As the economy continues to chug along and the Federal Reserve continues to battle inflation by raising the target interest rate, the real estate market continues to shift in reaction to the greater economic factors. December showed signs of stabilization as the Federal Reserve announced a modest hike to the target interest rates, resulting in a decline in mortgage interest rates. Prices also showed signs of stabilization, although for the first time in recent history they dropped below prior year’s prices. In this December Los Angeles real estate update , we discuss the state of the market, and what we expect for the future.
Mortgage Interest Rates Show Signs Of Stabilizing
With mortgage interest rates spiking in October and November, all eyes were on the Federal Reserve in December in anticipation of a further hike to the target interest rate. In December the Federal Reserve implemented a “modest” 0.5% increase to the target interest rate (as opposed to prior rate hikes of 0.75%). This was consistent with the Fed’s previous announcements concerning its anticipated actions, and it took the Fed’s target interest rate to the 4.25%-4.5% range. In its December press release, the Fed pointed to its target of returning inflation to the 2% range as the reason for ongoing increases to the target interest rate, and it confirmed its plan for future increases to the target range.
As a result of this more modest increase to the target interest rate, mortgage interest rates saw a significant decline. It would appear that rates have stabilized around the 6% range. This relatively is good news for the future of the real estate market, as lower and stable interest rates result in increased affordability for buyers.
Real Estate Prices Continue To Track Prior Years
Given the lag between interest rates and real estate prices, as well as seasonal fluctuations in the market, it was expected that sale prices in November would see a decline in comparison to October. Indeed, every year in recent history has seen a drop in sale prices from October to November. The only question is by how much?
As shown below, sale prices in 2022 have continued to track 2021 prices in the latter half of the year. The average sale price in Los Angeles dropped from about $855k in November to $760k to December. This is consistent with last year, when the average sale price dropped from about $850k in November to $770k in December. It is notable, however, that this is the first time in recent history that the average sale price is lower than at the same time last year.
As noted above, real estate prices tend to lag by about a month behind interest rates. This is due to the time it takes to close a deal, i.e. a deal that closes in December is likely based on an interest rate that was locked in November. Thus, December sale prices will likely be reflective of November interest rates.
In November, interest rates remained high in the 6.5%-7% range. As with October, this will likely put downward pressure on real estate prices. We expect that the average sale price in December 2022 will be lower than that of December 2021, as it was with November. However, given the drop in interest rates in December, we expect an upward trajectory after that, and we expect that to continue so long as the Federal Reserve acts consistently with its announcements.
If you would like to further discuss our December Los Angeles real estate update, or how Esquire Real Estate Brokerage can help you in the Southern California real estate market, feel free to give us a call at 213-973-9439 or send us an email at email@example.com.