Cash Buying Trends in 2024- Why Fewer Homes Are on Market

By 2010, the Great Financial Crisis had played its course long enough for lawmakers to pass the Dodd-Frank Act. Following the first major housing crash since the Great Depression and poor economic conditions, the act paved the way for recovering the financial market by strengthening regulations and oversight. Dodd-Frank was the key to preventing the same meltdown from ever happening again while creating another issue: The Supply Crisis. 

As a result of Dodd-Frank, fewer homes were placed on the market. Without high-risk adjustable mortgages, people could use their homes as a secure and unfailing hedge against inflation. Most buyers had excellent credit and great jobs and opted for fixed-rate mortgages. Since there were far fewer foreclosures and short sales, the United States national housing inventory slowly tumbled to record lows.

In response to COVID-19, mortgage rates dropped to historic lows, causing people to take advantage of a once-in-a-lifetime opportunity. For example, if a buyer desired a $5,000 payment (principal and interest) in November 2020 when the 30-year fixed rate was 3%, they were looking at a home priced just shy of $1.5 million. With today’s stubbornly high mortgage rate environment, currently hovering near 7%, that same buyer can only afford a home at $940,000. The difference of $542,500 between the two mortgage rates is enough to stop many would-be buyers from purchasing.

In a typical market, most home purchases are primarily made utilizing a mortgage, with a smaller percentage of buyers paying in cash. We can even see this in the auto industry, with financing (mortgage) and leasing (renting) being the two most popular ways to acquire a car. However, fewer people have sufficient funds to purchase a car, let alone a home.

From 2022 on, we’ve seen a swan dive of a decrease in existing home sales in the United States. With limited inventory and demand due to high mortgage rates, fewer transactions can take place. As a result, smaller factors and changes become more evident to the naked eye. One will even notice how mortgage rate fluctuations dictate where supply and demand can move in the future.

As affordability deteriorates over time, fewer people can afford a mortgage, explaining why there are fewer home purchases. While taking a closer look, one will notice that cash transactions have not changed much over time, yet have become a much larger percentage of all transactions. With not as much movement in the market, cash transactions are viewed in a larger scope, causing many to think the entire market has shifted towards cash.

Thankfully, high mortgage rates are not here forever. Eventually, there will be a gradual relief in the federal funds rate, causing mortgage rates to fall, as well as rates tied to cars, credit, or any consumer loans. With enough relief, expect to see a shift in the housing market. As soon as mortgage rates dip into the 5's, even 5.99%, a new market will emerge, a tidal wave of movement. More transactions mean that cash buyers will be a smaller percentage of the purchasing pool.

In May of this year, 24.5% of all closed sales in Southern California (Los Angeles, Orange, Riverside, San
Bernardino, and San Diego) were cash transactions, approaching a quarter of the entire market. The cash purchased homes represented 3,530 out of a total of 14,381. In a normal pre-covid average (2017-2019) market, for May, there would typically be just over 19,000 home sales. That difference is 4,797 homes or 33% extra home sales. If the same amount of cash homes were bought with the pre-covid May average (2017-2019) for existing home sales, 18% of all closed homes would have been closed in cash, which tells an entirely different story. Unfortunately, many have created a negative narrative around the inability to purchase today due to the competition of so much cash in the market.

PERCENTAGE OF CASH CLOSED SALES BY COUNTY : JANUARY - MAY

It is crucial to understand that today’s market is not permanent and is subject to change. When that will happen is entirely unknown.

Julia Huntsman, REALTOR, Broker | http://www.abodes.realestate | 562-896-2609 | California Lic. #01188996

Article by Brennan Thomas

Rules About Broker Compensation Are Changing -- Everywhere

Broker compensation is not going away, but it will be handled in a different way than has been the previous long-established practice.  

As of August 13, 2024, revised California REALTOR forms for residential real estate are going into effect, as well as the way listings are entered into CRMLS.  These changes are the result of a nationwide settlement entered into between the National Association of REALTORS and the Department of Justice as the result to lawsuits which were filed in other states.  "To remain compliant with the settlement, CRMLS must remove all compensation fields from the MLS. Compensation negotiations will not be allowed in the MLS in any way, shape or form." - CRMLS.   Because compensation is being removed from the MLS, it is handled separately in one of the following ways, or a combination thereof:

     a) when the buyer includes a term in the offer stating the Seller will pay the Buyer Broker fee. Assuming the seller agrees, the Buyer Broker fee becomes part of the complete purchase agreement. Additionally, if using the C.A.R. Residential Purchase Agreement and Joint Escrow Instructions (RPA), the payment would also become part of the Escrow instructions.

    b) when the buyer directly compensates the buyer agent, i.e., per terms in the C.A.R. buyer/broker agreement required to be in place prior to an agent showing property to a buyer, a requirement as of August 13, 2024.

    c) or compensation from the listing agent (not made through the MLS).

This is not a practice change only in California, it is nationwide for all REALTORS that entered into the settlement, which is more than one million National Association of REALTORS members, MLS members and other qualifying brokers.

REALTORS in California have always used a listing contract which explained how compensation occurred, and will continue to do so. A seller should expect to get a clear understanding as well under the new practices when they are contemplating selling their property and going over a listing contract. 

The same holds for buyers who are now required to enter into an agreement with their brokers -- additionally, it's anticipated that this will become a California state law in 2025.

Julia Huntsman, REALTOR, Broker | http://www.abodes.realestate | 562-896-2609 | California Lic. #01188996

July 1, 2024 Law for California Security Deposits

Yellow bungalow

Beginning July 1, 2024, under the passage of AB12, there will be significant changes to the security deposit law for residential property as follows:

• Rental property owners will only be able to demand or receive one month’s rent in addition to the first month’s rent, for security deposit, whether the unit is furnished or unfurnished.
• However, small property owners will be able to demand or receive two month’s rent in addition to the first month’s rent before initial occupancy. 
• A small rental property owner is defined as one who:
• Owns no more than two residential rental properties that collectively include no more than four dwelling units offered for rent.
• Is a natural person or LLC in which all members are natural persons. A family trust may also qualify as a small landlord.
• Exception: If the prospective tenant is a service member, then the exception for small landlords does not apply, and the small property owner is limited to one month’s rent in addition to the first month’s rent.
• 
  
• Owners who currently hold a security deposit or those who demand or collect a security deposit in excess of one month’s rent prior to July 1, 2024, may retain the security deposit even though it is more than one month’s rent.

Unfortunately, one month's rent really provides very little protection to the property owner who may have to engage in eviction costs, and/or damage costs.  An uncontested eviction cost alone may be over $1200, see this site for an idea of costs, and that does not cover the cost of repair and cleanup. One attorney recommends that the property owner review an applicant's credit and look for a score of at least 700 FICO which ideally would indicate a more responsible tenant. Applicants' professions and history, though, are not always proof of good behavior.  (I once lived near a married couple in a high rise condo building who kept cats--more than allowed on the lease agreement--and allowed them to completely ruin a bedroom which was used as the litter box, as well do nothing about controlling fleas. The owner had to leave the unit vacant for months in order to restore hygiene and flooring.) So back to  the amount of deposit -- another good option is to own property in an LLC.

Please contact me if you would like additional information on tenant/property owner issues.

Julia Huntsman, REALTOR, Broker | http://www.abodes.realestate | 562-896-2609 | California Lic. #01188996

Are You a California Rental Property Owner? The Upcoming Proposition for the Statewide November Ballot

Update:  7-18-2024 - taken off 2024 ballot, will be addressed lin 2025.

Update 7-15-2024, see below.

In 1995, in response to a growing number of rent control issues, the Costa-Hawkins Rental Housing Act  was enacted by the California state legislature. Today, there is a third push to repeal it in November. Known as the Justice for Renters Act, it states: "“The state may not limit the right of any city, county, or city and county to maintain, enact or expand residential rent control.” As a rental property owner, you probably know there is an increasing overlay of multiple county and municipal laws governing rents and rights of tenants, and if as a property owner you are in such a jurisdiction, then you are bound by those laws. Long Beach is one such city, so is City of Los Angeles, in total about 25 local governments which have enacted rent controls.  If not in one of those jurisdictions, your property is under statewide rent control. This is important for knowing your current ability to raise rents.

House with For Rent Sign

The Costa-Hawkins Act made exempt single family homes, condos, townhomes and newly constructed  apartment buildings from the rent control ordinances, "and allows landlords to reset the rental rate on rent-controlled rental units where they become vacant or where the last rent-controlled tenant no longer permanently resides at the unit." The ability to reset the rents after, for instance, a long-term tenant who has been paying less than market value rents, is a property owner right under the Costa-Hawkins Act.  The above proposed Justice for Renters Act would eliminate the owner's ability to charge the market rate when a tenant vacates, or "vacancy decontrol".

But if this proposition should pass, property owners would no longer have the protections of the Costa-Hawkins Act but would instantly activate whatever local jurisdiction controls are already in place, many of which are more restrictive.  Should an owner not be able to bring rents to market value, but rather be subject to some much lower rent increase requirement, their entire property value would be devalued, along with less funds to maintain a property, rising property taxes, increasing property insurance, and increasing utilities, and which will also be charged fees at current market rates by contractors to do their work. While a simplified picture for tenants is that they may pay less money if they have rent control, they may also be living in a less enhanced, less attractive, non-turnkey property over time, with repair issues.  Such strict rent control could affect the smaller properties in the rental market as those owners exit due to financial constraints, thus causing lower availability of housing for renters and lower quality.   UPDATE 7-15-2024:  Now known as Proposition 33 on 2024 ballot:

"Proposition 33, rent control: A vote in favor of this measure would expand rent control in California. If the proposition passes, it would get rid of a nearly three decade-old law, known as the Costa-Hawkins Rental Housing Act, that bans rent control on single-family homes finished after February 1, 1995.

"Cities and counties would have more power to limit rent increases for incoming and existing tenants, making it harder for landlords to hike up prices. The measure would also insert new language into California law that prohibits the state from limiting how cities and counties expand or maintain rent control. It’s backed by the Aids Healthcare Foundation and is the third time since 2018 that voters will decide on the issue: Similar ballot initiatives, in 2018 and 2020, failed by 19 and 20 points, respectively." https://www.sacbee.com/news/politics-government/capitol-alert/article289594036.html

If passed, this proposed Act could only be repealed by another ballot initiative, it does not address the statewide housing shortage, or address homelessness.  It's important to not lose the Costa-Hawkins Act, it still maintains property rights for owners, which are being eroded with each passing year.

Go to Californians for Responsible Housing for more information on the effect of repealing the Costa-Hawkins Act. 

Julia Huntsman, REALTOR, Broker | http://www.abodes.realestate | 562-896-2609 | California Lic. #01188996