The Los Angeles County housing market will either slow further or accelerate depending on the direction of mortgage rates.
There are many crossroads in life where a single decision can take someone down a completely new path. Whether it's choosing a career, getting married, or moving to a new city, each decision shapes a unique and distinct future.
Similarly, the second half of 2025 stands at a crossroads, where the pathway of mortgage rates will result in two vastly different outcomes. Will mortgage rates remain elevated, or will they fall below 6.5% with duration? The housing market is at the mercy of rates. Until rates drop, expect more of the same.
In recapping the first half of 2025, mortgage rates started the year above 7%, according to Mortgage News Daily, and did not drop into the 6s until mid-February. They bounced between 6.6% and 6.99% ever since, except for four days when they rose above 7% due to the reaction to the tariff announcement and concerns about the deficit following the details of the new tax bill. As a result of the sticky, higher-rate environment, the affordability crisis has persisted, and demand has remained essentially unchanged over the last couple of years. Demand (a snapshot of the previous 30 days of pending sales activity) is currently at 3,619 pending sales, 4% below last year’s 3,781 level, and 3% below the 3,734 pending sales reading in 2023.
The active inventory is an entirely different story. Homeowners continue to “hunker down” in their homes, unwilling to move due to their current, underlying, locked-in, low fixed-rate mortgage, resulting in 13% fewer “For Sale” signs through June compared to the 3-year pre-pandemic average (2017-2019). Yet, there were 6,317 additional signs compared to last year, and 11,815 more than in 2023. In pairing these extra signs with similar year-over-year demand, they have accumulated and triggered a steep rise in the inventory. The supply of available homes has increased from 8,533 at the start of the year to 14,707 today, a 72% rise. There are 40% more homes available today than at the same time last year, and 100% more than in 2023, or double.
As a result of a rapidly accelerating supply of homes and similar, year-over-year muted demand, the Expected Market Time (the number of days it takes to sell all Los Angeles County listings at the current buying pace) has steadily increased from 90 days in March to 122 days today, its slowest start of July pace since tracking began in 2012. With longer market times, negotiations have shifted in favor of buyers, and they are now calling more of the shots. There is also pricing pressure, and values are slowly declining from month to month.
So, where does the housing market go from here? It all depends on rates. There are two scenarios: rates remain elevated and continue to fluctuate between 6.5% and 7% for the remainder of the year, or rates drop and hover between 6% and 6.5% with duration. For mortgage rates to remain where they stand today, the economic data must continue to be similar to that of the first half of 2025. Financial market volatility persists due to ongoing tariff announcements, while strong labor market readings continue, characterized by solid job growth and low unemployment rates. Additionally, any rise in inflation due to the implementation of tariffs will keep a lid on Federal Reserve rate cuts.
In this scenario, the Expected Market Time will slowly rise from week to week. Demand will remain muted and gradually decline through the end of the year. The inventory will slowly climb until it reaches a peak, and fall progressively until New Year’s Eve. Los Angeles County peaks typically occur during the summer, but have been occurring later in the fall due to the higher mortgage rate environment over the past few years. The market will slow until the Holiday Market in mid-November. Home values will slowly fall from month to month.
For the second scenario to occur, mortgage rates falling between 6% and 6.5% for an extended period, the U.S. economy must show signs of a looming slowdown. The Federal Reserve is closely monitoring the job market. Any cracks in labor will lead to immediate cuts in the Federal Funds Rate. Weakening job openings, a decline in job creation, a sudden and unexpected rise in unemployment, or a surge in the four-week moving average of initial jobless claims will signal a major shift in the economy. Declining consumer spending, weakening GDP, falling industrial productivity, and further drops in consumer sentiment are all additional signs of a slowdown.
Last year, from early August to the start of October, rates dropped below 6.5% for 47 consecutive days. Demand surged by 14%, a virtually unheard-of increase during the Fall Market. If rates follow a similar pattern to last year and remain there for the rest of the year, demand would surge higher. Millennials and Generation Z homebuyers who have been waiting for home affordability to improve will finally have the opportunity to purchase. The biggest difference between last year and this year is the abundance of additional choices with a much higher inventory. The increase in demand would result in a limited rise in the active listing inventory. The inventory would peak earlier than in the first scenario. With fewer available homes and higher demand, the Expected Market Time would decrease, and the housing market would improve from week to week. Home values would stabilize and potentially rise on a monthly basis by the end of the year.
The Los Angeles County housing market is at a crossroads. The speed of the market depends entirely on the direction of mortgage rates, which hinges on the direction of the U.S. economy.
