It’s a Buyer’s Market!
After years of waiting, it’s finally here. Aside from a short blip during the first few months of the pandemic in 2020, we have not seen a slowdown in demand like this in years. For sale inventory is increasing and offers are slowing substantially. When 5+ offers for condos and 10+ offers for houses was common early in the year, now 1-2 is a success and waiting 30 days before the first offer is not uncommon in Los Angeles.
As I predicted in my first post of 2022, the market would cool this summer and it has done so. Rapid interest rate increases in the first and second quarters slowed demand, which became noticeable in late March. Despite a sharp reduction in offers, the market remained strong through the spring as inventory struggled to keep up with buyer demand and motivated buyers who had lost out on offers for months, continued to compete. As we moved into summer (mid-June), demand slowed dramatically and thus, supply of homes for sale has crept up above pre-pandemic levels.
I attribute this rapid slowdown mostly to people travelling during the summer season. This has been one of the busiest travel seasons in years due to pent-up demand and a high savings rate from the pandemic. Last summer, there was a slowdown around this time, but it was less dramatic. There is also generally less urgency this time of year to secure a home prior to starting school as well as more supply, which leads to buyers not rushing to make a decision. Additionally, there is less urgency to buy before interest rates go up because they already have.
In Playa Vista, for example, there are 16 condos for sale (up 60% from January). Of this, three are identical floor plan condos in the Carabela complex, which are currently available from between $1.3M-$1.4M. We have not seen this buyer-friendly of a selection in some time and, as a result, buyers should be able to regain some negotiating power (time to decide, price negotiation power, standard contingencies). Supply of single-family homes in Playa Vista is still low with only two homes currently on the market.
So what’s next? Higher rates and the recent supply increase might have shocked the market into a prolonged buyer’s market. The combination of lack of affordability, lack of urgency, and economic uncertainty does not portend a major reversal immediately. Summer is ending next month and some buyers should return to the market, but with the media reporting that housing is in the beginning of a correction, no one wants to be the sucker who buys at the top of the market.
On the bright side, supply should be somewhat constrained by the reduction of move-up buyers who are already locked into a low payment and might not see moving to be worth it right now. Rents have not lost steam and are seeing rapid increases, making alternatives to purchasing less attractive. Additionally, to combat inflation, the FED is likely to raise the funds rate too much and too late, which could lead to a recession. This could result in a quick reversal for mortgage rates in late 2022/early 2023, which would coincide with the often hot buying season in early 2023. In the end, lower rates combined with the pause in demand and historical undersupply of properties will bring the market back in 2023. Despite the slowdown in demand and buyer hesitations, this could be a good opportunity for buyers who will be facing less competition and a refinance opportunity 6-9 months away.