I am not a big fan of jumping on bandwagons (unless that wagon happens to be luxuriously wrapped in soft velvet and ambles along the Southern California coastline during a beautiful wintry sunset) but for now, let’s jump.
There are a few topics everyone’s been talking about lately (interest rates, 2-1 buydowns) and these can’t-get-away-from-them industry conversations are indicative of some trends we can expect to see for 2023. And no, I didn’t mean to rhyme that last line but yes, I am going to explain my predictions for the residential real estate market next year.
The Mansion Tax
Measure ULA, affectionately known as “the mansion tax” was on the ballot this past election cycle and, despite what some predicted would happen, it passed. This is a huge deal for luxury real estate buyers and sellers, and it’ll be a factor in many high-end sales next year.
So, what exactly is the mansion tax and how will it impact 2023 home buyers and sellers in L.A.?
Measure ULA imposes a new “Homelessness and Housing Solutions Tax” on property priced over $5 million, which will take effect for all property sales on or after April 1, 2023. According to the measure, property over $5 million but less than $10 million is subject to an additional tax at the rate of 4%. Properties valued at $10 million or more are subject to an additional tax at the rate of 5%.
Also of note: This new tax applies to the entire sale value, not just the amount the property is valued in excess of $5 million or $10 million. It would also be applied whether the property sells at a gain or at a loss. These thresholds may also be adjusted annually based on inflation rates.
This is a huge deal. Some might say buyers at the $5 million or $10 million+ price range don’t care about spending “a little” extra but in my experience, the more money people have, the more they care about how it’s spent. We’ll see a real learning curve next year as luxury sellers (by way of their agents) get creative in the incentives provided for buyers to take the sting out of this newly imposed tax. Maybe a home will sell at a certain price if the seller pays for the mansion tax or maybe both parties will split the new tax. All that remains to be seen but one thing is certain: The mansion tax will definitely be a big deal in real estate transactions next year.
“I’ve got a 12 o’clock conference call with the stager who’s coming in to thin out the place.”
While this phrase might not have been spoken too often in 2021 and the first half of 2022, I have my stager saved as a Favorites contact because staging just got that critical – and will continue to be crucial throughout 2023.
In 2023, it’s going to be more important than ever to have your house looking PRISTINE. Staging is going to become key. No longer can sellers kick problems or cluttered rooms down the road because properties are in such high demand. Sure, you can do that when the market is fast-moving but in a more balanced environment, buyers pay a lot more attention to the details of your home.
Waive Hello to Contingencies
In 2021 and for the first half of 2022, buyers were waiving appraisal contingencies and inspections like they were walking in real estate’s version of the Macy’s Thanksgiving Day Parade.
No contingencies or limited contingencies was abnormal and now, we’re returning to a more normal circumstance where buyers are saying to themselves, “Wait a minute. This isn’t a multiple offer situation. I’m the only offer here. Why should I waive any contingencies?”
As an agent, it’s all about educating buyers and sellers that contingencies are back and buyers are asking for repairs, big credits on home inspections and using contingencies as a negotiating tool in their favor more than ever.
I tell my sellers to think twice before giving buyers a “no thanks.” You never know what you’ll get in round two!
There might not always be three or four people standing in line for your house like we experienced in 2021. However, that doesn’t mean the buyers have all packed up and decided not to go to a new home. There are still plenty of buyers for good houses. Sure, 2023 probably won’t see five to seven offers on a property in the first week it hits the market and it might take two or three weeks for an offer to roll in but therein lies another trend: This isn’t just a holiday thing. This longer average days on market time is the new market.
So we accept it, embrace it and move on in order to get buyers to move in.
Home Equity, Interest Rates & Leasing Properties
Remember: You always date the rate and marry the home.
There’s been a surge in properties for lease and the surge makes sense. A lot of people with low interest rates are realizing they don’t want to give up on their 2.5% or 3% mortgage, and instead, they’d rather lease their house and use that cash to buy a new home. And this applies to homeowners not only in L.A. but also throughout the U.S.; an estimated 71% of U.S. homeowners have a mortgage rate of 4% or less and these owners are hunkering down until rates decline.
Just in Sherman Oaks, there are 50 houses for lease right now in the $5K-$8K price range, which is a strong indicator that inventory is going up for leases. At the same time, there’s a concurrent trend of longtime renters downsizing dollar-wise. If someone was renting at $20K or $25K per month, that family may want to spend $15K per month. his trend isn’t so much reflective of renters’ desire to downgrade their lifestyle (they don’t want to do that) but more about paying closer attention to their cashflow, even if they’re leasing property.
And on the subject of interest rates, we’re seeing the 2-1 buydown program happening everywhere now, and will more than likely have that trend go well into 2023.
It’s helping to ease people into these higher rates; if a seller buys the rate down for the first two years, buyers rightly believe by year three they can refinance at a better rate. Relatedly, economic experts are saying rates will most likely drop by the middle of 2023 to about 5 or 6% as part of a housing price regulation and deceleration as real estate moves to a more “normal” market.
On the other side of the situation, I have clients on adjustable rate mortgages that are also spiking, and they’re wanting to raise rents on properties to cover this higher mortgage.
They can’t refinance, they’re stuck in a current situation and to unstick themselves, they’re making leases on properties they own higher.
Ah! We’ve unlocked yet another trend-within-a-trend. Landlords during the pandemic really didn’t raise rents for a variety of reasons and with almost no rent increases (or minimal rent increases) the past two to three years, landlords are now needing a little extra cash to cover the cost of living due to higher levels of inflation.
The big question I help clients work through during my real estate consultations is this: Do you want to keep your current tenant? If you raise rents too much you could risk losing them but if you raise rent just enough to cover the cost of inflation, they’ll understand that the price to move out would cost more than the rental increase, and they’ll most likely stay. It’s a tightrope act that (*dramatic overemphasized wink*) requires the expertise and guidance of a real estate professional to strike the perfect balance for you.
In today’s market sellers can no longer put houses on the market (in all price ranges) with bad cell phone pictures. Photography and a listing’s overall online presentation is more important than ever. Doing those small fix-ups in a house like repairing a crack in a wall or replacing the kitchen drawer knobs could make the difference between “for sale” and “sold.”
Think about it: If an already wary seller is perusing homes and sees a crack in the wall, they might just think, “Oh my gosh! What is wrong with the foundation?”
Get rid of cracks. Touch up the painting. You can’t afford not to in this new market. The more move-in ready a property looks, the more people will pay and the more interest that property will generate. It’s also difficult and time-consuming to get contractors to complete renovations.
A 2023 buyer will easily dismiss a property that requires some work and gravitate toward a home that’s already done and ready to move in ASAP. Even in this balancing market, buyers will pay a premium for a done product.
Remember the days when new construction properties sold before a hammer was swung or nail drilled? Well those days are gone, friends. Today, new construction properties aren’t selling the first day they’re completed. There’s a little more competition in the new home arena and buyers are taking their time and wanting to make the best deal. They’re also window shopping a bit more than they used to be; sure, this home is beautiful but what else is coming on the market and will it be better than the home I’m looking at now?
The 2023 buyer will explore all their options – both for new homes and resale – and ensure they’re getting the best deal before submitting any offer.
So, those are a few trends you can expect from 2023. And if you pop the champagne at midnight on New Year’s Eve and suddenly think, “How am I ever going to accomplish [INSERT FUN BUT ATTAINABLE WITH A REAL ESTATE PROFESSIONAL BY YOUR SIDE REAL ESTATE GOAL HERE] now?!”
Call me. I’m always happy to talk you through the trends and help you find your way home, whatever and wherever that means for you.
Contact me to book your complimentary real estate consultation today!