Market Update Los Angeles

Market Update Los Angeles

The Big Story

 

Fed policy is working, but mostly just on housing

 

Quick Take:

  • The national median home price declined 3.8% in the third quarter, landing only 4.7% below the all-time high reached in June 2022 and reflecting typical seasonal trends. Prices didn’t contract significantly in Q3 2023 despite mortgage rates rising 0.6%.
  • In October, the average 30-year mortgage rate reached its highest level since October 2020 at 7.79%. Higher and higher rates continue to price potential buyers out of the market and prevent sellers who are locked into hyper-low rates from entering the market.
  • The Q3 Real Gross Domestic Product (inflation-adjusted GDP) rose 4.9% quarter over quarter, indicating a broadly strong economy. Although unemployment rose 0.3% to 3.9%, the jobs market remains robust. Inflation, which rose in Q3, is nearly double the Fed’s target rate of 2%, so rate reductions won’t happen in the near future.
Note: You can find the charts & graphs for the Big Story at the end of the following section.
 

It’s all about interest rates

 
Home prices remain near all-time highs, largely due to the sustained low inventory levels, and despite the average 30-year mortgage rate hitting a 23-year high in October at 7.79%. It’s hard to overstate the full significance of higher mortgage rates on the housing market; but, in short, they are the primary driver of market slowdown. For example, when accounting for the cost of financing a mortgage, a buyer’s monthly cost for a median home today is actually 11% higher than in June 2022 when prices were at their peak. Looking further back to when the Fed began to raise rates at the beginning of 2022, the median monthly cost of a home has increased 76% from then until now.
 
So why have prices stayed elevated even as the cost of financing has skyrocketed over the past 22 months? For sellers, prices have to stay high or else they wouldn’t enter the market. Approximately 75% of U.S. homeowners have mortgage rates of less than 4%, according to JPMorgan, which has kept sellers from entering the market. If prices broadly contracted, even fewer sellers would come to market because they likely couldn’t afford a new house because their profit margin would be too low. Although people move for all sorts of reasons, generally speaking, there are very few sellers who are selling because they have no choice. Even if sellers were breaking even on their home sale, transitioning from a sub 4% mortgage to a nearly 8% rate is completely unappealing. Sellers who are coming to market now need to make a profit so that they can finance less of their next home in order to counteract the higher mortgage rate. Of course, this is for existing homes, but new construction isn’t much different. Material and financing costs are higher for homebuilders, too, and when a house costs more to build, the prices increase as well.
 
Inflation isn’t helping the market, either. People feel less wealthy than they did three years ago, and they’re right to feel that way. In just the three years from September 2020 to September 2023, the dollar has lost about 15% of its buying power, the same amount it lost over the preceding 10 years (September 2010 to September 2020). Even though inflation is declining, all that means is that prices are rising more slowly than last year — which is good, but it doesn't make anything more affordable. The combination of declining purchasing power and higher mortgage rates only reduces market participants, slowing the market.
 
High mortgage rates aren’t going away anytime soon because inflation is still about twice as high as the Fed would like. So far, most of the economic slowing the Fed intended by raising rates seems to be isolated to the housing market. The National Association of Realtors (NAR) reported that the number of homes sold dropped 2.0% month over month and 15.4% year over year to the lowest number of sales in the four years that NAR reports. Real GDP rose significantly in Q3 2023, indicating strong U.S. economic growth rather than economic slowdown. It’s unlikely that the Fed will hike rates at the December meeting, and very unlikely that they will reduce rates in the near future. We can expect mortgage rates between 7% and 8% in 2024, which will continue to slow the market.
 
Different regions and individual houses vary from the broad national trends, so we’ve included a Local Lowdown below to provide you with in-depth coverage for your area. In general, higher-priced regions (the West and Northeast) have been hit harder by mortgage rate hikes than less expensive markets (the South and Midwest) because of the absolute dollar cost of the rate hikes and limited ability to build new homes. As always, we will continue to monitor the housing and economic markets to best guide you in buying or selling your home.
 

Big Story Data

 

 

The Local Lowdown

In this Local Lowdown, we divide Los Angeles into three luxury real estate areas as follows:

  • North Beach, including the Pacific Palisades, Santa Monica, and Venice
  • Westside, including Beverly Hills, Brentwood, West Hollywood, and Westwood
  • South Bay, including Hermosa, Manhattan Beach, and Redondo

Quick Take:

  • The median single-family home prices and average price per square foot were mixed across markets from September to October. Price per square foot gives a more accurate picture for the selected areas. Year over year, North Beach and the South Bay are flat, while the Westside is up 4% in terms of price per square foot.
  • In the selected markets, only North Beach inventory and sales rose year over year. The South Bay sales notably dropped in October, but this is most likely an outlier month, which happens from time to time.
  • Buyers have been negotiating harder as the cost of financing rose higher over the past three months, and sellers are receiving a smaller percentage of asking price on average.
Note: You can find the charts/graphs for the Local Lowdown at the end of this section.
 

Price per square foot declined significantly from September to October in North Beach and the South Bay

 

Home prices and inventory in luxury markets continue to buck seasonal trends, showing considerable variability month to month in terms of median price and average price per square foot. The unique homes, higher mortgage rates, and low inventory have all contributed to these volatile price trends. Year to date, median prices increased in North Beach and the Westside and declined in the South Bay. However, price per square foot rose in the Westside and the South Bay, but declined in North Beach. In markets with high variability month to month, it can be hard to identify the signal from the noise. When we look over the past two years, prices have moved horizontally with high variability around the average.
 
Luxury markets tend to be affected more acutely by higher interest rates due to the absolute dollar cost of financing. With mortgage rates at a 23-year high, homebuyers aren’t willing to pay for anything less than the right home for them, and even then, they may still want concessions.
 

North Beach sales increase month over month

 

Inventory, sales, and new listings in the selected areas haven’t trended together. North Beach inventory has slowly but steadily increased since January 2022 because new listings outpaced sales. When we compare the first 10 months of 2022 to 2023, North Beach new listings have increased by 7%, while sales declined 21%. The Westside and the South Bay both have had fewer homes come to market than last year, down 4% and 15%, respectively. Generally, fewer new listings equate to fewer sales, and sales declined 27% in the Westside and 15% in the South Bay. South Bay homes are generally less expensive than in North Beach or the Westside, which equates to more market participants, so sales declined less.
 
As demand slows, buyers are gaining more negotiating power and paying less than asking price on average. From July to October 2023, the average seller received 3% less in North Beach, and 2% less in the Westside and the South Bay. That being said, inventory will almost certainly remain historically low for the rest of the year, and will likely remain low in 2024, which will create price support and at least minor competition among buyers.
 

Months of Supply Inventory indicates North Beach and the Westside favor buyers, while the South Bay favors sellers

 

Months of Supply Inventory (MSI) quantifies the supply/demand relationship by measuring how many months it would take for all current homes listed on the market to sell at the current rate of sales. The long-term average MSI is around three months in California, which indicates a balanced market. An MSI lower than three indicates that there are more buyers than sellers on the market (meaning it’s a sellers’ market), while a higher MSI indicates there are more sellers than buyers (meaning it’s a buyers’ market). Luxury markets tend to have higher MSIs because there are fewer market participants. In October, MSI in North Beach and the Westside remained high, meaning the market still favors sellers. South Bay MSI nearly doubled from September to October, which technically indicates a shift from a sellers’ market to a buyers’ market. However, this is almost certainly an outlier month, which will be corrected next month. The South Bay is still in a sellers’ market.
 

Local Lowdown Data


Let's Talk

You’ve got questions and we can’t wait to answer them.