Last year, the Southern California housing market looked like a runaway train, with bidding wars driving home prices higher and higher, and desperate buyers waiving loan contingencies and even inspections.
Faced with rising mortgage rates, however, July’s market looked more like an uphill locomotive that’s running out of steam.
Prices slipped downward for a second straight month, and sales dropped to their third-lowest level since the pandemic hit. Bidding wars now are scarce, sellers are cutting prices and the market is bunching up as homes take longer to sell.
Rising mortgage rates have priced some buyers out of the market, while others sit on the sidelines waiting for prices to go down.
“We hear it every day: ‘We just want to see where the market is headed,’ ” Suzanne Seini, CEO of Irvine-based Active Realty Inc., said of today’s home shoppers. “There are not as many buyers now.”
As a result, the median price of a Southern California home – or the price at the midpoint of all sales – fell to $740,000 in July, down 1.3% from the month before and down 2.6% from April’s all-time high of $760,000, according to CoreLogic figures released by DQNews on Wednesday, Aug. 17.
Last month’s median still was 8.8% higher than in July 2021. But that’s the smallest annual price gain – and the first in the single digits – in 23 months.
July sales, meanwhile, fell 34.8% from last year to 16,390 transactions, DQNews/CoreLogic figures show. Last month’s sales were down 20% just from June, marking the second slowest July in records dating back to 1988. The last July with fewer sales was in 1995.
Higher mortgage rates are the key reason behind behind slower sales and sluggish price growth, said Redfin Chief Economist Daryl Fairweather.
“When mortgage rates go up and make borrowing to buy a home less affordable, more homeowners are just simply priced out,” Fairweather said. “And in Southern California, those higher mortgage rates can translate into hundreds, if not thousands, of extra dollars a month.”
Mortgage rates averaged 5.39% in the three months ending in July, compared with 2.94% a year earlier.
At current rates, a buyer with a 20% down payment on a 30-year mortgage would pay $3,319 monthly on the $740,000 median sale of last month. That’s up $1,043 a month – or nearly 46% — from last year’s typical monthly payment of $2,276.
“The housing market is slowing as higher mortgage rates sideline many prospective homebuyers,” Redfin said in a housing report released Tuesday, Aug. 16. “With competition declining, the house hunters who are still in the market are enjoying newfound bargaining power, a stark contrast from last year, when they often had to pull out every stop in order to win.”
Increased buyer leverage translated into more escrows falling through, the Seattle-based online brokerage reported. Failed escrows last month hit 16.1% nationwide, the third-highest percentage on record, Redfin reported.
Locally, 20.6% of July escrows fell through in the Inland Empire, followed by 18% in Los Angeles County and 16.4% in Orange County, the report said.
Buyers also have more homes to choose from as the number of homes for sale rises to levels not seen since the spring of 2020.
Southern California had 32,344 homes for sale as of Aug. 4, up 53% from a year earlier, according to Reports On Housing.
“The looming recession has buyers on the edge of their seats, fully aware that the housing market has slowed considerably,” ‘Reports on Housing’ author Steve Thomas wrote in his latest commentary. “Homes are taking a lot longer to sell. The number of price reductions has surged higher in the past couple of months. As a result, many buyers sit on the sidelines waiting for prices to plunge.”
More homeowners also are choosing to stay put rather than sell their homes and buy another because of higher prices and higher mortgage rates, said Fairweather, the Redfin chief economist. Hence, “stale” listings sitting on the market are the main reason there are more homes for sale. Redfin figures show new listings are down 21-22% in Los Angeles and Orange counties and down 4.5% in the Inland Empire.
California home sales and prices were showing signs of slowing even before mortgage rates spiked, added Rick Sharga, executive vice president for market intelligence for Attom Data Solutions. When that happened, sales volume was bound to plummet.
“That’s how the cycle is supposed to work, isn’t it?” Sharga said in an email. “Sales volume increases, prices increase, and then increase to a point where buyers decide the prices are too high and sales volume drops off, generally followed by list price reductions, slowing appreciation, and sometimes price corrections.”
Despite the current slowdown, neither Sharga or Fairweather are expecting year-over-year price drops. And if they do occur, they’ll be nothing like in 2007-12, when Southern California’s median plunged 48%.
Fairweather believes it’s possible annual price appreciation could slow to 5% or less by next winter, unless there’s a recession. In which case, annual price drops are possible.
“But I’m starting to be more optimistic that we won’t have a recession,” Fairweather said. “Or if we do have a recession, it’ll be over before we know it.”
Here’s a county-by-county breakdown of median home prices, sales totals and year-over-year percentage changes:
- Los Angeles County’s median rose 5.7% to $840,000; sales were down 33% to 5,491 transactions.
- Orange County’s median rose 10.5% to $1,000,000; sales were down 38% to 2,277 transactions.
- Riverside County’s median rose 10.4% to $579,500; sales were down 32.5% to 2,971 transactions.
- San Bernardino County’s median rose13.2% to $515,000; sales were down 31.5% to 2,237 transactions.
- San Diego County’s median rose 9.5% to $800,000; sales were down 39.8% to 2,667 transactions.
- Ventura County’s median rose 10.0% to $805,000; sales were down 35.5% to 747 transactions.
Source: Orange County Register
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