Late Summer Real Estate Market Update

It’s hard to believe we’re two thirds of the way through summer and kids are already back to school! As of this writing, the Playa Vista market has been sleepy over the past three months ending August 16th with 28 total sales vs. 44 in the same three months last year (which was also a slower than typical period – there were 86 sales during that period in 2021, a banner year), per the MLS. Less than ten sales a months in an area with over 2,500 homes is extremely few and it can be attributed to the “lock-in” effect as a result of the rapid increase in interest rates keeping homeowners unwilling or unable to swap their current sub-3% rate mortgages for one closer to 7% on a new home. Demand, while much lower than typical, has kept pace with tepid supply.

Interest rates have gone from historically low to elevated so quickly because of inflation. High inflation erodes purchasing power and tends to disproportionately hurt poorer people. Inflation can also become a vicious cycle as higher prices cause workers to demand higher wages, which, in turn, causes businesses to charge higher prices, so it is a condition that requires urgent and strong attention. I have written numerous blog posts and given presentations on the state of inflation in the United States and how it leads to increased interest rates. It had been my prediction for about a year that as we crossed into August of 2023, with very high months of consumer price index (CPI) dropping off of the yearly roll, inflation would be back down to 3% annually or lower (from over 9% in spring 2022). 2% is considered normal. This turned out to be correct, however I did not correctly predict the continued strength of the economy, which has been incredibly resilient despite over 500 basis point of increase in the FED funds rate. As GDP has edged up and employment and consumer spending remain strong, along with core inflation (excluding food and energy prices) remaining elevated above CPI at 4.7%, the FED shows no sign of pivoting to a less restrictive stance in the near future and treasury yields have increased to recent highs. Long term interest rates closely follow the 10-year U.S. treasury yield, which generally reflects longer-term inflation expectations, as well as the Federal Reserve’s monetary policy response to this, and these have gone up in recent weeks.

Predictions for the first FED rate cut are now being pushed until the second quarter of 2024, according to Goldman Sachs and other financial experts. I admit I was wrong as I saw rates coming down with inflation to the 5% range by late summer, but instead they are closer to 7%. Another year of high rates and slow transaction volume is going to be a hard pill to swallow for the struggling real estate industry and could lead to distress, especially in the commercial market, due to lower rates expiring and needing to be refinanced. Sustained higher rates also have the potential to significantly increase our national debt service as well as household debt, of which credit card debt recently surpassed $1 trillion for the first time. There is a lot to unpack here and these are topics for another time.

What I am seeing in the real estate market right now, in and out of Playa Vista, is that properties priced under around $900K remain extremely competitive and values are going up. These purchases are normally made by downsizers who are paying all or mostly cash and are therefore less interest rate-sensitive or first time buyers who do not have the sticker shock of trading out of a mortgage rate that is less than half of the current rate. Higher priced properties are moving slower, largely due to being more frequently purchased by move-up buyers who are normally getting loans and might not NEED to move or relocation buyers, of which there are fewer than during the pandemic years. The market above $5 million in Los Angeles is basically dead due to the above reasons as well as Measure ULA, which enacted a 4% tax on transfers over this amount, reducing activity to a near standstill.

The housing market will go as interest rates go and the market remains supply-driven. An over-supply of inventory results in less urgency for buyers, while an under-supply creates FOMO for motivated buyers. Rate increases have had the desired effect of reducing demand for housing purchases, but it also has had the similar effect of reducing supply, which has resulted in keeping housing prices stable. Will people get used to the current rates and begin transacting again or will reduced rates in the future lead to an increase in supply faster than in demand that could de-stabilize prices? Only time will tell, but this market is a challenging one and destined to be here a bit longer.