High-End Home Prices Squeezed By Interest Rates

Some sectors of Southern California’s housing market are starting to feel the pinch from rising interest rates, particularly in such upscale communities as Bel-Air, Westwood and Pasadena.
By: KATE BERRY: Los Angeles Business Journal Online
Some areas of Southern California’s housing market are starting to feel the pinch from rising interest rates, particularly in such upscale communities as Bel-Air, Westwood and Pasadena, where median home prices in some ZIP codes have dropped 15 percent to 20 percent from a year ago.

Many real estate agents and brokers have long predicted that a slowdown in the housing market would first hit homes that sell for between $2 million to $3 million – a sweet spot in the market for well-heeled families trading up from existing homes. And the June numbers show that trend popping up in some locales, although it’s not widespread.

“The slowdown in sales appears to be most noticeable in the move-up category,” said Marshall Prentice, president of DataQuick Information Systems. “Prices are flattening out in that market. Entry-level and mid-market homes are not seeing as much of a sales slowdown, and prices are still going up, though at a slower pace.”

Indeed, brokers and mortgage lenders tend to dismiss any suggestion that Los Angeles’ housing market is slowing dramatically. Instead, they say that after four years in which sellers have had the advantage, prices are readjusting to normal levels.

“There’s a much more even playing field now for buyers and sellers,” said Jerry Jolton, estates director of the Beverly Hills office of Coldwell Banker. “The market is adjusting and usually sellers are about six months behind the curve because they look at their neighbor who may have sold last year at a higher price.”

The housing data, provided to the Business Journal by HomeData Corp., a Melville, N.Y.-company that tracks housing prices nationwide, indicates that rising interest rates appear to be having a modest impact.

The median price of an existing home that sold in June in Los Angeles County was $555,000, which is 11 percent greater than a year ago in June. Prices rose less than 1 percent from the previous month, however. The median price in May was $550,000.

Indeed, homes are appreciating in value at their slowest pace in almost six years. The slower pace has been expected for months because last year home prices in Southern California were appreciating 20 percent or more every month, a level that was clearly unsustainable.

Beyond the price, housing experts pay attention to the number of homes sold – that is, the volume – as a good indicator of whether the housing market still has momentum. In a decelerating environment, the volume tends to drop before prices drop.

There were 7,019 homes that sold in June in the county. That’s down 17 percent from the number of homes that sold in June 2005, and down 22 percent from May 2006, according to HomeData. Sales volumes have been down in seven of the last eight months.

Three-quarters of the cities in Los Angeles County showed a deceleration in the volume of home sales last month compared with a year ago, further evidence of a slackening in the market.

Normal market
David Soleymani, managing director of First Capital Corp., a mortgage originator in Santa Monica that is owned by Cendant Corp., said he doesn’t see a bubble in the housing market. Rather he expects prices to decline 10 percent to 20 percent from the outlandish prices commanded last year.

“Houses that are priced right are getting a lot of activity early on in the process,” he said. “The sellers who overprice their homes are not getting much action, so they have to reduce the price. Sellers have been spoiled because they think they should have five offers the first day they put their houses on the market. That’s not happening.”

At the same time, Los Angeles’ low default and foreclosure rates suggest that this market is holding up better than several markets around the country including Las Vegas and Miami, where overdevelopment is causing prices to fall dramatically.
“Our market is surprisingly resilient,” Soleymani said. “There’s clearly been a transition and the statistics show that there’s more inventory, houses are being listed for sale longer and we’re seeing a more normal market.”

The California Association of Realtors’ Unsold Inventory Index, which measures how many months it would take to sell the inventory of existing single-family homes in Los Angeles, continues to rise. That means buyers are gaining ground on sellers.

There is currently a backlog of 6.2 months of inventory, up from just 2.2 months a year ago. Six months is considered a balanced market.

“We’re off from the insanity of last year,” said Steve White, president of the Southland Regional Association of Realtors, who is also co-owner and operating principal of Keller Williams VIP Properties in Santa Clarita.

White said some of the housing statistics are hard to understand because they point in many directions. In April, he said there was a strong surge in lower-priced condo sales, which generally portends a rise in sales of single-family homes.

Many brokers dismiss the housing statistics because they lag the market by two to three months. The data that tracks home sales and prices also is somewhat skewed because some ZIP codes only have a handful of sales in a given month, which may not accurately portray the entire market.

Still, one striking trend appears to be that more of Los Angeles’ wealthiest move-up communities are seeing home prices drop, while several affordable communities are finally seeing double or triple-digit price increases.

Some brokers consider the bifurcation of the market to be a normal part of the adjustment to a more rational market.

In Westwood’s 90024 ZIP code, for example, the median price of a new home fell 19 percent in June to $1.6 million, down from $1.97 million a year ago, but the data was based on just five homes that sold in the area. Median home prices in Bel-Air’s 90077 ZIP code have been knocked down 13 percent to a median of $1.44 million last month for 10 homes that sold. In Pasadena’s 91105 ZIP code, prices have dropped 16 percent to a median of $785,000, which tracked 15 home sales.

Just as different sectors of the stock market are affected as interest rates rise, much the same happens with different sectors of the housing market.

Last month, several of the more affordable communities witnessed big home price increases, such as Inglewood’s 90305 ZIP code, where housing prices jumped 72 percent from a year earlier to a median of $594,000. In City Terrace, median home prices were up 44 percent from a year earlier to $455,000. And in South Los Angeles’ 90003 ZIP code, prices rose 41 percent to a median of $494,000.

Brokers said that instead of the bottom of the market finally coming to the top, the available pool of potential buyers is simply larger for lower-priced homes because more people can afford them. Some new entrants who missed out on the housing boom are coming in to the market to take advantage of interest rates that are still fairly low by historic standards.