The Tale of Two Markets
There is a definitive difference between starter homes and the rest of the Los Angeles housing market.
For several years, there has been a wave of millennials turning 32, the prime first-time home buyer age. They have been getting married and having babies and now want to own a home. Unfortunately, with higher mortgage rates and higher home prices, many have been unable or unwilling to purchase. For nearly two years, since rates spiked, they have been sitting on the sidelines, waiting for either home values to plunge or mortgage rates to drop. Yet, neither has occurred. Instead, there has been a standoff between buyers and sellers, and with a limited inventory of available homes, sellers have had the edge.
In taking a careful look under the hood, the upper price ranges above $750,000 have had a lot more activity than last year. There are more homes coming on the market and more closed sales. Yet, for starter homes, anything below $750,000, it is an entirely different story. There are not as many homes coming on the market, and there are far fewer closings. There is a noticeable squeeze on the starter home market.
The data illustrates the stark differences between starter homes and the rest of the market. In 2024, through March, an extra 1,561 homes were placed on the market, 11% more compared to 2023. Yet, there were 4% fewer, or 188 missing FOR-SALE signs below $750,000. On the other hand, 19% more homes were placed on the market above $750,000, or an extra 1,749 signs. The entry-level market is already suffering from a chronically low supply. There is plenty of buyer competition due to the scarcity of available homes. As a result of the limited inventory of starter homes, the Expected Market Time (the number of days to sell all Los Angeles County listings at the current buying pace) for all homes below $750,000 is a very hot 48 days.
Homeowners are “hunkering down” in their homes and are unwilling to move due to their current underlying, locked-in, low fixed-rate mortgage. Through March, 28% fewer homes are on the market compared to the 3-year average before COVID (2017 to 2019). Starter homeowners are even more inclined to stay put compared to homeowners in the higher price ranges. Many cannot afford to sell their homes and trade their low rates for today’s 7.4% mortgage rate. It simply does not make economic sense. According to the Federal Housing Finance Agency’s National Mortgage Database, 84% of Californians with a mortgage have a 5% or lower rate, 67% are at 4% or lower, and 30% are at 3% or lower.
Mortgage rates have been bobbing around 7% for most of the year. With the recent sticky Consumer Price Index (CPI) inflation report and other hotter-than-expected economic reports, rates spiked to 7.44% as of April 15th. Last year, in mid-April, mortgage rates were around 6.5%, nearly a whole percentage point lower. Even with today’s higher mortgage rate environment, year-over-year sales are nearly identical. Yet, there were 3,556 closed sales below $750,000 this year compared to 4,251 last year, 16% less or 695 fewer closed sales. Above $750,000, every price range has experienced more closed sales, other than home prices above $4 million. There were 6,110 this year compared to 5,438 last year, 12% more, or 672 extra sales.
The entry level will improve once mortgage rates eventually ease to the mid-6s. Many economic experts believe the U.S. economy will cool sometime this year. Rates drop with a cooling economy. If the economy downshifts enough, rates could fall to the low 6s or even into the upper 5s. The lower mortgage rates fall, the more inclined homeowners will be to move. It will also result in a spike in demand. With more homes available and more demand, the housing market would begin to thaw.
Yet, the U.S. has proven to be extremely resilient thanks to the strong consumer. The economy has exceeded expectations despite the high-interest rate environment since the start of last year. With recent economic reports, the anticipated cooldown does not look like it will appear during the first half of 2024. Only time will tell. The Federal Reserve has been very data-dependent. Future economic reports will pave the path for the entire housing market, especially in the lower price ranges.
With more FOR-SALE signs above $750,000, there are more choices, pending sales, and activity compared to the lower price points. There is a squeeze on starter homes in Los Angeles County, and lower mortgage rates are the only eventual cure.
