Los Angeles Homebuyers Take Two Steps Forward and One Step Back

 

• Total home sales in the greater central Los Angeles area were 2 percent below last May, following April’s upwardly revised 2 percent year-over-year increase.

• Sales between $2 million and $3 million saw a 6 percent jump compared to last May, the first year-over-year increase following six months of double-digit declines, driven by East Valley, Eastern Cities (Arcadia and Monrovia), and Foothill Communities.

• Home sales activity remains relatively stronger on the eastern side of Los Angeles and among homes priced below $1 million – including Eastern Cities, Foothill Communities (La Cañada Flintridge, La Crescenta – Montrose), East Valley (from Sherman Oaks to Glendale), and also South Bay.

• For-sale inventory is up 10 percent year-over-year, a notable slowing from 20 to 30 percent increases seen during winter months.

• Relatively larger for-sale inventory growth is seen in western parts of Los Angeles, including Mid City, Sunset East, Silicon Beach, and Brentwood, while inventory is aging without an increase in new listings on the East Side, NELA, North Valley, and areas surrounding DTLA – days on market has increased relatively more, up 17 days YOY.

• While demand for homes priced below $1 million remains solid, buyers are taking longer to make the purchase leading to longer days on market, up 7 days YOY to an average of 27 days.

• Absorption of available inventory and the share of homes selling over the asking price improved markedly from winter lows with 36 percent of homes sold over the asking price.

• Home prices remain flat year-over-year with only Eastside, areas surrounding DTLA, South LA, and Mid City seeing an increase of 6 to 8 percent above last year.

• The home price forecast remains flat through 2020.

Considering the volatility in monthly changes, Table 1 summarizes the 3-month average change (March-May) compared to last year. The East Side of Los Angeles, including East Valley (up 58 home sales YOY), Foothill Communities, and Eastern Cities, maintained relative strength compared to the other areas, generally due to strong sales of homes priced below $1 million. Sales below $1 million also fared well in the Greater Malibu region, Silicon Beach and Hollywood Hills, while sales priced between $1 million and $2 million fared well in West/Mid LA, North Valley, South Bay, NELA, and South of 210. The strength of the sale activity is largely a function of existing inventory.

For-sale inventories continued to trend ahead of last year, however, the rapid growth rates seen at the beginning of the year have slowed considerably and are back to rates seen at the same time last year. In other words, after 20-30 percent increases in inventory during the winter months, the rate of increase has slowed to an average of 10 percent. Figure 2 illustrates year-over-year changes in for-sale inventories by price range, with percentages denoted on the line tracing inventory below $1 million. Overall, while inventory is trending 10 percent above last year for the last two months, inventory priced between $2 and $3 million is growing at a higher rate in recent months, up 14 percent in May.

Furthermore, Table 2 illustrates changes in inventory by region, change in new listings, median days on market, and change in days on market from last year. A few trends are of note. Inventory increased and seems to continue increasing (with an increase in new listings) at the highest rate in many western parts of Los Angeles, such as Mid City, Sunset East, Silicon Beach, and Brentwood; while inventory is aging without an increase in new listings on the East Side, NELA, North Valley, and areas surrounding DTLA. Those are also areas where days on market have increased relatively more, up 17 days.

In addition, absorption of available inventory has improved in spring, from around 15 percent in the first quarter to an average of 20 percent in May, suggesting buyers are cautiously optimistic in most areas. Figure 3 traces out the 3-month moving average of absorption rate together with the percent of homes selling over the asking price. Both indicators suggest that buyer demand has notably picked up in recent months, and while it still has not matched the levels seen in the last couple of years, it measures up with conditions seen in 2016. 

Table 3 summarizes absorption rates in May, year-over-year change in absorption rate, the share of homes that sold over the asking price, and the change from last year. The change in absorption rates from last year suggests that the number of homes sold from the available inventory is only 3.5 percent points below last year when they were 24 percent. Although the overall absorption rate is down, some areas such as Eastern Cities, Foothill Communities, East Valley, and areas surrounding DTLA have seen an increase in absorption rates.

Lastly, the question remains, where does the Los Angeles housing market go from here? As discussed last month, median home price growth remained flat overall since the beginning of the year and remained so in May, meaning that following seasonal changes, it is back to last year's levels. A few areas did see some price increases, mostly value-driven, compared to last year — namely Eastside, areas surrounding DTLA, South LA, and Mid City where prices are about 6 to 8 percent above last year. But generally, softening of price growth has been anticipated at this point of the housing cycle. In the Pacific Union Real Estate Economic Forecast 2020, see Figure 4, our housing experts discussed the expectations around the normalization path, suggesting that home prices will reach a point in 2019 when they will remain flat for a couple of years. Unfortunately, softening of price growth may be alarming some buyers who fear that housing market correction is inevitable and are waiting for sellers to yield further and lower their prices. Nevertheless, while buyers may be expecting price declines, declines are likely to be very minimal and unlikely to resemble the correction that we saw in the last housing cycle. However, many conditions are different than the last cycle. Most importantly, credit conditions are significantly better than in the last cycle with the current housing boom driven by exceptionally solid underwriting, many all-cash sales, and almost negligible new construction growth, all of which suggest that the correct path is looking notably different.