Economic Straight Talk: How are lower interest rates impacting Los Angeles housing markets?

 

economic-straight-talk

Executive Summary

After a large dip in housing market activity starting in the last quarter of 2018 and first quarter of 2019, housing markets in recent months have mostly bounced back to where they were last summer. The number of home sales trends about the same, home prices have recovered to again show annual increases, inventories are scarce, and absorption rates have returned to the same rates. Buyers, however, remain more constrained than last year leading to fewer bidding wars and longer time on the market. Still, last summer marked a cyclical peak in the most recent housing market renaissance.

Detailed Analysis

Housing markets in Los Angeles have been oscillating thissummer. Home sales activity picked up speed in July, after some slowing inJune, bringing activity back in line with stronger numbers seen in May. InJuly, total sales in Los Angeles County trended at the same level as July oflast year, with an increase in sales of homes priced between $1 million and $2million, up 5 percent year-over-year, being offset by slower sales in otherprice segments.

Strong activity among homes priced between $1 million and $2million bring the levels of homes in that price range to the highest level inthe last five years. Homes priced below $1 million declined 2 percent aftersome strong months seen in April and May. This suggests that while lowerinterest rates may be helping spur some refinance activity, the positivespillover on home sales activity has not fully realized. On the other hand,sales of homes priced over $3 million have picked up significantly in July, downonly 1 percent after the average 17 percent year-over-year declines in the lasteight months.

Consequently, some West Side communities, which experiencedslower market conditions since last year, have finally seen more activity. Mostnotably, sales in Malibu and Beach Communities North have posted the firstannual increase since last summer, up 11 percent year-over-year. The impact ofwildfires has had a considerably negative impact on the area with overallyear-to-date decline in sales of 26 percent. The most recent uptick was drivenby strong sales of homes priced below $2 million while higher priced salescontinue to lag.

In contrast, several more affordable communities, such asEastside (East LA communities of El Sereno, Lincoln Heights and Boyle Heights)and NELA have seen a notable slowdown in sales in July, down about 30 percentyear-over-year.

Figure 1 tracks total home sales in Los Angeles County overthe last five years. Note that in the last three years, July sales dipped belowJune and August sales. That was not the case this year when July salesoutperformed June sales. The monthly increase from June was driven byrelatively stronger increases in the Malibu region, West Side/Central or MidCity, and Mid LA/Baldwin Hills. Again, relatively more affordable communities inLos Angeles, such as Eastside and NELA, saw large negative declines on amonthly basis, down about 20 percent. Nevertheless, monthly data can bevolatile and are not indicative of longer lasting trends.

Figure 1

Source: Source: Terradatum, Inc. from data provided by local MLSes, August 7, 2019

Unfortunately, however, availability of for-sale inventoriescontinues to pose concern for housing market activity going forward. As Figure2 suggests, for-sale inventory is once again trending below last year’s levelswith July’s year-over-year decline for the overall inventory down one percent,and inventory priced below $1 million down 5 percent. Declines follow almost ayear of year-over-year increases. And the lower priced inventory is now 24 percentbelow the 2015 levels.

Figure 2 Year-over-year change in for-sale inventory by price range

Source: Source: Terradatum, Inc. from data provided by local MLSes, August 7, 2019


Interestingly though, while the lower priced inventory is ona decline again, some relatively higher-priced communities have seen gains inthat inventory. Figure 3 illustrates 3-month average inventory change from lastyear for total inventory and inventory priced below $1 million. Bluehighlighted fields for West Side communities including Brentwood, HollywoodHills, Malibu and Silicon Beach show significant gains from last year. Overallinventory in the lower priced segment is relatively smaller in thosecommunities, thus overall lower priced inventory is still declining. Lookingforward, the growth of new listings suggests overall inventories, particularlylower priced inventories, will continue declining.

Figure 3 

Source: Source: Terradatum, Inc. from data provided by local MLSes, August 7, 2019

On the other hand, home prices have made a comeback in Julyafter a period of no changes and some declines. In July, median home price inLos Angeles County reached another peak at $655,000 (see Figure 4). Lastsummer, the highest seasonal price was reached in June at $640,000. The 4percent year-over-year increase in July was the first such increase this year.Nonetheless, variation in home price changes is notable with some areas againseeing strong acceleration in price growth.

Figure 4 Median home prices in Los Angeles county

Source: Source: Terradatum, Inc. from data provided by local MLSes, August 7, 2019

Figure 5 lists median home prices and year-over-year changessince last July. Strong acceleration in price growth was seen in Mid Los Angelesaround greater Baldwin Hills and Mid City. Also, Malibu maintained the pricegrowth that started last month after the area experienced some weakness inprices resulting from reconciliation of fire lots and overall weaker demand forhigher priced homes. Price growth in Beverly Hills and Brentwood areas benefittedfrom a jump in higher priced sales.

July’s pick up in price growth is thus partially due toreignited demand for luxury homes and in part a function of lower mortgagerates which could have been a catalyst for some, as mortgage rates have beentrending at levels not seen since 2017.

Figure 5

Source: Source: Terradatum, Inc. from data provided by local MLSes, August 7, 2019

And lastly, what to expect in coming months? Marketactivity, while subdued by some account, has nevertheless returned to lastyear’s highs—when Los Angeles’s housing market likely reached its cyclicalpeak. The return in activity is a function of solid continued economyperformance, jobs and wage growth, insufficient supply, and possibly lowermortgage rates. While it is difficult to say to which degree rates are helpingwith the demand, we also don’t know the counterfactual – meaning, where wouldthe market be today if it wasn’t for the lower rates? The last chart showsyear-over-year changes in units under contract (pending sales), which have beengrowing since May and have reached 11 percent in July. This suggest that atleast in the month ahead, we should see continued improvement in the number ofhomes sold.

Figure 6 Year-over-year change in number of pending sales

Source: Source: Terradatum, Inc. from data provided by local MLSes, August 7, 2019