Los Angeles December Market Update 2022
Hello and welcome to the December market update. Merry Christmas, Happy Hannukah, and Happy Holidays. My name is Dennis Maynard. I am a real estate broker in Los Angeles. Please don’t forget to like, subscribe, and follow. In this month’s market update, we are going to go through multiple subjects. The first is a continuation from a Real Cap Daily episode on the potential for a housing crash published this week. We are also going to talk about inflation and hedges, rental market numbers, mortgage rates, the national housing market, and the Los Angeles County numbers. I will leave chapter markers below so you can jump ahead if you like.
Many economists and pundits are calling for prices to fall a minimum of 7-10%. If there is a recession, some are looking for prices to fall 20% next year. However, using the Case-Shiller Index, home prices rose 31% from January 2020. This is largely due to cheap money. At the same time, foreclosures remain extremely low. I covered this in a real cap daily update which we are continuing here. You can watch it by clicking the link above. Essentially, we are dealing with a supply and demand imbalance. The US is undersupplied by about 4 million homes while interest rates have been kept way too low for way too long. Looking at this graph, you can see mortgage rates and the fed funds rate since 2000. This juiced up demand and pricing. Supply on the other hand did not keep up pace. This is evident in the single-family construction starts on this graph. So, are we headed for a crash?
According to Taylor Marr, “For those bearish folks eagerly awaiting the home price crash, you’ll have to keep waiting. As much demand is pulling back from supply is as well reducing downward pressure on prices in the short run.” Let’s take a look at why this is the case. Home equity is still substantial. 38% of homes in the US are owned free and clear with no mortgage. Here is a chart of loan-to-value distribution from CoreLogic. The majority of homeowners across the country have a loan to value ratio of 80% or less, meaning 20% or more equity in their homes. The total amount of tappable equity in homes across the country with LTVs at 80% max, $10.3 trillion. The total amount of equity, $16 trillion. Which city is in the best position with homeowner equity? The answer is Los Angeles. Most homeowners don’t have to sell even though they have lost equity. This is demonstrated further by 30-day late notices on mortgages which are currently below 3% of total mortgages at large banks. In order to have a crash, you need a large supply of inventory to be liquidated. Homeowners across the US don’t have to sell. There will be sales happening, but not enough to cause a crash. So are we looking at a correction or a crash. I would call a correction from inflated prices. After all, if you lose 20% from peak pricing to still have a 10% equity gain from 2020, you are still ahead.
Inflation, I hear complaints constantly. Principle #9 from my economics courses, prices rise when the government prints too much money. Since January 2020, the Biden Administration and Congress have been flooding the economy with money. This was compounded with more regulations and restrictions on energy production and supply chain constraints. This affected energy, housing, food, and now wages. This is evident on these charts. Keep in mind, this is a 12-month rate of change. The price increases are on top of the 2021 price increases.
Inflation is currently at 7.7%. Gasoline is up 17.5% and will likely go back up when China reopens. Electricity is up 14.1%. And food is up 12.1%. What do all of these have in common? Hydrocarbons or oil and natural gas. Essentially, we are reliving the 1970’s except we are doing it to ourselves. In case you are wondering, Los Angeles is at 7.5% inflation.
Traditionally, there are hedges against inflation including the stock market, metals, and real estate. All are being affected due to the increasing value for the US dollar which is driven by monetary policy. One such place to park money is the Individual Series Bond from TreasuryDirect.gov. The current rate through April 2023 is 6.89%. There are limitations, but it is a good start.
Real estate is a hedge because it can be rented. Rents can adjust over time. This is why multifamily real estate has been hot. However, it appears the rental rates have been pushed to their limits. Renters’ abilities to absorb higher rents are challenged. According to a survey by PropertyManagement.com, 1 in 4 millennials are living at home. That is the age group of 26 to 41 years old. Out of the group surveyed, 55% moved home in the last 12 months, 51% to save money, and 39% because they can’t afford rent. Of millennials, only 44% can afford a mortgage at 3.5% interest rate or less. Rates are now close to 7%. According to Zillow, Rents in Los Angeles for a two-bedroom average $2,866. This is for the county so please don’t call me up saying I’m dead wrong and you would never rent your Beverly Hills apartment for that rate. It’s the whole of Los Angeles. But, in case you are wondering, median two-bedroom apartment in Beverly Hills rents for around $3,900 per month.
In order to combat inflation, the Fed will continue to raise rates. The speculation around whether it is a 50 or 75 basis point hike is palpable and frankly irrelevant. According to the Taylor Rule per the Atlanta Fed, Fed Funds Rates will have to get above the rate of inflation which is currently at 7.76% with Los Angeles at 7.5%. This means the final destination will be above this rate. Even if it comes down some, the Fed Funds rate is going higher which means mortgage rates are going higher.
Mortgage rates are loosely associated with the 10-year Treasury. The current 30-year mortgage is at 6.33% and the 10-year Treasury is at 3.83% at constant maturity. There is a 2.5% or 250 basis point difference. The Fed Funds rate is at 4%. Let’s say the Fed Funds rate has to get above 6.5% over the next year to meet the Taylor Rule. This means mortgage rates would end up around 9%. Anyone want to sell their home?
In the national housing market, list prices are still up 10% over last year. The number of sellers putting their homes up for sale has declined for 22 weeks in a row. Inventory is up 53% from one year while time to sell took 9 days longer. There is traditionally a slow down in winter months in the number of homes coming on market and how long it takes to sell. The increase in list prices is largely due to migration to the Midwest elevating home prices. In high-cost areas and overheated markets, prices are generally falling.
In Los Angeles, the median single family home price has fallen to $870,000, down 13% from the peak in June. There is currently 2.7 months’ supply. The median sale price for condos fell to $621,000, down 5.6% from the peak. The number of months’ supply stayed flat at 2.5 months. Both homes and condos have average days on market between 34-36 days and final sales prices are around asking price. This means homeowners are pricing their properties well. Generally, sales in Los Angeles are still happening. Overpriced listings are reducing their prices to meet the market demand. The number of buyers who will qualify for current prices has fallen which is prompting the shift in price. Many buyers still have substantial savings to use as down payments. But and this is important, Los Angeles remains the least affordable city in the country.
Many are speculating the return to cheap rates again once the recession starts. Rate pivots from the Fed have not historically happened until the bottom of recessions. However, I don’t anticipate a return to a zero funds rate or sub 4% mortgages. Rather, I expect a reversion to the mean in which mortgage rates will range between 6-9%. Congress will have to get its fiscal house in order. What are your thoughts on the market? Have you been thinking about selling your property? Leave your comments below. If you have any questions, or would like me to review your property, please reach out. I’m here to answer your questions.