Is winter coming for Southern California's housing market? Sales are falling and price cuts are more common

Oct. 30, 2018 10:35 AM PT

A chill is settling over the once white-hot Southern California housing market.

Listings are up. Sales are falling. Price reductions are becoming more common.

The latest evidence came Tuesday when CoreLogic released its monthly market report. Sales across the region plummeted nearly 18% in September compared with a year earlier, the largest drop in almost eight years. The median home price in the six-county region rose 3.6% to $523,000, the smallest rise in more than three years.

With the economy still growing, experts don’t see any immediate prospect of home prices plunging, as they did in 2008 when they dropped nearly 30% amid the financial crisis. But real estate agents said buyers are pulling back because housing has simply become too expensive — a situation made worse by the recent surge in mortgage interest rates. Some who can still afford a home are holding back because they don’t want to buy at the peak.

“Prices have gotten ahead of themselves,” said Richard Green, director of the USC Lusk Center for Real Estate. “I think it’s very possible the market is going to cool down for a while.”

That would be welcome news for many would-be buyers. The housing market has been on the upswing for more than six years. Prices surged in major markets across the nation as rock-bottom mortgage rates and an improving economy collided with a shortage of listings.

That’s especially true in California, where experts say opposition to development has long stymied companies from building enough homes for everyone who wants to live here. Million-dollar listings have popped up even in some working-class Los Angeles communities, as have yellow signs on which investors promise to buy your house fast with cash.

Now the housing market rocket appears to be sputtering. Mirroring a national trend, home sales in Southern California are falling, reaching the lowest level for a September since 2007. More homes are on offer, increasing supply as demand weakens.

According to online brokerage Redfin, listings in September grew in all six Southern California counties compared with a year earlier, ranging from a 2% gain in San Bernardino County to a 32% leap in San Diego County. Zillow estimated even larger increases in listings, ranging from 14.6% in San Bernardino County to 39% in San Diego County.

Part of the slowdown is seasonal, reflecting that sales tend to tail off in late summer and pick up again in spring. However, data indicate the market is weaker now than at the same time last year.

Also, the share of listings in the past two months whose prices have been cut is at multiyear highs — a sure sign that sellers are scaling back ambitions. Redfin says Los Angeles County saw price cuts on 23.8% of listings in September, up from 17.9% a year earlier. Data from Zillow show 15.5% of listings had price cuts last month, the highest level in at least eight years.

That includes a three-bedroom house in West Adams that was listed in August for $869,000. Last month, the price dropped to $849,000. At a Saturday afternoon open house, real estate agent Rafaela Magdaleno stood in the empty, remodeled home waiting for potential buyers. About eight people came through in the first three hours — a “so-so” showing, she said.

Magdaleno said two people mentioned they would put in offers, but she didn’t expect others to do so.

“They like the house, but they don’t qualify [for financing],” she said. “They say it’s too expensive.”

To some extent, home listings are being swollen by owners who believe the market will turn south and want to get out ahead of it.

Barbara Boyd, 61, was recently laid off from her job as a project coordinator at NBCUniversal and worried that she might lose the equity she had built up in her five-bedroom home in Valley Glen, which she bought in 2011 for $615,000. The home is now in escrow for $1 million and Boyd plans to move to Arizona.

“At a certain point, even if it doesn’t crash, it’s going to stop,” Boyd said. “I am not going to gamble .… I am pulling the plug.”

Many economists believe that what’s coming is not a crash, but rather a cooling period caused by rising interest rates. The average rate on a 30-year fixed mortgage was 4.86% last week, up nearly a percentage point from a year earlier, according to Freddie Mac. The increase adds $228 to what previously would’ve been a $2,632 monthly mortgage payment on a $523,000 house.

“Interest rates are shifting up and it causes the market to pause,” said Christopher Thornberg, the founding partner of Beacon Economics, who predicted last decade’s housing meltdown. “This is how it always works.”

Many experts don’t expect home values to fall unless there is a recession, which they consider unlikely in the near future. Stock market gyrations aside, economic indicators remain strong and people who are buying homes can largely afford them, Thornberg said.

“There is not one reason to think a little bit of a slowdown turns into anything more dramatic than that,” Thornberg said. “Real estate bubbles are driven by overbuilding or overborrowing and you don’t have either one right now.”

Bill McBride, who writes the respected financial blog Calculated Risk, thinks the current market shift is similar to one several years ago. That’s when the Federal Reserve signaled it would slow its purchase of bonds, and interest rates suddenly surged in an event called the “taper tantrum.”

The sharp rise in rates helped halt an explosive run of double-digit home-price gains. Annual price appreciation in L.A. and Orange counties slowed to 4.9% in October 2014, down from a high of 22.1% a year earlier, according to the Case-Shiller index, viewed as one of the most reliable gauges of home prices.

Home price gains hovered in the 5% and 6% range for the next three years before accelerating to a high of 8.2% in April. On Tuesday, the latest Case-Shiller release showed price increases are down to 6.2%.

Not everyone agrees with the soft-landing scenario. Green of USC believes prices could fall 5% to 10% over the next two years, even absent a recession.

Green noted price growth has outpaced rents, which can be a better gauge of what incomes will support. Buyers, on the other hand, can be prone to overpay because they see their home as a financial investment that will increase in value.

At a certain point, they can’t stretch any further.

“I wouldn’t expect to see a big pullback,” he said. “But prices could fall a little bit.”

[email protected]

Follow me @khouriandrew on Twitter