With interest rates on the rise, the increasingly common belief is that real estate prices have declined, or will decline soon. But is that truly what is happening to the market? Is the Los Angeles real estate market truly facing 2008 recession-like prices? In this article, we analyze the data to provide an update on the state of the market.
The 2022 Interest Rate Spike
Interest rates are the biggest talking point these days. The Fed has quickly raised the target interest rate this year to the 1.5-1.75% target rate, in its effort to battle record-setting inflation rates. It is poised to make further substantial increases this year, with inflation having reached another record of 9.1% in June. The Fed has acknowledged that its increases to the target interest rate may put the economy into a recession, but that the rate hikes are necessary to battle inflation. The target interest rate will likely be raised to at least the 2.25-2.5% range, possibly higher, in July, and further rate hikes are expected throughout the year.
As a result, mortgage interest rates have also quickly spiked since the beginning of the year. The graph below depicts recent historical average interest rates on 30-year mortgages, as published by Freddie Mac.
December of 2021 saw average interest rates at 3.1%. Since then, the blue 2022 line shows a constant upward trend, with the biggest increase from March to April, and the most recent data in June showing an average interest rate of 5.52%.
The common belief is that with a higher cost of borrowing, prices must come down so that buyers can afford their monthly payments.
Prices Continue To Trend Upward Despite Higher Interest Rates
Contrary to popular belief, the data shows that prices have continued their upward trend in 2022. The graph below shows recent historical average sales prices of single family homes in Los Angeles, as published by the California Association of Realtors.
Although interest rates began to spike in January of 2022, the trend of prices in 2022 is in line with prior years, and certainly does not indicate recession-like pricing. The average price saw a slight decrease in February, consistent with other years as a result of the winter holidays, after which prices have increased. Interestingly, despite the biggest spike in interest rates between March and April of 2022, prices have seen their biggest increase this year between May and June. It appears that interest rates have had little, if any, impact on the Los Angeles real estate market thus far.
How Is This Possible?
The apparent contrast between increasing interest rates and simultaneously increasing prices raises the obvious question of “How is this possible?” As with most questions worth answering, the answer is complicated and depends on a variety of factors. In its simplest form, though, it can be explained by “pent up demand.” Over the past two years, particularly since May of 2020, there has been a substantial increase in demand for housing and a simultaneously decline in supply. This has driven prices up substantially, as shown by the grey trendline beginning in May, and 2021s yellow trendline that stands out as substantially higher than the prior years. Thus, while it is true that interest rates have likely put downward pressure on demand due to increased cost of borrowing, it is simultaneously true that demand continues to exceed supply, and as a result prices continue to trend up. It is also important to remember that although the overall market may be facing a recession, it is not necessarily true that prices will substantially decline like they did during the 2008 recession.
It remains to be seen whether this upward trend will continue into the end of the year. With the Fed poised to continue to increase the target interest rate, it is likely that average mortgage interest rates will also continue to climb. This will continue to put downward pressure on demand. That being said, while it’s possible that there will be a shift later in the year, at this point there does not appear to be any reason to predict a substantial decline in real estate prices.
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.