Losing Interest in Homebuying

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Poor L.A.’s housing market, prostrate for so long. Just when it looked as if it were ready to stand again, it’s getting kicked.

It was only last week when the Business Journal reported that the median price of homes that sold in Los Angeles County in May actually went up for the first time in a year and a half. Now that may or may not have marked the bottom in prices locally, but the bottom must be getting near.

Besides that, we had several other signals that the housing market here may be ready to start stirring: an economy that seems to have stabilized. A stock market that’s firmed up a bit. Incentive programs to help homebuyers. And, of course, low interest rates.

Oops. Strike that.

Suddenly, interest rates are shooting up. Just in the last couple of weeks, average mortgage rates sprung up from about 5 percent to 5.8 percent.

That may not seem like a lot, but an increase of that magnitude is not to be shrugged off in high-cost Los Angeles. A $500,000 loan would cost about $250 a month more at 5.8 percent than at 5 percent.

In fact, that little surge alone roughly chops in half the number of homeowners with an incentive to refinance their mortgages, according to a financial firm that was quoted in a Wall Street Journal article last week.

If you believe all those talking heads on CNBC, there seems to be no real indication that interest rates will spiral down soon. And if they go up from here, that could arrest any spark in the housing market.

This is particularly important in Los Angeles, of course, where people depend to a high degree on housing as a source of wealth and upward mobility.

The only good news is that, if you had to choose, it’d be better to have low house prices and high interest rates rather than the other way around. At least with high interest rates, a homeowner can buy now and refinance later.

Of course, that’s assuming he could afford to buy the home in the first place, a task made more difficult by the higher interest rates.

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Last week another round of calls started up to raise taxes to plug the yawning hole in the state budget. A powerful union even began running ads on television suggesting new levies. The tax-first-and-ask-questions-later crowd picked some vulnerable and tempting targets for new taxes: cigarettes, alcohol, card rooms and the like.

The rationale is compelling. The state could get money from undesirable activity and therefore would not penalize good behavior. And if the higher taxes cause people to stop smoking or drinking, well, that’s a social benefit to California. All good and simple, right?

Alas, not quite. Aside from the fact that such taxes disproportionately hurt the poor, such taxes also fall heaviest on small businesses. Many convenience stores, for example, depend on cigarettes and liquor for much of their sales and a bulk of their profits. Those shopkeepers have families to feed, too.

And it’s not a stretch at all in this Internet age to assume that if the taxes get too high, consumers will simply buy their alcohol and tobacco in low-cost states and countries and have them shipped in. If that happens in any abundance, the state may end up with less tax money, not more, and the little businesses that depend on liquor and cigarette sales will get hurt. They may even pay less taxes as a result.

Good and simple? The rationale may sound good, but the result is not so simple.


Charles Crumpley is editor of the Business Journal. He can be reached at

[email protected].

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