,000 home (principal and interest of $1,595).
For this couple, a 1 percent increase resulted in a decreased purchase power of about 10.2 percent.
Scenario 2: Looking in Boulder
A couple would like to buy an average single-family home in Boulder, which costs about $1 million. They have about $200,000 (or 20 percent) saved as a down payment and meet with a lender, where they learn that they will need a jumbo loan, and that they qualify for a maximum principal and interest payment of $4,000 per month. (A jumbo loan is one that exceeds the conforming loan limits set by the Federal Housing Finance Agency, which, in Boulder County is $479,950.)
If the current interest rate is 4 percent, then their monthly principal and interest payment would be about $3,820, and they would be able to buy the house. (They could qualify up to $1,050,000 in the case of a bidding war.)
If, however, the interest rate increased to 5 percent, then the monthly principal and interest would increase to $4,295, and they would not qualify to buy the average home. In fact, at this new interest rate, they would qualify to purchase only a $945,000 home (principal and interest of $4,000).
For this couple, a 1 percent increase resulted in a decreased purchase power of 10 percent.
Price appreciation
The above scenarios consider only increasing interest rates. When you factor in price appreciation, which was roughly 15 percent last year for single-family homes in Boulder County, it increases the magnitude of lost purchasing power for buyers.
The Bottom Line
Many buyers in the Boulder Valley have felt a sense of urgency in the past several years, given the quickly appreciating housing market. The prediction of increasing interest rates and, therefore, decreasing purchasing power, will likely add further pressure to buyers to purchase a home quickly before they are priced out of the homes they desire.
Jay Kalinski is broker/owner of Re/Max of Boulder.