Those of us involved in the real estate market are hearing it constantly these days – “the market is shifting.” But what does that mean? Are prices falling off the cliff like people seem to think? Are we looking at a 2008-like real estate crash? In this September Los Angeles Real Estate Market Update, we take a look at the data to provide accurate information on the reality of what is happening with the Los Angeles real estate market.
Interest Rates Stabilize
With the Federal Reserve aggressively raising the target interest rate in order to battle inflation, mortgage interest rates are a regular topic of discussion in the real estate world. While the Fed kept interest rates at close to 0% during (and before) the covid pandemic, buyers enjoyed historically low rates in the 2-3% range. This year, however, the Fed has raised rates aggressively, with the most recent raise happening today taking the target rate to the 3-3.25% range.
Interestingly, though, mortgage interest rates spiked in June of this year and have declined since then, despite the Fed’s continuing increases to their target interest rate. This is likely because lenders reacted to early Fed rate hikes by “building in” future rate hikes. As a result, although the Federal Reserve continued to increase its target interest rate, mortgage rates remain relatively stable. That is likely to remain true unless the Fed makes a significant departure from its announced plan of raising its rate to the 4.25-4.5% range by the end of the 2022.
The graph below shows the monthly average 30-year interest rate on a mortgage, as announced by Freddie Mac.
Home Prices Show Signs Of Stabilizing
Contrary to popular belief, real estate prices are not dropping, at least not in Los Angeles. Prices saw a small dip in July, likely due to the spike in interest rates in June, but have since recovered and seem to be stabilizing. This is likely due to (1) higher interest rates and (2) buyers being more willing to consider cheaper condominiums and townhomes (as opposed to single family homes) as business returns to “normal” after the covid pandemic.
The graph below shows the median sale price in Los Angeles, with each line reflecting one year in order to depict the general seasonal fluctuation of the real estate market.
Interest rates will continue to play a significant role in the real estate market for the remainder of this year. If the Fed “sticks to the plan”, we anticipate a continuing stable real estate market with a slight increase by the end of the year. On the other hand, it is important to note that mortgage rates have seen a spike already in September, with rates climbing to slightly over 6% for the first time since 2008. We anticipate a slight reversal of this course with the Fed’s announcement that it is sticking with its plan of a 3/4 hike in September.
Overall, the market remains stable, and is returning to what many would consider a “normal” pre-covid market. Buyers will enjoy a bit more flexibility in terms of potentially negotiating below-list purchases and listings staying on the market for longer, but will pay the price with a higher cost of borrowing. Sellers will need to go back to being cognizant about preparations for listings and pricing, due to buyers being more selective. These changes are welcomed by many, including this author, who have witnessed an unsustainable “hot” market over the past two years.
If you would like to further discuss this issue, 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.