Can Falling Mortgage Rates Revive Homebuying in Los Angeles County?

Los Angeles County has always been a place where dreams come true, but the dream of homeownership seems to be slipping away for many in recent years. In this blog post, we will delve into the current state of the Los Angeles County housing market and explore the potential impact of falling mortgage rates. Is there a silver lining on the horizon for homebuyers, or are we stuck in a never-ending cycle of unaffordability?

The State of the LA County Housing Market:

Let’s start by examining just how slow the market in Los Angeles County has become. Over the 12 months ending in August, only 65,140 homes were sold, a staggering 37% drop compared to two years earlier. One significant factor contributing to this slowdown is the drastic fall in affordability during the pandemic era. In August, the median home price reached a staggering $830,000, up 34% since February 2020. Meanwhile, mortgage rates soared from 3.5% to 7.1%, causing monthly house payments to surge by 100% for a typical Los Angeles buyer with a 20% downpayment.

The Role of Mortgage Rates:

We know that mortgage rates play a vital role in shaping the housing market. To understand this better, we’ve taken a deep dive into historical data dating back to 1988. The data was split into two categories: periods when mortgage rates surged and periods when rates tumbled significantly. Both groups experienced an average one-percentage-point change over 35 years.

Rate Swings and Home Prices:

  • When mortgage rates experienced their steepest jumps, home values in LA averaged impressive one-year gains of 7.6%. However, when mortgage rates fell significantly, median home prices in LA only saw modest 1.6% gains. The local median price, in total, appreciated 4.7% since 1988.

The Impact on Sales Pace:

  • Falling mortgage rates do modestly boost the pace of home sales historically. The most substantial rate drops correlated with 2.1% one-year gains in closed transactions. In contrast, rapid rate increases led to a 5.3% one-year decrease in the sales pace.

The Secret Sauce – Jobs:

There’s a catch to the lower rates – jobs, jobs, jobs. Historically, lower rates tend to occur when the economy is not at its best. A strong, stable economy typically sees rates rising, as does robust hiring. And remember, to be a successful house hunter, you need a reliable paycheck.

  • When rates surged over the past 35 years, California employment grew at an impressive annual rate of 2.7%. However, when rates tumbled, jobs in California shrank at a negative annual rate of 0.7%.

Bottom Line:

The real estate market is a complex and ever-evolving beast, influenced by a multitude of factors. Falling mortgage rates can indeed provide some relief, potentially leading to softer pricing and a boost in sales pace. However, there’s a critical caveat – the health of the job market. Historically, rates tend to drop when the economy is less than favorable, and this isn’t the best backdrop for a significant purchase like a home.

It’s worth noting that this isn’t just a Los Angeles housing quirk; it’s a trend seen in many places. In Southern California, the sharpest rate jumps were accompanied by impressive one-year price gains of 8%. Conversely, the most substantial rate drops resulted in a more modest 2% average price gain.

Nationally, the pattern is consistent. Soaring rates correspond with an average 7.5% one-year gain in the Case-Shiller US index, whereas rates cascading led to a more moderate 2% appreciation.

In Conclusion:

While history isn’t always a perfect forecast, it can be a useful guide. Falling mortgage rates might provide a glimmer of hope for potential homebuyers in Los Angeles County. However, the state of the job market and the overall economic climate will significantly influence whether this trend can reverse the recent slowdown in homebuying. So, if you’re considering buying a home in LA, keep an eye on those mortgage rates and the job market – they hold the key to your homeownership dreams.

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