FROM OUR COMPANY CHIEF ECONOMIST, SELMA HEPP
Summary
- Los Angeles home sales declined by 24 percent year over year in September, with all local communities except the Eastside showing a decline in the third quarter, bringing 2018 housing market activity to 11 percent below last year.
- Following a strong start for higher-priced sales at the beginning of 2018, sales activity slowed in all price ranges in the third quarter, and sales of homes priced higher than $1 million are now trending with 2017 activity.
- Inventory is also 10 percent below last year’s levels, suggesting about 1,100 fewer homes on the market. South L.A. posted the largest inventory drop, down by 34 percent, followed by a 27 percent decline in Downtown L.A. and a 24 percent decrease in Foothill Communities.
- Despite slowing annual price growth of 2 percent, almost half of Los Angeles communities posted appreciation of more than 10 percent — particularly in Northeast L.A., Foothill Communities, Eastern Cities, and Beverly Hills.
- Price reductions rose by 3 percentage points, from 21 percent last September to 24 percent now. More reductions were seen in greater Malibu, Foothill Communities, the Eastside, the West Valley, and the South Bay.
- The rebalancing between buyers and sellers is being driven by affordability constrains and buyer fatigue.
Los Angeles home sales activity in September slowed notably from one year ago, posting 24 percent fewer transactions. With 2018 sales lower each month since January, home sales in the first three quarters of 2018 declined by 11 percent on an annual basis. Figure 1 summarizes Los Angeles September sales for the last four years by price range. While the magnitude of the drop in home sales priced below $1 million outweighs declines in higher price ranges, sales of more expensive homes are generally in line with 2016 activity, if not with 2017. Figure 2 shows 2018 year-over-year and year-to-date changes in the four price ranges. Again, higher price ranges generally line up with last year’s sales in the first three quarters.
Figure 1: September Los Angeles home sales since 2015 by price range
Source: Terradatum, Inc. from data provided by local MLSes, Sept. 7, 2018.
Figure 2: Year-over-year and year-to-date Los Angeles home sales changes by price range
To provide a better sense of which Los Angeles neighborhoods have seen the largest decline in sales activity, Figure 3 summarizes changes in third-quarter sales compared with last year. Declines were widespread across the region, with only the Eastside showing an increase in sales. The Southbay and the East and West Valleys posted the largest drops in sales, particularly for more affordable homes. And while higher-priced sales also decreased from the third quarter of 2017, there was an increase in activity for homes priced between $1 million and $2 million. However, the gains were not enough to offset the drop among lower-priced sales, namely in West L.A., Mid L.A./Baldwin Hills, Northeast L.A., and Eastern Cities. The East Valley, too, has seen some more activity for higher-priced homes.
Figure 3: Year-over-year changes in third quarter home sales by Los Angeles neighborhood
Source: Terradatum, Inc. from data provided by local MLSes, Sept. 7, 2018.
Unfortunately, inventory also continued to drop on an annual basis, with about 1,100 fewer homes available for sale in the third quarter, or about 10 percent below last year. Supply declines were widespread across the region, with only Brentwood/Santa Monica/Palisades and West L.A. showing improvements. Figure 4 illustrates the average quarterly change in the number of for-sale homes by Los Angeles community and price range. The last column shows the percent change in total inventory, suggesting a relatively larger decline in South L.A., down by 34 percent, followed by a 27 percent drop in Downtown L.A. and a 24 percent decrease in Foothill Communities.
Figure 4: Quarterly inventory changes by Los Angeles neighborhood and price range
Source: Terradatum, Inc. from data provided by local MLSes, Sept. 7, 2018.
Furthermore, following considerable price growth at the beginning of this year, appreciation came to a halt in September. Figure 5 illustrates year-over-year changes in median home prices in the greater central Los Angeles area.
Figure 5:Year-over-year median home price change in greater Los Angeles
Source: Terradatum, Inc. from data provided by local MLSes, Sept. 7, 2018.
Figure 6 summarizes average third-quarter year-over-year home price changes by Los Angeles neighborhood. And while the total quarterly change declined to 5 percent, some communities continued to see strong price growth hovering close to 20 percent, particularly Northeast L.A., Foothill Communities, Eastern Cities, and Beverly Hills. Almost half of the communities covered in this analysis posted 10 percent-plus home price gains. By contrast, the Greater Malibu area, along with Sunset East and the Southbay, showed lower median prices than at the same time last year.
Figure 6: Third-quarter home price changes by Los Angeles neighborhood
Source: Terradatum, Inc. from data provided by local MLSes, Sept. 7, 2018.
Declining home sales and prices appear to reflect two underlying conditions that are shifting Los Angeles housing markets: Affordability constraints and buyer fatigue. While affordability has long been a serious concern in Los Angeles, recent median home price hikes coupled with rising interest rates have put a 20 percent to 25 percent dent in buyers’ purchasing power. The impact of these forces is reflected in fewer sales and slowing price growth.
Also, a sentiment that the housing market has reached the top has additionally impacted sales activity, with buyers not wanting to purchase at the top of the market and owners who have been considering selling their homes listing them in now.
Lastly, price reductions increased compared with the same period last year, up by 3 percentage points, from 21 percent to 24 percent this September. However, a look at the longer trend suggests that 24 percent is still in line with the two previous Septembers, when reductions averaged a respective 23 percent and 24 percent (Figure 7).
Figure 7: Percentage of Los Angeles home sales with price reductions since January 2015
Source: Terradatum, Inc. from data provided by local MLSes, Sept. 7, 2018.
Figure 8 illustrates the change in the share of homes with price reductions compared with the third quarter of last year. Shades of red suggest increases in reductions, while green areas suggest fewer reductions. Areas with relatively more reductions were seen in greater Malibu, Foothill Communities, Eastside, West Valley, and the Southbay.
Figure 8: Change in the share of homes with price reductions by Los Angeles neighborhood
Source: Terradatum, Inc. from data provided by local MLSes, Sept. 7, 2018.
Taken together, September Los Angeles market activity showed the changing dynamic between buyers and sellers. As noted above, both parties may feel like housing price growth has reached its peak and are acting accordingly, with buyers pulling back and sellers rushing to list their homes before the slow winter season kicks in. Also, with affordability being a concern, markets deemed relatively less expensive may see more pronounced shifts. Also, to some extent, volatility in financial markets and geopolitical developments may be exaggerating consumer fears. However, the underlying macroeconomic environment and California’s continued growth confirms that housing markets may be returning to a more normalized balance between buyers and sellers rather than preparing to topple.