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Creating Wealth and Following Your Dreams

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By Rick Tobin

Is it better to let your money work hard for you or for you to work hard for your money? For most people, the answer would be that they’d want their money or investments to grow and compound each year so that the investor could enjoy life and travel or sleep more.

The Social Security Administration released their final wage statistics for employed workers across the nation for 2023. As per this latest published report for annual wages, the “median wage” in the U.S. was just $43,222.81. If true, this means that half of Americans made less than $43,222.81 in 2023 while the other half made more than this annual income amount.

“Based on data, about 67.6 percent of wage earners had net compensation less than or equal to the $63,932.64 raw average wage. By definition, 50 percent of wage earners had net compensation less than or equal to the median wage, which is estimated to be $43,222.81 for 2023.”
– Social Security Administration

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Equity Gains and California Dreamin’

“If you don’t find a way to make money while you sleep, you will work until you die.” – Warren Buffett

The average annual home appreciation rate in California over the past 39 years is 6.77%, as per sources like the California Association of Realtors (CAR).

Earlier this year in 2024, the average California home price statewide surpassed $900,000 for several consecutive months. This was more than double the national home price average closer to $428,000 that was reported for September 2024 by Redfin.

To simplify the math, let’s use the $900,000 California home value average and multiply this same home price number by the 6.77% average annual home appreciation percentage rate over the past 39 years.

$900,000 home value x 6.77% annual appreciation = $60,930 in potential future equity gains if future value percentage gains maintained the same 6.77% historical pace.

While there are no absolute guarantees for real estate and life, the fact that the average California homeowner might’ve collected more than $60,900 when they were literally sleeping part of the time is quite impressive. If so, this $60,930 annual equity gain was much higher than the $43,222.81 median wage income average for U.S. workers.

Whether the skies around you are blue or gray, it’s time to take more walks around your neighborhood to find the next great housing investment deal.

All the leaves are brown (all the leaves are brown)
And the sky is gray (and the sky is gray)
I’ve been for a walk (I’ve been for a walk)
On a winter’s day (on a winter’s day)
I’d be safe and warm (I’d be safe and warm)
If I was in L.A. (if I was in L.A.)
California dreamin’ (California dreamin’)
Music video: California Dreamin’ by The Mamas & the Papas

Good or Bad Times in California

Is time the most valuable and precious commodity of them all? Life is too short for us all. Many people who invest in real estate, stocks, insurance vehicles, bonds, gold, silver, or other investments just want to create more free time to spend with their family and friends instead of being forced to work until they die.

The varying degrees of real estate wealth creation is directly affected by a few different things or factors such as location and time when the property was bought or sold. Since 1977, home appreciation in California has far surpassed the cost-of-living inflation increases two-thirds of the time.

Timing is key when you buy and sell your home for profits. For example, a California home purchased in 1990 and later sold in 2000 would’ve resulted in a net loss. Conversely, a home purchased in 1996 and sold 10 years later in 2006 near the peak of the last major housing bubble in both California and the nation would have resulted in a significant price gain.

Let’s take a look below at how statewide home values or median home sales prices either increased or decreased for a specific year in California:

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Between 2008 and 2012, California home prices fell to a still all-time state record loss of -41.7% from peak to trough. However, California home prices skyrocketed more than any other region in the entire 2010 decade, starting shortly after the housing market bottomed in 2012 or 2013, depending on the region.

There’s no other state in the nation that has experienced such extreme home price swings from low to high in a relatively short period of time than California, for better or worse. In spite of falling more than -41% within four years (2008 to 2012), California home prices still rose a net gain of 120% between 2010 and 2020, which was double the national average.

Life is Short, Invest Today

The sooner you start investing in real estate, the more likely it will compound and grow over time as the home value may double or triple while you pay down your mortgage debt until the home is later free and clear.

A few decades ago, it was much more common for young college graduates to marry and start having multiple children in their early to late 20s. Additionally, these same young families followed their heart and grabbed a piece of the American Dream by buying their first home.

In more recent years, housing has become so unaffordable and fewer people are choosing to marry or have children, partly due to how expensive it is to raise children these days, that the average first-time home buyer age and the overall age of all homebuyers nationwide have reached all-time record ages.

Between July 2023 and July 2024, the average age of first-time buyers rose from 35 to 38, and from 58 to 61 for repeat buyers.

The average age of all U.S. homebuyers reached an all-time record high of 56 years of age in 2024, according to the National Association of Realtors and Yahoo! Finance. By comparison just one year earlier in 2023, the average U.S. homebuyer age was seven years younger at 49.

Please note again that California home prices tend to be more than double the national average, so it can be more challenging to purchase here. Yet, rents are significantly higher here in our state too.

If you can set aside a few thousand dollars or more or have family members “gift” you some funds, you may still be able to purchase a home in California or across the nation that has a monthly mortgage payment similar to what rent is these days for many tenants.

The average age of a U.S. home seller in 2023 was 60. For many of these homeowners, they probably bought their home 30 years earlier at the age of 30 when they borrowed a 30-year mortgage.

Either way, your monthly housing payments will make someone wealthy over time whether you rent or own. Homeowners are 40 times wealthier on average than tenants as I’ve shared before in past articles.

It might as well be you who creates wealth while you sleep, so please create a plan and take action sooner rather than later as your future nest egg is depending on you.

Rick Tobin

Rick Tobin has worked in the real estate, financial, investment, and writing fields for the past 30+ years. He’s held eight (8) different real estate, securities, and mortgage brokerage licenses to date and is a graduate of the University of Southern California. He provides creative residential and commercial mortgage solutions for clients across the nation. He’s also written college textbooks and real estate licensing courses in most states for the two largest real estate publishers in the nation; the oldest real estate school in California; and the first online real estate school in California. Please visit his website at Realloans.com for financing options and his new investment group at So-Cal Real Estate Investors for more details. 

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

Weather Extremes, Homes, and Insurance Risks

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By Rick Tobin

We live in interesting times these days with the unusual combination of all-time record highs for weather extremes, home prices, mortgage and overall consumer debt, and insurance costs.

Redfin reports that the combined total U.S. home value rose $3.1 trillion in value between August 2023 and August 2024. If these home appreciation trends continue onward at a similar pace, the US housing market may soon surpass $50 trillion in total value by sometime next year in 2025.

If you have a mortgage secured by your home, you are required to carry some form of basic homeowners insurance that’s sufficient enough to cover your ownership risks as well as your mortgage lender’s risks.

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Water is usually the #1 source of damage to homes across the nation each year. These horrific hurricanes, tornadoes, and massive fires across the nation are financially wiping out many homeowners, insurance companies, and government agencies.

These literally underwater homes from the horrific floods in many Southeastern regions are also causing many of these properties to lose value and become “underwater” figuratively where the mortgage debt far exceeds the current market value.

The Pool of Disaster-Relief Funds Dried Up

Let’s take a closer look at some of the news headlines shared this year about how financially insolvent insurance or government agencies are these days:
FEMA (Federal Emergency Management Agency) has been technically insolvent or broke since earlier this year, as per FEMA themselves. The National Flood Insurance Program (NFIP) was described as being more than $20 billion in debt back in January 2024 at a panel hearing held by the U.S. Senate Banking, Housing and Urban Affairs Committee.

“The Small Business Administration’s (SBA) disaster assistance loan program is out of money after hurricanes Helene and Milton struck parts of the United States, the agency has announced.”
– ZeroHedge

The Citizens Property Insurance Corporation is described as the “last” option for insurance within the state of Florida. However, Citizens was also described by many as being out of money before Hurricanes Helene and Milton reached the Florida shores.

“Citizens was created by the Florida Legislature in August 2002 as a not-for-profit, tax-exempt, government entity to provide property insurance to eligible Florida property owners unable to find insurance coverage in the private market.”
– Citizens Property Insurance Corporation

Hurricane Helene and Milton might’ve caused more than $200 billion dollars’ worth of damage in Florida, North Carolina, and other nearby regions, according to The Real Deal.

Who will bail out FEMA first so that FEMA can bail out the National Flood Insurance Program, Citizens, SBA, and others?

Top 10 Largest Insurance Payouts

Will Hurricane Helene and/or Hurricane Milton break the all-time financial damage record set by Hurricane Katrina or at least reach the all-time Top 3? Please see the Top 10 financial damage list that I put together before in past articles and real estate courses.

Hurricane Ian, which hit Florida and other regions in late September 2022, has already caused more than $109 billion in overall damage claims in Florida alone. How will the insurance industry make it through another hurricane and fire season in Florida, California, Oregon, Washington, Idaho, Texas, Louisiana, and elsewhere?

Floods from horrific rain storms or hurricanes especially are generally the most common and costly natural disasters each year. Within the past 20 years, the 10 most financially damaging floods in the history of the National Flood Insurance Program (NFIP) happened while exceeding $50 billion dollars in costs. A whopping 75% of national flood insurance payouts have happened since 2002.

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The 10 largest payouts in the history of the National Flood Insurance Program on an adjusted inflation basis up through the second quarter of 2022 were as follows:

1. Hurricane Katrina – $22.17 billion
2. Superstorm Sandy – $10.05 billion
3. Hurricane Harvey – $$10.03 billion
4. Hurricane Ike – $3.32 billion
5. Louisiana severe storms and flooding (2016) – $2.83 billion
6. Hurricane Ivan – $2.40 billion
7. Hurricane Jeanne – $2.15 billion
8. Hurricane Ida – $1.64 billion
9. Hurricane Irene – $1.58 billion
10. Hurricane Irma – $1.26 billion
Source: FEMA

Upwards of 75% of flood insurance funds that were paid by the National Flood Insurance Program (NFIP) to property residents were located in just five states: Louisiana, Texas, Florida, New York, and New Jersey. After inflation adjustments, Louisiana was the highest-ranked state with NFIP payouts at $28.9 billion since 1978. The highest percentage of NFIP payouts to Louisiana residents were as a result of Hurricane Katrina. which totaled more than $22.1 billion dollars.

Paying High Premiums with Lower Chances of Coverage Benefits

It’s not uncommon for Florida residents to pay close to an average near $1,000 per month for homeowners insurance coverage. I’ve heard of property owners in the high-risk Florida Keys region who pay upwards of $100,000 per year for insurance coverage for homes valued near $2 million dollars.

It’s one thing to pay significant amounts for home insurance coverage protection benefits when you may later need it if a storm or fire damages your home. Yet, it’s even worse when the insurance carrier later denies any coverage protection.

For example, the lesser known Hurricane Debby that reached Florida as a Category 1 storm on August 5, 2024 caused significant damage to homeowners and businesses.

According to published data released by the Florida Office of Insurance Regulation, nearly 60% of all Hurricane Debby insurance claims cases were listed as “closed” just about one month after the storm hit. More than half of those insurance claim cases were listed as “closed without payment.”

As of September 6, 2024, the Florida Office of Insurance Regulation data showed that 19,973 insurance claims were filed after Hurricane Debby. The number of closed claims were listed as 11,090. Of these closed claims, 6,447 were listed as closed without any payments and 58% of those claims were completely denied, according to ABC Action News.

High-Rise Condominium Tower Risks

The implosion of the Champlain Towers in Surfside, Florida (Miami-Dade) back in 2021 was a catalyst to set off a chain reaction that is adversely affecting high-rise towers in Florida and even across the nation to this day.

As a result, a higher percentage of all-cash buyers who can self-insure like BlackRock, Vanguard (BlackRock’s largest shareholder), Blackstone (BlackRock spinoff), and others will likely acquire a higher percentage of these properties in the near future. Gee, what’s the common link here?

The legal outcome of the Champlain Towers collapse story was the SB 4-D legislation, which passed in 2022, that requires all owners of condominiums older than 30 years to hire outside engineering and/or architects to thoroughly inspect these properties no later than December 31, 2024.

These inspections will also be used to ensure that the usually financially insolvent HOAs have enough funds to cover the repairs or they must rapidly increase the monthly HOA payments that could be increased by several hundred or thousands of dollars per month.

Local, state, or federal agencies may have the power or legal right to fine or assess apartment building landlords or individual high-rise condominium owners with $100,000 to $300,000+ retrofit requirements per unit to modernize balconies, air conditioning and heating systems, appliances, windows, and other property features while insurance costs skyrocket.

Then, these older and more spacious affordable building units may be replaced with new smaller and more costly “smart” buildings that rent for $10 to $20+ per square foot (or up to $4,000/month for a 200 square foot unit) while closely following the newly restrictive high-density zoning laws.

If so, there will be an increasing number of motivated sellers who wish to avoid these new HOA assessments and “green living” requirements, especially if their own homeowners insurance company cancels their policies due to the perceived risks.

A homeowner with a mortgage who loses all access to insurance will then later have a mortgage default trigger and subsequent foreclosure filing, sadly.

Check Your Insurance Policies

No matter where you live, there are potential internal and external risks that can severely damage your home or rental property investments. Please call your insurance agent to discuss the best ways to minimize your risks and maximize your asset protection.

You may also consider speaking with local experienced home inspectors who can advise you how to best clear trees and shrubs near your home to reduce fire risks and how to protect against floods and mold risk.

For most Americans, the bulk of their net worth comes from the equity in their primary home. To best protect your wealth and to keep a roof over your head, please surround yourself with a knowledgeable team of inspectors and insurance, mortgage, and real estate agents who can help advise and protect you at the same time.

Rick Tobin

Rick Tobin has worked in the real estate, financial, investment, and writing fields for the past 30+ years. He’s held eight (8) different real estate, securities, and mortgage brokerage licenses to date and is a graduate of the University of Southern California. He provides creative residential and commercial mortgage solutions for clients across the nation. He’s also written college textbooks and real estate licensing courses in most states for the two largest real estate publishers in the nation; the oldest real estate school in California; and the first online real estate school in California. Please visit his website at Realloans.com for financing options and his new investment group at So-Cal Real Estate Investors for more details. 

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

Are You Focused on Commercial Real Estate?

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By Rick Tobin

Earlier this year in January, economists from the International Monetary Fund claimed that commercial real estate prices had fallen at the steepest pace in more than 50 years. As we now approach the fourth quarter here in 2024, the price drops have escalated and only worsened for property owners. Now, we might be seeing the worst commercial property price declines in U.S. history.

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Approximately 20%, or $929 billion, of the $4.7 trillion dollars’ worth of outstanding commercial mortgages owed to lenders and investors may balloon or become all due and payable by the end of 2024, as per the Mortgage Bankers Association’s 2023 Commercial Real Estate (CRE) Survey of Loan Maturity Volumes.

Between 2024 and 2028, upwards of $2.81 trillion in commercial loans are scheduled to come due and need to be paid off or refinanced, according to Trepp. Within this same analysis provided by Trepp, they project that more than $533 billion will balloon or come due in 2025. The largest commercial mortgage holders for these commercial mortgages coming due are regional banks and thrifts that hold over half of these maturing loans through 2028.

Commercial Real Estate Trends

Let’s take a look at both positive and negative commercial property trends across the nation in recent years:

  • The estimated total dollar value of commercial real estate was $22.5 trillion as of Q4 2023, which makes it the fourth-largest asset market in the nation following stocks or equities, residential real estate, and Treasury securities. (Federal Reserve’s April 2024 Financial Stability Report),
  • By 2050, commercial building floor space is expected to reach 124.3 billion square feet, a 33% increase from 2020. (Center for Sustainable Systems, University of Michigan)
  • 72% of commercial buildings in the US are 10,000 square feet or smaller. (National Association of Realtors)
    The typical length of a building lease in the US is three to 10 years. (DLA Piper)
  • Approximately 69% of all commercial buyers in the US need financing to purchase properties. (National Association of Realtors)
  • As of July 2024, the national office vacancy rate reached a whopping 20.1%. This was the very first time ever that the U.S. vacancy rate surpassed 20%. (CommercialEdge)
  • In 2024, the U.S. apartment construction industry is expected to break a new all-time record for apartment units delivered with well over 500,000 units completed, which is 30% higher than back in 2022. (Fannie Mae)
  • An estimated one-third of industrial space in the US is more than 50 years old. (NMRK)
  • The Inland Empire (Riverside and San Bernardino counties) in California had averaged an incredibly low 1.2% vacancy rate for industrial space in 2021 and/or 2022. (Commercial Edge)
  • However, vacancy rates for industrial properties in the Inland Empire skyrocketed to 6.8% by Q1 of 2024, a 400-basis point vacancy rate increase compared to 2023. The Inland Empire now has the second highest vacancy rate for industrial properties on the West Coast, behind only Phoenix. (Kidder Matthews)
  • Nationally, the industrial real estate vacancy rate reached 6.1% in the first half of 2024. (CommercialEdge)
  • For every $1 billion of growth in the e-commerce sector, it requires an extra 1.2 million square feet of new warehouse space. (Prologis)

Is Multifamily Strong or Not?

In many U.S. regions, the multifamily sector is very strong partly since so many tenants can’t afford to buy homes nearby that are currently priced at all-time record highs. In other regions, multifamily apartment landlords may be struggling with significant financial losses.

The multifamily apartment mortgage default rate has quadrupled over the past year, according to Freddie Mac. Last year in 2023, this year in 2024, and through at least 2025, more brand new apartment units will be completed and available for lease than at any other time since as far back as 50+ years ago in 1973.

Multifamily apartment landlords across the nation are defaulting on their mortgages with decade-high rates in states like California, Texas, Florida, and elsewhere.

Some of the main factors why multifamily apartment mortgage default rates are rising are as follows:

1. The owner’s existing mortgage rate may have increased by 100% or more after their previously 3-year, 5-year, 7-year, or 10-year fixed rate converted to a new adjustable rate at today’s much higher mortgage index. As a result, the once positive monthly cash flow turned negative due to the higher mortgage rates and payments.

2. Rising vacancy rates as fewer tenants could afford rapidly increasing rents in many of these apartment building locations found in various metropolitan regions.

3. In other regions, the vacancy rates had increased so much that landlords had to drop their rent prices which, in turn, turned monthly profits into losses.

4. Skyrocketing costs for various types of landlord insurance or umbrella insurance policies as well as increased litigation costs from unhappy or injured tenants.

The multifamily market is projected to add or deliver another 574,000 new apartment units in 2024 alone, according to an analysis shared by the CoStar Group. As a result, future rent prices may start falling as the available supply exceeds the demand.

Upside-Down Office Buildings

Almost 45% of all office buildings nationwide that are leveraged with debt are upside-down or underwater where the existing mortgage debt exceeds the current market value, according to sources like ZeroHedge, Bloomberg, and Morgan Stanley. Some office buildings are now selling for as low as $9 per square foot, not $900/sq. ft.

An eye-opening example of how massive some of these commercial property prices have plunged was the recent April 2024 sale of the 44-story AT&T Center office building in St. Louis, Missouri. Back in 2006 near the previous real estate bubble peak, the same building sold for $205 million dollars. In April, this property sold for just $3.6 million, which was a staggering 98% value drop.

Some savvy investors who purchase these discounted office buildings may choose to convert them into multifamily apartment buildings if the remodel and rezoning costs aren’t too high. Are you seeing heavily discounted office building deals in the areas where you live or invest as well?

Two of the main causes for falling residential and commercial real estate values are related to rising unemployment and upside-down properties as more people may soon clearly see, sadly.

All-Time Record Consumer Debt and Defaults

The ability to pay rent or a mortgage payment is directly related to access to cash and credit for most people. When times are more challenging and the employment or investment income is either lower or nonexistent, many people choose to access their credit cards to make their monthly payments. Once the credit card limits are reached, some tenants may not be able to pay their rents.

There is not a single state in the U.S. today with less than a 10% credit card delinquency rate for their residents as credit card APRs are near 28% to 40% in 2024, depending upon the credit card issuer and the borrowers’ creditworthiness .

Back near the depths of the Great Recession in April 2009 when credit card rates were closer to 12%, the national credit card delinquency rate was only 6.77%.

Highest Credit Card Defaults

By state, here is the percentage of consumers who are delinquent on one or more accounts:

* Mississippi – 39%
* Louisiana – 32%
* Alabama – 31%
* Arkansas – 30%
* Oklahoma – 28%
* Kentucky – 28%
* South Carolina – 27%
* Tennessee – 26%
* Texas – 25%
* West Virginia – 25%
* North Carolina – 24%
* Indiana – 24%
* Georgia – 23%
* New Mexico – 23%
* Missouri – 22%
* Arizona – 20%
* Nevada – 19%
* Wyoming – 18%
* Oregon – 17%
* California – 15%
* Florida – 15%
Sources: Trading Economics and John Williams

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Top 10 Credit Default Cities

Here are the U.S. cities where the largest share of people are behind on their credit cards by at least one payment.
1. McAllen, Texas — 51.7 percent
2. El Paso, Texas — 46.3 percent
3. Baton Rouge, La. — 45 percent
4. Greensboro, N.C. — 44.8 percent
5. Columbia, S.C. — 44.6 percent
6. Jackson, Miss. — 44 percent
7. San Antonio, Texas — 43.8 percent
8. Augusta, Ga. — 43.3 percent
9. Greenville, S.C. — 42.6 percent
10. Memphis, Tenn. — 42.5 percent

Source: LendingTree

Discounted Real Estate Buying Opportunities

Just like following the Great Depression, the Savings & Loan Crisis, and the Great Recession, there were incredible discounting buying opportunities for homeowners and investors who were searching for both residential and commercial real estate deals.

You must continue to stay focused on the opportunities rather than on the obstacles to get ahead in this world. “Out of chaos comes opportunity” as I like to say repeatedly to friends, family, and clients.

If 99 people are running towards the hills and doing nothing, you can be the sole brave and wise person who buys the property for almost cents on the dollar like some of the office building deals. If so, you might create generational wealth for you and your family.

Rick Tobin

Rick Tobin has worked in the real estate, financial, investment, and writing fields for the past 30+ years. He’s held eight (8) different real estate, securities, and mortgage brokerage licenses to date and is a graduate of the University of Southern California. He provides creative residential and commercial mortgage solutions for clients across the nation. He’s also written college textbooks and real estate licensing courses in most states for the two largest real estate publishers in the nation; the oldest real estate school in California; and the first online real estate school in California. Please visit his website at Realloans.com for financing options and his new investment group at So-Cal Real Estate Investors for more details. 

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

Wealth Creation in a Hyperinflationary America

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By Rick Tobin

Are we currently experiencing the best economic boom ever with all-time record high stock and real estate prices? Or are more investors moving their weakening dollars into hard assets like real estate, partly as a hedge against skyrocketing inflation trends? Can Quantitative Easing ever end, or have the Federal Reserve and US Treasury created a seemingly infinite hyperinflationary spiral?

Home values have never been higher in many U.S. regions than what we’ve all seen here in 2024. The Dow Jones index also recently reached an all-time peak high of 40,000 and the NASDAQ surpassed 17,000 for the first time ever.

American mortgage holders may now have access to a staggering $11 trillion in tappable equity that’s over and above their existing mortgage balances, according to the May 2024 Mortgage Monitor report from the Intercontinental Exchange (ICE).

The amount of residential property equity is so massive that if all 48 million homeowners spent $10 million of their tappable equity each day, it would take more than 3,000 years to exhaust it, as per ICE. This amount of residential equity available is more money than the Gross Domestic Product (GDP) of Japan, India, and the United Kingdom combined.

The West Coast Gold Rush

The same ICE report identified just five housing markets on the West Coast that represented a quarter of that $11 trillion equity number: Los Angeles, San Francisco, San Jose, San Diego, and Seattle. Four of these five core equity cities are located in the Golden State of California.

As per a study released by Zillow, approximately 20% of our nation’s total housing value is in California. With an estimated 40 million residents in California and upwards of 333 Americans across the nation, the state residents represent close to 12% of all Americans. Yet, our state home values represent a much higher 20% number as compared with the rest of America.

Homeowners usually need income first to qualify for a third-party mortgage to purchase their home. While the cost of living for West Coast residents is typically near the highest in the nation, the salaries paid out by many employers, or the income generated by self-employed workers, is also among the highest in the nation with San Francisco, San Jose, and Seattle ranking first, second, and third nationally for the top average salary, according to CareerBuilder.

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The Top 5 Most Unaffordable Housing Regions

Three of the Top 5 most unaffordable housing regions in America are located in Southern California – #1 Los Angeles, #3 Irvine, and #5 Long Beach. Miami was #2 and New York City was #4, as per the RealtyHop Housing Affordability Index for May 2024.

Average families who earned the median income in Los Angeles must now spend a shockingly high percentage of 99.33% of their income on home ownership costs, as discovered in this RealtyHop survey. If true, the average Los Angeles resident would have just 0.67% (or less than 1%) of household income left over to purchase groceries and pay for utilities, automobiles, clothing, home maintenance, and other basic necessities if they were actually able to qualify for a home mortgage with those very high debt-to-income ratios.

Rounding out the Top 20 for the most unaffordable housing cities in America, which included many more California regions, were as follows:

6. Newark, NJ
7. Anaheim, CA
8. San Diego, CA
9. San Jose, CA
10. Boston, MA
11. San Francisco, CA
12. Santa Ana, CA
13. Oakland, CA
14. Chula Vista, CA
15. Fremont, CA
16. Jersey City, NJ
17. Austin, TX
18. Dallas, TX
19. Riverside, CA
20. Seattle, WA

These Top 5 most unaffordable housing regions in the survey compared the median home listing price primarily with the median income for the same region. Let’s take a look below at how high the percentage of household income was needed to cover the project monthly household expenses (mortgage, property taxes, insurance, etc.):

The Top 5 Most Affordable Housing Regions

Now, let’s review the Top 5 most affordable cities in America, which have much lower percentage of income to monthly household payment numbers:

Out of the 100 major cities analyzed by RealtyHop, a whopping 88 of the cities had homebuyers paying more than 30% of their monthly income towards household expenses.

The RealtyHop report findings were based on factors such as the percentage of income required to afford a home, a 30-year fixed mortgage rate of 7.125% (subject to change), and projected household income based on US Census and BEA data.

While there are many cities and towns across the nation with much higher median home values than the Top 5 most unaffordable housing regions listed by Realtyhop, those areas usually had much higher household income averages that helped make the home purchases more affordable.

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Income Requirements for Homes by State

Families who live in the five most expensive U.S. states for home purchases require an annual income exceeding $270,000 to live comfortably, according to a report published by Visual Capitalist.

“Comfortable” is defined as the income required to cover a 50/30/20 budget, with 50% set aside for necessities like housing and utilities, 30% for discretionary spending, and 20% allocated for savings or investments, as per the same Visual Capitalist report.

The Top 10 most expensive states for two working adults who are raising two children is listed as follows:

Because home values are so much higher today, the average mortgage balance debt is dramatically rising for many borrowers. One-to-four residential mortgage debt has also reached all-time record highs just north of $20 trillion dollars, as per the St. Louis Fed’s Economic Data.

Investments and Wealth Creation

“If you don’t find a way to make money while you sleep, you will work until you die.” – Warren Buffett

If you’re fortunate to own assets, your net worth is probably rapidly increasing. If not, the declining purchasing power of the dollar is making it very challenging for tens of millions of Americans to pay their bills on time.

There’s another old saying that is somewhat similar to Mr. Buffett’s quote that’s as follows: “Either you work hard for your money or your money works hard for you.”

Our towns, cities, states, and our nation are spending money like never before in U.S. history. The federal government continues to increase our debt at a pace of close to $1 trillion dollars every 90 days.

Between January 2020 and October 2021, the M1 money supply (cash or cash-like instruments) grew from $4 trillion to $20 trillion as I’ve written before. The more money that is created and the larger our federal debt grows and compounds, the weaker the purchasing power of the dollar.

For those people who don’t own any real estate or stocks, they are not experiencing firsthand the record wealth being created for many Americans.

Inflation is more likely than not to grow at a faster pace in the near future than what we’ve seen over the past 50 years or so. If so, real estate has proven to be an exceptional hedge against inflation as properties tend to appreciate on a historical average at least as high as the published annual inflation rates.

If you’re lucky enough to own one or more properties today, then you might consider pulling some equity out of the home to acquire more income-producing assets. For first-time homebuyers, today may be the best time to start looking for properties.

A home near you that you consider to be “too expensive” might seem very reasonable five years from now as inflation keeps rising and our dollar gets weaker and weaker.

Rick Tobin

Rick Tobin has worked in the real estate, financial, investment, and writing fields for the past 30+ years. He’s held eight (8) different real estate, securities, and mortgage brokerage licenses to date and is a graduate of the University of Southern California. He provides creative residential and commercial mortgage solutions for clients across the nation. He’s also written college textbooks and real estate licensing courses in most states for the two largest real estate publishers in the nation; the oldest real estate school in California; and the first online real estate school in California. Please visit his website at Realloans.com for financing options and his new investment group at So-Cal Real Estate Investors for more details. 

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

Unaffordable Housing, Taxation, and Consumer Debt Trends

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By Rick Tobin

The purchasing power of the dollar continues to rapidly decline, sadly. This weakening dollar trend hasn’t just happened in recent years. Rather, it’s been going on since the formation of the Federal Reserve back in 1913. One dollar in 1913 now has the equivalent purchasing power of about 2 cents today.

Yet, the purchasing power has rapidly decreased at a seemingly accelerated pace since 2020 when the worldwide pandemic declaration began.

As per a home unaffordability study shared by Redfin and Visual Capitalist on April 4, 2024, an “unaffordable” home is defined as a new listing with a monthly mortgage payment that is no more than 30% of the median monthly income in its county.

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Here are the findings from this unaffordability report:

  • Only 16% of U.S. homes for sale were affordable in 2023, which was an all-time record low.
  • By comparison in 2021, 39% of listed properties were considered affordable.
  • With just 0.3% of home listings deemed affordable, Los Angeles has the lowest share of affordable listings in America.
  • By contrast, Detroit had the highest share of affordable listings with over 51% of homes.

Let’s take a look at how the unaffordable housing numbers have rapidly fallen over the past 10 years:

2023 16%
2022 21%
2021 39%
2020 45%
2019 40%
2018 37%
2017 42%
2016 45%
2015 45%
2014 46%
2013 50%
Source: Redfin and Virtual Capitalist

The Top 20 Most Unaffordable Cities

Seventeen of the top 20 most unaffordable U.S. cities to buy a home are located in either the counties of Los Angeles, Orange, or San Diego in Southern California. The other three cities are in Northern California. This is a national study created by the real estate tracking agency Construction Coverage, not just for California.

This data report compiled by Construction Coverage took a closer look at cities of all sizes, while focusing on the ratio of home prices to household income as the core basis for determining how affordable a region is these days.

The Top 3 most unaffordable cities in this study were as follows:

1. Newport Beach, CA: Median home price of $3.23 million; median household income of $127,353; and a home price-to-household income ratio of 25.4.

2. Palo Alto, CA: Median home price of $3.41 million; median household income of $179,707; and a home price-to-household income ratio of 19.

3. Glendale, CA: Median home price of $1.17 million; median household income of $77,483; and a home price-to-household income ratio of 15.2.

There are many regions across the nation with median home prices much higher than these Top 3 unaffordable housing regions. However, those regions generally have much higher household income to make the home price-to-household income much lower.

The California cities in the top 20 of the report are:
1. Newport Beach
2. Palo Alto
3. Glendale
4. Los Angeles
5. El Monte
6. Costa Mesa
7. El Cajon
8. Inglewood
9. Hawthorne
10. Sunnyvale
11. Irvine
12. Huntington Beach
13. Torrance
14. Garden Grove
15. San Jose
16. Anaheim
17. Long Beach
18. East Los Angeles
19. Carlsbad
20. Tustin

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States With the Highest Home Price-to-Income Ratios

Toughest Regions to Save Money

The national personal savings rate has dropped from record highs of over 20% in 2020 and 2021 to 3.8% as of January 2024, according to Forbes. Many Americans these days couldn’t come up with $400 in cash for an unexpected emergency, partly due to rising grocery, gas, utilities, housing (own or rent), clothing, restaurant, entertainment costs, and how high or not the state income taxes are there.

Let’s focus on how high certain foods have risen since 2019 to better understand why things seem so much more unaffordable these days:

1. Cocoa: +345%
2. Orange juice: +260%
3. Olive oil: +219%
4. Sugar: +120%
5. Fruit snacks: +77%
6. Cooking oil: +54%
7. Chocolate bars: +52%
8. Apple sauce: + +51%
9. Beef: +51%
10. Mayonnaise: +50%
Source: The Kobeissi Letter

The Riverside-San Bernardino-Ontario metropolitan area is ranked as the #1 most challenging place in America to save money with the Los Angeles-Long-Anaheim metropolitan region ranking second.

The list of America’s hardest metropolitan regions areas to save money in is listed below:

1. Riverside-San Bernardino-Ontario
2. Los Angeles-Long Beach-Anaheim
3. Miami-Fort Lauderdale-Pompano Beach, FL
4. New York-Newark-Jersey City, NY-NJ-PA
5. Atlanta-Sandy Springs-Alpharetta, GA
Sources: Forbes Advisor and KTLA

The top ten most difficult states to save money in can be viewed below:
1. California
2. Hawaii
3. Nevada
4. Oregon
5. Maryland
6. Florida
7. New York
8. South Carolina
9. Colorado
10. Louisiana
Source: Forbes Advisor and KTLA

Rental housing changes: According to data shared by Zillow and NerdWallet, the average U.S. rent was $1,958 in January 2024. This is +29.4% more expensive than before the pandemic declaration in March 2020.

Rising Taxation Risks

Our federal government debt surpassed $34 trillion earlier this year. It’s now growing at a pace of an additional $1 trillion every 90 days, which is an annual new debt pace of $4 trillion per year. For comparison purposes, it took 10 years for the federal debt to increase by $2 trillion between 1980 and 1990.

The White House is seeking to raise another $5 trillion in tax revenues starting next year in 2025 to help offset the increasing size of our budget deficits. For real estate investors, you and your tax advisors should stay focused on these proposals that may more than double the capital gains rate and possibly eliminate the 1031 tax-deferred exchange option, which helps to defer capital gains taxes over a much longer period of time.

If this 2025 budget proposal is enacted, California residents will be looking at upwards of a 59% federal-state capital gains income tax rate starting in 2025. It also may make significant negative changes to the “death tax” for heirs. Don’t be surprised if Americans start selling assets here in 2024 on a larger scale to avoid these much higher capital gains taxes next year.

Additionally, the White House’s 2025 budget proposal includes the creation of a minimum tax equal to 25% of an individual’s taxable income and unrealized capital gains for assets that weren’t even sold for certain higher income people, as per multiple sources including Quoth The Raven.

The combination of increasing all types of taxes (state, federal, capital gains, and possible unrealized tax gains) plus the potential elimination of the 1031 tax-deferred exchange for rental properties will hurt real estate values at some point.

All-Time Record Credit Card

Credit card and overall consumer debt are at all-time record highs along with the total rates and fees (APRs). Credit card defaults are now at the highest level ever or at least since 2012, when the Fed started tracking this data.

Average APRs are fluctuating between 27% and 33% these days for many consumers. It wasn’t that long ago when credit card APRs were closer to 12% about 10 years ago or so.

All stages of credit card delinquency (30, 60, and 90+ days) rose during the fourth quarter of 2023, according to data shared by the Federal Reserve Bank of Philadelphia.

Freddie Mac Bailouts for 2nds

Freddie Mac may soon start purchasing funded home equity lines of credit (HELOCs) in the secondary market, as per multiple sources including HousingWire.

A new multi-trillion dollar stimulus package of up to $2 trillion is being prepared, by way of the government-backed Freddie Mac entity, so that it’s easier for banks and mortgage companies to offer 2nd loans, which will then be quickly sold off to Freddie Mac.

In recent years, a larger number of banks and mortgage companies stopped offering HELOCs due to the perceived risk, especially for liens in 2nd position. If lenders may soon be able to quickly unload the funded HELOCs over to Freddie Mac, they may be inspired to offer these types of riskier loans again.

Whether it’s a federal bailout of lenders, homeowners, small businesses, billion-dollar corporations, or consumers drowning in credit card or student loan debt, all of these actions are inflationary and will likely make the dollar weaker and weaker.

Because government spending is likely to keep exceeding all-time record highs, these inflationary actions may help boost real estate values that are generally hedged against inflation.

Please try to pay off any double-digit consumer debt, set aside cash for you and your family if possible, and keep your eyes wide open for potential discounted real estate bargains in a neighborhood near you.

Rick Tobin

Rick Tobin has worked in the real estate, financial, investment, and writing fields for the past 30+ years. He’s held eight (8) different real estate, securities, and mortgage brokerage licenses to date and is a graduate of the University of Southern California. He provides creative residential and commercial mortgage solutions for clients across the nation. He’s also written college textbooks and real estate licensing courses in most states for the two largest real estate publishers in the nation; the oldest real estate school in California; and the first online real estate school in California. Please visit his website at Realloans.com for financing options and his new investment group at So-Cal Real Estate Investors for more details. 

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

Will the Realtors®’ Commission Settlement Impact You?

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By Rick Tobin

The biggest purchase of a person’s life for the average American is their primary home where they live. Later in life, the equity in this same owner-occupied home will likely represent the bulk of the homeowner’s entire net worth.

A wise purchase can make you very wealthy, while an unwise purchase can be financially devastating. Would you prefer to take this risk alone or with a team of experienced professionals by your side?

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How many of you have seen how thick a real estate purchase and mortgage file can be at the time of closing? I’ve seen files for residential or commercial real estate loans that were three, six, twelve, and twenty-four plus inches thick by the time of closing. Could you imagine handling the closing of a purchase transaction without the expert assistance provided by real estate licensees, mortgage brokers, loan processors, underwriting teams, escrow, title insurance, appraisers, home inspectors, and several others?

As a result of the recent $418 million dollar anti-monopoly lawsuit settlement that the National Association of Realtors® (NAR) approved, let’s take a closer look at how these new buyer agency relationship regulations may directly impact you as a buyer or seller.

The potential reduction of brokerage commissions

The potential elimination of buyer’s agents from a larger percentage of future sales transactions will obviously hurt many real estate licensees. Prior to this NAR settlement, the average commission paid per real estate transaction was about 5.5%. It can be split evenly at 2.75% to the listing agent and 2.75% to the buyer’s agent or with more of the commission split going to the listing agent such as 3% for list agent and 2.5% for the buyer’s agent. Will future commission splits fall to lower amounts?

There are upwards of 1.5 million Realtors® who belong to NAR and about 500,000 additional real estate licensees who don’t belong to NAR for a grand total of nearly 2 million real estate licensees.

Upwards of 80% of real estate licensees (about 1.6 million) own at least one home. With the future loss of income from discounted or eliminated buyer’s brokerage fees, many of these real estate licensees may be forced to list their home for sale while pushing the national home listing inventory rates higher.

Generally, the buyer’s agent does the most work in a real estate transaction because they tend to interact with almost every party involved in the transaction (listing agent, mortgage broker or banker, escrow, attorney, and/or title insurance, appraiser, home inspectors, environmental specialists, etc.). Wouldn’t the elimination of a buyer’s agent be problematic for many transactions across the nation?

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How will first-time buyers afford to buy their buyer’s agent directly?

The average first-time homebuyer invests approximately 6% of the purchase price. For all homebuyer types (move-up, 2nd home, investor, etc.), it’s closer to 13% nationwide and as high as 18% here in California.

VA (Veterans or active military personnel) homebuyers are not allowed to pay buyer’s agent fees. Most of them qualify with no money down 100% LTV loans. FHA buyers usually come in with somewhere between 0% and 3.5% down. Many times, FHA home buyers do not have any extra cash to pay their buyer’s agents directly.

If homebuyers are now expected to find and hire their own buyer’s agent and pay them anywhere between 1% and 3%, it will be very challenging for many homebuyers to come up with the additional funds to pay their buyer’s agent directly and purchase their dream home.

Commissions and seller credit negotiations

Commission fees for the listing agent and buyer’s agent have always been negotiable. This new NAR settlement doesn’t change that option. Yet, it makes it more challenging for buyers, sellers, and real estate licensees to complete a transaction.

If a buyer prospect signs a buyer’s agency agreement with a real estate licensee for 2% and the seller or new home builder offers to pay 3% to the buyer’s agent, then can the buyer’s agent be paid the higher 3% commission offered by the seller or is the commission amount limited by the 2% fee mutually agreed to by the buyer and buyer’s agent? For licensees, this is a topic to be discussed with your employing broker and/or advising legal experts.

Many times, a purchase deal is structured with seller credits that cover the buyer’s agent and listing agent fees and overall closing cost credits (loan, escrow, title, inspection, and/or appraisal fees), which may vary between 5% and 10% of the total purchase price. Without these seller credits, the buyers may not have enough of their own funds to cover the required down payment and closing costs with or without being required to pay their own buyer’s agent.

The rise of dual agency, attorney closings, and self-represented deals

This NAR case settlement may set a legal precedent for future courtroom cases to completely outlaw dual agency where one licensee represents both the buyer and seller. I’ve written real estate courses in more than 30 states over the years and have held eight different real estate, mortgage, and securities brokerage licenses, so I’m somewhat familiar with the fact that many states already outlaw dual agency.

Many legal groups are behind the push to eliminate real estate licensees so that lawyers handle a higher percentage of closings like they do in New York state and elsewhere. Attorneys like to say that dual agency for Realtors® is akin to an attorney unfairly representing both sides in a lawsuit.

A buyer’s agent is focused on protecting their buyer more than any other licensed or unlicensed professional involved in a purchase transaction. Why would so many people be happy to eliminate the main party who is truly working in the buyer’s best interests?

Contingency dates and disclosure risks

Real estate contracts and inspection reports are incredibly complex. A buyer or seller who attempts to represent themselves in a purchase contract may miss important contingency dates for the completion of the appraisal, home inspection reports, or formal mortgage approval and lose their 1% to 3%+ in earnest money deposits.

Sellers, in turn, who don’t fully disclose all known or potential home and environmental risks to their buyers may later be subject to multi-million dollar lawsuits related to mold, cracked foundations, leaky roofs, or toxic air from a nearby chemical plant. The seller’s $300,000 home price sales gain later turns into a – $1.7 million dollar loss after the $2 million dollar court judgment is filed for not clearly disclosing all known or potential risks.

The median U.S. home sales price is at or just below $400,000. The average buyer’s brokerage commission fee is 2.5% or about $10,000. A buyer who is self-represented may pay too much for the home at prices well above $10,000 and put themselves at greater risk for missing out on the disclosure risks that could later cost them tens or hundreds of thousands of dollars.

A future lawsuit against the seller may net them zero if the seller files for bankruptcy protection unless fraud can be proven. The buyer still may collect zero from a recorded judgment if the seller has no assets.

For more successful real estate licensees who can afford a rather large marketing and networking budget while controlling a high percentage of the listings in their region, how many buyers’ agents will show your listing if there’s no buyer’s agent commission being offered by the seller? Why would someone work for free and take on such significant risk for nothing?

Mortgage brokers who hold a real estate broker’s license like me could step in and write up the purchase contract, negotiate the seller credits, and bring in the money to close it. Yet, why would I want to double my workload if I act as the buyer’s agent to collect no additional commission and significantly increase my liability risks? In many of my purchase deals, I value the assistance provided by the buyer’s agent more than any other professional.

Will home values be impacted by new agency regulations?

The real estate sector represents upwards of 20% of the national economy. For people who don’t hold real estate licenses, they may still be directly impacted as future home inventory numbers possibly rise and property values start to decline. As foreclosures rapidly increase, these become the neighborhood sales comps that either hurt or help your home value.

Some in the media are claiming that this buyer’s agency commission reduction or elimination will be very good for homeowners. Again, the average buyer’s brokerage commission is closer to 2.5% than 2.75% or 3%, yet I will increase it to 3% for the average $800,000 home sales price in California to arrive at an alleged $24,000 commission savings for the buyer and/or seller.

If home prices fall just 5% in California due solely to these massive Realtor® regulation changes, that’s equivalent to a $40,000 price reduction for the seller. If so, the seller is now losing $16,000 in gains ($40,000 – $24,000 = $16,000 in total losses) with just a 5% reduction in sales prices in spite of paying no buyer’s agent commission fee on a typical $800,000 home sales transaction. What happens if home prices fall 10%, 20%, or more?

The rise in mortgage rates, insurance costs, utilities, and overall skyrocketing inflation rates will also inspire more homeowners to list and sell. Real estate prices are influenced the most by the old economic theory known as supply and demand, for better or worse.

As more and more residential and commercial property go underwater or upside-down (mortgage debt exceeds value), how will buyers or sellers be able to handle the complex process of forbearance, pre-foreclosure, or short sale discounts on their own without the help of an experienced advisor?

To learn more details from the perspective of the National Association of Realtors®, here’s an informative post that’s entitled The Truth About the NAR Settlement Agreement.

Whether you’re in favor of this NAR settlement agreement or hate it, please research as many different sides of this topic to better understand how it may help or harm you as a buyer, seller, landlord, tenant, real estate licensee, or third-party professional.

Rick Tobin

Rick Tobin has worked in the real estate, financial, investment, and writing fields for the past 30+ years. He’s held eight (8) different real estate, securities, and mortgage brokerage licenses to date and is a graduate of the University of Southern California. He provides creative residential and commercial mortgage solutions for clients across the nation. He’s also written college textbooks and real estate licensing courses in most states for the two largest real estate publishers in the nation; the oldest real estate school in California; and the first online real estate school in California. Please visit his website at Realloans.com for financing options and his new investment group at So-Cal Real Estate Investors for more details. 

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

How to Overcome Declining Purchasing Power with Real Estate

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By Rick Tobin

Homeowners are 40 times wealthier than tenants. Real estate is an exceptional hedge against inflation because home values tend to rise at least as high as the published inflation rates.

If you’re fortunate to own real estate over years or decades, it’s very likely to be the main reason for the bulk of your family’s overall net worth. Conversely, tenants will be losing money over time as their rents continue to rise right alongside skyrocketing inflation rates.

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Americans in 2023 need to earn more than $11,400 to be able to enjoy the same standard of living as they did in 2021 thanks to the rapidly declining value of our dollar, according to CBS News.

If your earnings rose by 34% from January 2020 to October 2023, the purchasing power of your labor kept pace with higher costs. All of us who aren’t earning 34% more since January 2020 have lost ground. It now takes more hours of work to buy groceries and everything else. To offset declining purchase power, real estate ownership may be your best option.

The purchasing power of $100,000 in income in January 2020 is only $66,000 in purchasing power today (34% reduction). To keep pace with the rapidly falling purchasing power of the dollar, $100,000 in income in January 2020 would need to rise to $134,000 in income today or your investments would need to appreciate at the same rate to offset your dollar losses.

Rising Prices for Goods, Services, and Assets

Between 2008 and the 1st quarter of 2023, let’s review some of the “official” government published data for consumer goods, services, and assets from sources such as the U.S. Bureau of Labor Statistics:

  • Hospital services: +99.8%
  • College tuition: +64.4%
  • Child care: +62.1%
  • Medical care: +57.2%
  • Food and drink: +52.8%
  • Housing: 48.3%

Again, these are the published numbers that are likely underreported and much lower than the true inflated price changes. To me, it seems like all prices are significantly higher here in the 4th quarter of 2023 as compared to the 1st quarter this year. If so, the actual price gains may be significantly higher as we head into 2024.

All-Time Record High California Home Prices

In spite of mortgage rates more than tripling over the past year or so, housing prices statewide in California have never been higher for owners, new buyers, and tenants.

Shocking Los Angeles Home Price Swings

The median home sales price in Los Angeles County hit a record high of $914,640 in September 2023.By comparison, the median Los Angeles County home price was $318,075 (12/08).

Near the peak of the previous housing bubble and near the official start of the Credit Crisis or Great Financial Recession in late 2008, the median home sale price was almost $600,000 lower in Los Angeles County than median-priced homes in the same region. How is this not shocking?

Today, Los Angeles is ranked as the #2 most expensive U.S. city and the #6 most expensive worldwide city for residents to live in, according to KTLA News.

Many California homeowners have never been wealthier due to rapidly increasing home equity gains while many tenants have never been poorer due to their all-time record high rental payments, sadly.

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Expensive Coastal Regions and Inland Moves

Because some of the most expensive real estate prices in the world are located in California coastal counties like San Diego, Orange, Los Angeles, Ventura, Santa Barbara, and San Francisco (both a city and county name), more residents are moving inland to places like Riverside or San Bernardino counties in Southern California or out of state to Arizona, Nevada, or Texas.

Buyer demand still exceeds the available home supply while pushing home prices higher, especially in the Riverside County region, which is much more affordable than the near $840,000 statewide home price average for California.

Riverside County Home Spotlight Region

The median sale price of a single-family home in Riverside County was a new all-time record high of $620,960 in October 2023, up from $600,000 in September, with a rise from $599,990 in October 2022, according to the California Association of Realtors.

  • Lake Elsinore: $575,000 ($175,000 below the Temecula average)
  • Canyon Lake: $662,000
  • Menifee: $547,500
  • Murrieta: $657,500
  • Temecula: $750,000
  • Corona: $759,000

Adding Value to Real Estate

Owners or interested buyers who are thinking about purchasing a new one-to-four unit property to boost their wealth and/or monthly income with rental units have several options these days which may include:

  • First-time owner-occupied homes
  • A move-up from a smaller to a larger home
  • A short-term or long-term rental
  • Adding tiny homes or ADU (Accessory Dwelling Unit) to a residential property site to increase monthly cash flow.
  • Remodeling an existing home with a new kitchen, bathroom, or bedroom.
  • Building a brand new home, duplex, triplex, or fourplex from the ground up.

One-Time Close Construction Loans

I’ve worked on numerous individual home construction loans and large residential development tracts over the past few decades. Yet, I’ve never seen a better, easier, and more affordable home construction loan option for owners who are interested in building a brand new “dream home” for their family.

Generally, a person may need two or three separate loans to build a new home that may include a land purchase loan (40% to 50% LTV ranges are more the norm), construction loan, and a final 30-year takeout or permanent loan to pay off the construction loan.

With a One-Time Close Construction Loan, the borrower applicant qualifies for one loan to buy the land, build the home, and keep the same loan for up to 30 years all within one loan closing option. This way, there’s one credit report pull, one loan underwriting and approval process, one down payment unless it’s a VA loan (up to 100% financing) or a very low down payment requirement for FHA-insured and conventional loans (up to 95% to 96.5% LTV).

Let’s review below some of the loan product highlights offered by one of my main lending partners:

Conventional Loans

* Available on 15-and 30-year fixed conventional, high balance and 7- and 10-year ARM options
* Eligible on primary, second or vacation home, and investment property purchases and rate/term refinances
* Loan amounts up to the conforming loan limits
* 700+ FICO, up to 95% LTV
* 11-month maximum build period with 1-month modification period
* Interest-only monthly payments during the build period

VA Loans

* Available on 30-year fixed loans
* Loans up to $4M
* Eligible on primary home purchases and cash-out refinances
* 580+ FICO, up to 100% LTV
* 11-month maximum build period with 1-month modification period (build period is deducted from the loan term)
* No monthly payments during the build period

Rule of 72 and Power of Leverage

Real estate has proven to be an exceptional hedge against inflation over the past 100 years. In some economic boom years, home values may double in value every 2, 3, 5, 7, or 10 years. With minimal down payments, the true annual cash-on-cash returns are much higher than most people realize.

The Rule of 72 is an investment formula used to estimate how long it may take for an asset to double in value using a projected annual rate of return. If homes in your region have increased 7% per year over the past several years and home appreciation continues at the same pace in the future, then it may take 10+ years for your new home to double in value using the Rule of 72 (72/7 or 7% = 10+ years).

Most first-time home buyers use high mortgage leverage within a 0% to 6% down payment range (6% down is average).
Let’s use 20% down payment for an estimated cash-on-cash return for an owner-occupied or investment property buyer. At a 7% annual appreciation rate average, the cash-on-cash return is actually 5 times 7% (20% down – 1/5th; 80% bank – 4/5th) for a total 35% annual cash-on-cash return.

Time and inflation can be two great allies to eliminate the mortgage debt as your home rises in value thanks to the power of leverage and inflation.

Is the housing market positive, negative, or neutral? It depends on the home region, the regional home listing inventory supply, and the price range is perhaps the safest answer to give.

Why doesn’t it feel like a slow home sales market to first-time buyers? Let’s take a closer look at the national home sales numbers for October 2023 as provided by the National Association of Realtors:

  • 66% of homes for sale were sold in less than a month.
  • 62% of surveyed real estate professionals said that their first-time home buyers had to put in four or more offers before closing on a home.
  • The median home sales price for an existing home was $391,800, up 3.4% compared to a year ago.

Invest in Your Future Today

The average homeowner at retirement age has 83% of their net worth tied up in their primary home. 60%+ of Americans surveyed say that they live paycheck to paycheck, so saving is challenging. Middle-income parents may spend an average of $310,605 by the time a child born in 2015 turns 17 years old in 2032, per Brookings Institute. What about college?

The average Social Security benefit paid out in 2022 was $1,657/mo. ($19,884/yr.). Median savings rate (excluding retirement funds) by age: $3,240 (under 35); $4,710 (35-44); $5,620 (45-54); and $6,400 (55-64), per a Federal Reserve survey. The median retirement savings for all families is $87,000, according to the 2022 Survey of Consumer Finances.

There’s good debt (mortgages) and bad debt (credit cards at 28% to 33% rates, etc.). Mortgages help create long-term wealth, especially after they are paid off in full. To shorten the time to pay off a mortgage, you might pay biweekly and add some principal to reduce 10 to 15+ years in payments while the home asset potentially doubles or triples in value.

Our dollar’s purchasing power is on track to continue falling in value. If so, the prices paid for consumer goods, services, and assets like real estate may keep rising as well. As a result, equity gains for real estate ownership may increase while giving you more options to pay off debt and build a brighter future.

Rick Tobin

Rick Tobin has worked in the real estate, financial, investment, and writing fields for the past 30+ years. He’s held eight (8) different real estate, securities, and mortgage brokerage licenses to date and is a graduate of the University of Southern California. He provides creative residential and commercial mortgage solutions for clients across the nation. He’s also written college textbooks and real estate licensing courses in most states for the two largest real estate publishers in the nation; the oldest real estate school in California; and the first online real estate school in California. Please visit his website at Realloans.com for financing options and his new investment group at So-Cal Real Estate Investors for more details. 

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

Economic Extremes & Consumer Shock

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By Rick Tobin

None of us have ever seen such wide-ranging extremes of economic and asset trends as we’ve seen over the past few years. In many ways, it’s like we’re on a giant yo-yo swinging wildly from side to side or on a bumpy roller coaster ride with wicked twists and turns that keeps moving onward for years at a time instead of over just a minute or two.

All of the economic jerking that we feel on a daily basis can be overwhelming. Some days we see very positive news which gives us hope for a bright future. Other days, the gloomy negative news can seem a bit shocking because much of these positive and negative economic data trends have never been experienced in past years or decades.

Let’s review some of the key economic data trends that swing from very bad to very good (or vice versa) in hours, days, weeks, months, or over the past few years:

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Home Price Changes

Nationally, home prices have risen consistently since 2011. Investor home purchases fell the most on record in the 4th quarter of 2022 at a whopping -46% decline pace. Home prices fell for six months in a row since peaking in July 2022 through the end of January 2023, according to the Case-Shiller U.S. National Home Price Index.

A booming home price example: A young family purchases a new starter home for $300,000 in January 2020 shortly before the global pandemic designation. That same home would’ve peaked at $435,000 in the summer of 2022 using the same Case-Shiller data trends. If so, the family gained $135,000 in newfound equity in just 18 months or so.

The most horrific housing crash in US history took place between the market peak in 2006 and 2012 when the national housing average fell – 27%. California’s home losses were much more extreme with the peak to trough bubble burst falling as much as -41%.

Between 2019 and peak prices near the summer of 2022, many regions had home appreciation percentages of somewhere between massive 50% and 100%+ gains. Future home losses will need to be significant and the worst ever in national history to turn recent home purchases negative.

For people who’ve owned their homes for many years or decades, they will be more likely to ride out any significant price drops in the future. However, buyers who purchased with anywhere between 0% and 5% down in recent years may soon go underwater with the mortgage debt surpassing the market value.

Year-over-year home sales fell between 37% and 47% in Southern California counties through January. As sales volume declines, home price drops tend to follow even if most sellers aren’t willing to do it at first because they want peak record high prices like last seen in 2022.

Fewer buyers means less competition for quality properties and may lead to home listing price cuts and increased closing cost credits from sellers to buyers.

Commercial real estate properties: Upwards of 50% of all commercial property mortgage debt is a floating or adjustable rate. Additionally, the cost to insure the interest rate cap derivatives contract that protects both borrowers and lenders from the increasing risks associated with rising rates has increased 10-fold for borrowers, as per the Wall Street Journal. As such, it’s a double whammy for commercial mortgage borrowers in that both their mortgage and insurance rates have skyrocketed over the past year. The commercial sector is still getting hit harder than residential.

Listing Supply

The St. Louis Fed and Realtor.com share data together which shows both the current and past history for single-family homes, townhomes, and condominiums across the nation at any given time. As with other products available for purchase, a lower supply of something like eggs or popular toys will likely lead to higher prices due to the demand exceeding the available supply. Conversely, an oversupply of a product and falling demand will cause prices to fall.

Let’s review the national home listing trends dating back to 2016:

The US Census Bureau recently published data for the 4th quarter of 2022 which showed that there were 15 million vacant housing units (homes, condos, and rental apartments).

Vacant “shadow inventory” homes that are NOT listed for sale absolutely dwarf the total number of listed homes nationwide by a significant multitude. This has been true since at least 2009. If just 5% or 10% of the “shadow inventory” homes suddenly changed to homes available for sale, it could double the size of the national listing supply. “Shadow inventory” homes can also include homes already foreclosed upon by banks or mortgage loan servicing companies that are not offered up for sale.

Mortgage Rates

Approximately 75% of all homes nationwide were purchased with mortgages in recent years. Almost every boom and bust housing cycle over the past 50+ years was directly related to mortgage rate trends.

Between April 1971 and September 2022, the average 30-year fixed mortgage rate was 7.76% as per Freddie Mac. Today’s rates for borrowers with average FICO scores near 690 have fluctuated between 7% and 8% in recent months. The main difference today is that mortgage balances are two, three, four, or five times larger than in decades past.

We’re in the midst of the fastest mortgage rate increase in US history. The Federal Reserve’s rate hikes at a record pace over the past year are likely to later pivot and become massive rate cuts at some point in the future like we saw shortly after the 2008 housing bubble burst.

For comparison purposes about rate hikes, the Fed increased rates 17 times between June 2004 and June 2006 while pushing rates from 1% to 5.25% over 24 months while much smaller rate hikes that were closer to .25% at a time. This was the catalyst for the housing bubble burst later as so many adjustable rate option-like pay ARM mortgages and HELOCs doubled or tripled in monthly payment amounts.

Between the 1st quarter of 2022 and the 1st quarter of 2023, we’re on pace to increase rates 4.25% just like during the 2004 to 2006 era while doing it in about half the time (12 months instead of 24 months).

As of July 2022, approximately 80% of all open residential mortgages nationwide were priced at a fixed 4% rate or lower as per CoreLogic. Approximately 40% of all US residential mortgages were financed or refinanced near peak lows in 2020 or 2021.

Key point: The Primary Mortgage Market Survey conducted by Freddie Mac found that 99% of all residential mortgages nationwide had existing fixed rates lower than the national fixed rate average during the first week of March 2023.

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Three years ago near the start of the “pandemic” declaration in March 2020, the 10-year Treasury yield hovered close to an incredibly low and rather spooky 0.666% yield. The 30-year fixed mortgage rate is tied to the directions of the 10-year Treasury yield. Today’s 10-year Treasury yield closed at 3.966% on March 6, 2023 by comparison, which was about 3.3% higher.

Historically, the 30-year mortgage rate pricing is about 1.7% over the 10-year Treasury yield (0.6630 + 1.7% margin = 2.363% 30-year fixed mortgage rate, approximately). Over the past year, the margin has widened considerably to 3% or 4% over and above the 10-year Treasury yield to arrive at the latest 30-year fixed mortgage. This widening of the margin was partly due to perceived worsening financial conditions and the Fed’s Quantitative Tapering strategies which included their attempt to sell off trillions of dollars’ worth of mortgage bonds in spite of their being few buyers.

As a result, the 30-year fixed mortgage rate skyrocketed faster than ever to reach somewhere between 6% and 8%, depending upon the borrower’s FICO score and other creditworthiness guidelines.

Mortgage Applications

The lowest mortgage application reading of the 21st century was reached as of the 1st quarter in 2023 due to rising rates. By comparison when mortgage rates were at or near all-time record lows, there were 23.3 million home loan applications completed by consumers, according to the Consumer Financial Protection Bureau.

M1 and M2 Money Supply

“M1 is the money supply that is composed of currency, demand deposits, other liquid deposits—which includes savings deposits. M1 includes the most liquid portions of the money supply because it contains currency and assets that either are or can be quickly converted to cash. However, “near money” and “near, near money,” which fall under M2 and M3, cannot be converted to currency as quickly.” – Investopedia

The federal government has not published data about M3 since 2006. Our national money supply trends are more of a factor for causing rising inflation or falling deflationary trends more so than consumer spending.

High

The M1 money supply from $4 trillion to $20 trillion between just January 2020 and October 2021.

Low

M2 is a measure of the money supply which includes cash, checking deposits, and other types of deposits that are easily convertible to cash such as CDs. Last year was the first time when bank deposits declined within the same year since 1948. This is partly why banks are finally starting to offer higher savings rates to attract more deposits because they’re running low on cash.

The M2 year-over-year growth swung from one extreme to another between 2020 and 2023. It peaked at a +26% year-over-year growth in 2021 and later collapsed to a -2% by early 2023. In the past, a negative M2 money supply that was contracting was a foreboding or ominous sign of an upcoming economic recession or severe depression like seen back in the 1920s.

The M1 and/or M2 money supply directional trends tend to mirror inflation or deflation trends. The more money that is created, the more likely that inflation will rise as well while pushing assets like stocks and real estate much higher. Conversely, a falling money supply can create a deflationary economic cycle when asset prices fall as well.

Savings: US savings rates reached an all-time record low by the 1st quarter of 2023.

Stocks

Let’s take a closer look at some key dates for the Dow Jones stock index to get a better understanding of how wildly stock prices have swung over the past three years:

The Dow Jones stock index fell from a peak high of 29,551.42 on February 12th to a market low of 18,213.65 on March 23rd in 2020, which is more than a 38% overall percentage loss in just over a month. Of the 10 all-time biggest daily point losses ever for the Dow Jones index, eight of these days took place in either February or March in 2020. By comparison, the then all-time daily Dow Jones point loss record for the infamous day that almost took down the global financial system back on September 29, 2008 was only a -777 daily point loss.

Month & Year / Daily Point Loss

#1: 03/16/2020 / -2997
#2: 03/12/2020 / -2353
#3: 03/09/2020 / -2014
#4: 03/11/2020 / -1465
#5: 02/27/2020 / -1191
#6: 02/05/2018 / -1175
#7: 02/08/2018 / -1033
#8: 02/24/2020 / -1032
#9: 03/05/2020 / -970
#10: 03/27/2020 / -915
Source: Standard and Poors (through 03/27/2020)

Consumer Debt

Mortgage and other consumer debt is at an all-time record high. Credit card debt is near $1 trillion with the highest rates and fees ever averaging over 20%.

Distressed or pre-foreclosure numbers are listed as “below historical averages” today partly due to existing Covid-19 moratoriums. However, the true number of distressed properties that do not have foreclosure filings may later be on pace to reach peak 2008 to 2012 numbers and will likely be led by FHA mortgage defaults (95% to 96.5% LTV is the norm for FHA purchase deals).

After loss of income, the #1 reason why homeowners walk away from their mortgage and let the property go to foreclosure is when it’s upside-down, underwater, or the mortgage debt is higher than the current market value.

The #1 cause of financial insolvency or bankruptcy is related to unpaid medical bills; Americans have never been unhealthier than today, tragically.

Published inflation rates have varied between 6% and 9% in recent months. Yet, the true inflation numbers are closer to 15% to 17% if the federal government used the same data analysis techniques as a few decades ago.

Subprime automobile loans recently surpassed 6%, which is the highest default number ever.

Energy Price Swings

Back in April 2020, oil prices per barrel briefly went negative to reach -37 per oil barrel. As a result, the cost of the barrel itself was more valuable than the oil inside. Energy costs are usually a root cause of both inflation and deflation as we’ve all seen over the past few years. Some oil barrel prices later surpassed $100 in 2022 as many of us saw $5, $6, $7, $8, and $9 per gallon, especially here in California.

Derivatives

At the peak of the last housing bubble burst in 2007 and 2008, the estimated value of the global derivatives marketplace was about $1,500 trillion. Today, the global derivatives market is closer to $3,000 trillion and may reach closer to $4,000 trillion by 2027 if the same annual growth rates continue, as per Globe Newswire. The frozen global derivatives market was the main cause of the Credit Crisis or Great Recession back in 2008.

A derivative is a hybrid financial and insurance instrument that can be leveraged up to 50 times. Or, it’s a glorified bet on the future direction of things like interest rate directional trends as seen with interest rate option derivatives. Even though us mortgage brokers and real estate investors were blamed by the media for the Credit Crisis, defaulted subprime mortgage debt represented less than 1% of all debt that imploded back then.

Denial or Research – Pick Your Poison or Solution

What we avoid in life controls us. It’s usually best to research as many different positive, neutral, or negative sides to any story or asset class like real estate. You’re more likely to survive any economic downturn if you make precautionary plans and keep your eyes wide open for new opportunities that few others around you can see at the time.

Denial is usually the most common first reaction when presented with dissenting opinions or scary topics, especially if you work or invest in the real estate or financial sectors. Yet, you must thoroughly analyze all sides, question everything (especially your own perspectives), and focus on the potential opportunities or solutions.

The harder we fall, the higher we bounce back, hopefully. If the Federal Reserve does a massive pivot and starts cutting rates again and increasing their Quantitative Easing strategies with more asset purchases (stocks, bonds, and mortgages) to boost the economy again, the market may do another positive market swing skyward. Only time will tell, so get your popcorn ready!

Rick Tobin

Rick Tobin has worked in the real estate, financial, investment, and writing fields for the past 30+ years. He’s held eight (8) different real estate, securities, and mortgage brokerage licenses to date and is a graduate of the University of Southern California. He provides creative residential and commercial mortgage solutions for clients across the nation. He’s also written college textbooks and real estate licensing courses in most states for the two largest real estate publishers in the nation; the oldest real estate school in California; and the first online real estate school in California. Please visit his website at Realloans.com for financing options and his new investment group at So-Cal Real Estate Investors for more details. 

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