How Low Inventory And Rising Interest Rates Affect Los Angeles Real Estate
Many people are jumping to extreme conclusions about the impact of higher rates, high inflation, and a potential recession on the housing market. Right now, we are at the end of May, and while the market is slowing, it is gradually evolving from its out of control, insane pace, to a normal Seller’s Market where pricing will be fundamental in finding success. So if you have been thinking of selling - you really have to come to the market with a strategy that includes pricing your home at market value.
Now, if I were to flip open a Merriam-Webster Dictionary and looking up “Chicken Little,” it states, “one who warns or predicts calamity especially without justification.” It’s important to remember that news headlines do more to sensationalize than to rationalize. Economists are used to the constant chatter about recessions, bubbles, and plunging home prices. The current economic environment has amplified the noise: surging interest rates, highest inflation since 1981, and a volatile stock market. This will definitely have an impact on the economy and housing, yet it will not be to the extent of the fear mongering masses who immediately jump to the worst possible outcome. The sky is NOT falling when it comes to housing.
Most people remember the burn of the Great Recession. It either happened to them specifically, a family member, or a friend. There was an unstoppable wave of foreclosures and short sales. Home prices plummeted, erasing years of incredible gains. Unemployment jumped and took over six years to recover. The Great Recession was the largest economic downturn since the Great Depression, and it has left deep scars on society at large. Flash forward to today and home prices continue to soar, interest rates remain elevated above 5%, housing is just starting to slow, and many are calling for an imminent recession.
Only two of the last six recessions negatively impacted housing values here in Southern California, and both were caused by the housing industry. The savings and loan crisis of the 1980’s and early 1990’s led to a recession and an erosion in homes values that started in August 1990. One of the main reasons for the recession: unsound real estate lending practices. The Great Recession began in 2007 after the March subprime meltdown. Easy credit, pick-a-payment plan, subprime lending, zero-down loans, easy qualifying, adjustable teaser rates, and fraudulent lending all led to the largest downturn since the depression.
When pundits start talking about a potential recession, everyone’s collective brains immediately recall the Great Recession and expect the economy and housing to behave just like it did in 2007. They forget about the other recessions where housing values continued to rise. Today’s housing has an extremely strong foundation with years of tight lending qualifications, large down payments, fixed rate mortgages, plenty of nested equity, and limited cash-out refinances.
In housing, during a slowdown, demand falls, the active inventory rises, and it takes longer to sell a home. During the Great Recession there was a glut of homes available to purchase and it was matched up with muted demand. Consequently, home values plunged. In Southern California there were nearly 120,000 homes available in 2007 compared to the 19,000 homes available today, over six times more. Today’s missing ingredient that would lead to falling home values is supply. The number of homes on the market today is far below averages prior the start of the pandemic when values were still rising, but at a much more methodical pace.
The Los Angeles County supply is at 7,133, a sharp rise from the 4,432 homes on January 1st, but still far below the 3-year average prior to COVID (2017 to 2019) for this time of year of 12,088. That is 69% more than today, significantly more. Even with a 603-home climb, or 9% rise, in the past couple of weeks, it is still off by 4,955 homes. That’s a lot to make up just to get back to more normal levels. Keep in mind that the inventory levels since 2012 have been remarkably muted compared to the Great Recession and it has become even more pronounced each year.
With swiftly rising mortgage rates so far this year, demand, the prior 30-days of pending sales activity, began to slide after reaching an early peak on March 31st, when it normally rises. After initially dropping slightly, demand has stabilized and rose in the past couple of weeks by 80 pending sales. It now sits at 5,212, which is still 13% lower than the 3-year average prior the COVID, and 23% lower than last year at this time. But it is not going to plunge from here. The housing market has already digested 5% plus rates and there are still plenty of buyers looking to purchase at these higher rates. The recent rise is indicating that demand has indeed become more stable and has found its footing.
Demand is muted compared to its elevated levels of the last couple of years, and lower than the normal levels prior to the pandemic, yet it is matched up against an abnormal muted supply of homes available today. This has resulted in the Los Angeles County housing market remaining at an insanely, Hot Seller’s Market level. The Expected Market Time, the time it would take between hammering in the FOR-SALE sign to opening escrow, has risen from 30 days on March 16th to 41 days today, an 11-day rise. However, at 41-days, the housing market is still at an insanely hot level. Anything below 60-days is considered a Hot Seller’s Market. From 60 to 90, it is considered a Slight Seller’s Market. The market is balanced between 90 and 120 days. It does not become a Slight Buyer’s Market until the Expected Market Time eclipses 120 days. And values do not fall swiftly until it is a Deep Buyer’s Market above 150 days. Today’s 41-day mark is nowhere close to a Balanced or Slight Buyer’s Market.
