Home sellers are rapidly lowering their asking prices as buyers grow less inclined to enter the property market at any cost due to increased mortgage rates and general inflation.
One of the greatest pieces of evidence yet that the formerly hot market, powered by low mortgage rates and all-cash bidding wars, is cooling is the increased number of price decreases, which can be seen in statistics from Southern California and around the country.
Price drops may not always indicate a decline in housing prices overall. They make up a small percentage of listings in Southern California and the rest of the United States, but most properties still sell for more than the asking price.
For the time being, industry analysts do not predict a drop in the property market, which soared to record highs in the first two years of the epidemic as individuals wanted more room and had additional funds to spend.
Some analysts believe that if the Federal Reserve’s attempts to manage inflation push mortgage interest rates much higher — or throw the economy into recession — values might fall slightly.
For purchasers, the market has already changed dramatically from the frenetic rivalry of a few months ago.
“The market isn’t even the same as it was a month ago,” said Lindsay Katz of Redfin, a brokerage firm in Los Angeles.
The owner of a four-bedroom house on Covello Street in Van Nuys recently reduced the price by $50,000 to $949,900 after the 1950s tract home remained on the market for three weeks.
Other houses in the region have seen even greater price cuts, including a $78,000 decrease for a two-bedroom home and a $140,000 reduction for a house with an extra dwelling unit that was originally listed at $1 million and is now for sale for $860,000.
Katz does not represent the Van Nuys properties, but a Woodland Hills four-bedroom property had to be reduced in price by $40,000 recently.
According to real estate specialists, the rationale for the drastic change is straightforward. Mortgage interest rates have risen sharply in recent months, rapidly increasing the cost of a home.
Monthly mortgage payments for a similarly-priced property are now hundreds of dollars — sometimes even $1,000 — more than they were at the start of the year when rates were around 3%.
Some customers have been put in totally new price ranges as a result of the adjustment, while others have been priced out entirely.
Some people were already looking at houses in the Los Angeles region at the top of their price range.
However, because borrowing rates have risen, they can only afford a home in the Antelope or Victor valleys, high-desert villages more than 60 miles from downtown Los Angeles, which is a nonstarter “since they work in the L.A. region,” according to Cortez.
As a consequence, fewer houses are entering the escrow process, inventory is growing, and sellers are beginning to respond.
Since last year, the number of properties offered for sale that have seen recent price reductions has more than quadrupled. According to Redfin statistics, 16.2 percent of listings in Los Angeles County saw at least one price reduction in the four weeks ending June 5, up from 7.5 percent at the same time last year.
Price reductions accounted for more than 20% of postings in Orange, Riverside, and San Bernardino counties, up from roughly 7% a year ago.
There haven’t been this many price reductions in the United States since 2019. These many price reductions haven’t been witnessed in Los Angeles and Orange Counties since late 2018 — the last time mortgage rates rose.
Despite the downturn, real estate brokers say there are still plenty of interested buyers and that the quantity of houses for sale is still significantly below pre-pandemic levels, with bidding wars erupting for the finest homes.
Even those who can still purchase are opting not to while inventory builds, producing a self-fulfilling slowdown prophecy.
Despite the rising regularity of price drops, many experts do not believe that the real worth of Southern California houses will decline anytime soon — at least not without a recession.
According to Redfin, the first median list price — the price at first listing — in Los Angeles County for the four weeks ending June 5, was 9% higher than the same time last year, while the average price reduction — which happens on an increasing but still small number of listings — was 5%.
Experts believe that some of the recent price reductions were caused by overeager sellers who overpriced their houses to take advantage of what was once a very hot market.
Many economists believe that house prices will continue to rise this year, although at a slower rate than they are at present.
One of the most pessimistic estimates comes from John Burns Real Estate Consulting, which forecasted last month that by December 2022, house values in Southern California will have climbed by the mid-single digits compared to a year ago, a significant drop from the over 20% increase in May.
Home prices would then fall by the mid-single digits in both 2023 and 2024, according to the consultancy business, as the Fed’s attempts to combat inflation drove the economy into recession.
However, the market might change much more. Following a report on Friday showing that inflation has risen, more experts now anticipate the Federal Reserve to hike interest rates this week by a larger amount than previously forecast, potentially driving mortgage rates even higher.
According to Mortgage News Daily, the average rate on a 30-year mortgage touched 6.18 percent on Monday, up from 5.5 percent the previous Monday, largely in anticipation of a more aggressive Fed.
Because of the rise in mortgage rates by over 6%, Rick Palacios Jr., director of research at John Burns Real Estate Consulting, said the research company is evaluating whether to lower its projection.