The house-buying craze in Los Angeles has lost momentum, in some cases forcing agents to advise clients to lower list prices, rely less on bidding wars and in certain scenarios even cut commission rates.
Shouldered by the pandemic, the housing market was seeing homes sold at record prices, sometimes tens of thousands of dollars over the original asking price. Today, the market is looking a little different for sellers.
A study by RE/MAX found that nationwide the number of home sales in May 2022 dropped by 8.5% compared to May 2021. In Los Angeles, the number of houses sold declined by nearly 25%.
“We’ve definitely started to notice a pullback in the market,” said Jon Grauman, director of estates at The Agency. “The market is literally shifting beneath our feet, and until the market finds its footing, it’s hard to get an accurate gauge. But there’s certainly a sense of hesitation in the market.”
The shift, however, may mean a return to normal following the “flurry” of home-buying and selling between the beginning of the year to May, according to Susan Smith, an agent at Hilton & Hyland.
“The rates were a lot different and there was a lot of multiple offers and really an extraordinary market that we had in the first quarter,” Smith said. “I think really right now it’s just more correcting towards normal versus that abnormal situation.”
The main causes of the slowdown are inflation and the rise in interest rates, which have put a damper on consumers’ willingness to spend, experts agree.
“The housing market itself is not directly affected by the increase or the action by the Fed to increase short-term interest rates, but rather by investors’ expectations of inflation in the long run,” said Gary Dean Painter, a professor at USC’s Sol Price School of Public Policy.
“What we’ve seen is that 30-year fixed mortgage rates … have seen rates that have increased from lows in the 2% to 3% range to approaching 7%. The demand for buying a new home, especially for a first-time home buyer, has fallen because they simply can’t qualify for a home at as high a price as they would have been able to a year ago when mortgage rates were near historic lows.”
Kerry Ann Sullivan, a real estate agent at Pardee Properties, said she noticed a shift in the market beginning in May, when talks of rising interest rates began. Between February and April, Sullivan said homes she had on the market were receiving 10 to 15 offers, while now her properties receive one or two.
“That, to me, let me know that buyers are experiencing fatigue and there’s fear now starting to creep in because of what was being talked about in the media and on the news and by economists,” Sullivan said. “By the middle of June, we’re starting to see the sellers who are realizing that their properties aren’t selling for the same prices that they would have sold for in that hot spring market, and we started to see some of the sellers accepting either lower offers or starting to do their price reductions.”
Despite a dip in the number of houses sold and price reductions, the median sale price for a home in L.A. has remained on a steady rise and is now sitting at $1.03 million, according to Redfin Corp.
Victor Nissani, a Redfin senior real estate agent, said his listings haven’t been affected, but he has seen other West L.A. agents struggling to sell their properties or considering price drops.
“I think you just have to price accurately in any market,” Nissani said. “Even when prices were super high, everybody thought they were super high, but that’s based on the fact that there’s a lot of buyers out there. When rates were lower, it was more attractive to buy.”
Smith added that the market has seen dips before, but this one is not as extreme as previous ones.
“I’ve been doing this for 28 years. I’ve seen several cycles like this in the past … We’re not seeing the same kind of incidents that happened like in 2008 or prior where there were major corrections,” Smith said. “But I think we were due for a correction anyway because the prices were going so crazy, and it’s more evened out now.”
In an attempt to remain competitive, agents have, among other things, cut their commission rates, but Sullivan said that’s not the recommended route.
“What happens in this market is agents who don’t do a lot of business or who are inexperienced are desperate,” she said. “I’ve seen some of them reducing their commissions to very minimal numbers where it’s barely profitable for them. The problem with that from a consumer perspective is you’re not going to get the service. You might be paying less in commission and fees, but you’re not going to have somebody who’s going to be experienced in being able to get through a downturn in the market.”
Sullivan said it’s more important than ever to be a seasoned real estate agent who can accurately read the market and be able to give clients the best advice for navigating it. Her advice: get ahead of the market.
“You need to see what the market-comparable sales are, and you need to be below those in order to get attention so that you can hopefully reach that with the buyer pool,” Sullivan said. “The price has to be in line with the market and that’s going to be really important. Marketing is really important, but it’s also really important to have the correct price when you are getting that exposure.”
Grauman said that agents should have “frank, honest, candid” conversations with their sellers to let them know what is happening and what they can anticipate.
“We try to have an honest conversation with our clients about the fact that we are likely headed for some type of a dip here and that it starts with a decline in the volume of transactions,” he said. “As that happens, there’s likely to be an adjustment to the housing prices, which will be reflective of whatever the new level of demand is, but the hit to home prices will ultimately be predicated upon how high interest rates go and how long they stay there for.”