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Southern California home prices set more records as rate hikes fail to slow bidding wars

Southern California's housing market remains overheated, home prices hitting record highs despite soaring inflation and rising mortgage rates.

Sales are falling as rising prices and mortgages push many potential buyers to the side. However, buyer demand is still outpacing the supply of homes for sale.

Tami Fleming, a broker of the Westcoe Real Estate in Riverside, said, "The supply is so low and the demand is so high that we've had three homes in a row sell for more than $100,000 over the list price."

According to CoreLogic data released by the by the data firm DQNews on Wednesday (May 18) , the median price of a Southern California home - or the midpoint price of all sales - hit an all-time high of $760,000 in April, up to $109,000, or 16.7% from a year ago. That's equivalent to a weekly price increase of nearly $2100 over the past year.

According to Zillow, as sales have slowed, the number of homes has increased slightly after steadily declining over the past few years. There were nearly 31,000 homes for sale in Southern California in April, up from March, but still 26% lower than the year before.

According to Selma Hepp, a deputy chief economist at CoreLogic, demand remains strong despite rising interest rates. In some cases, rising interest rates have accelerated demand as buyers rush to lock in rates before they get higher. Sales volumes also haven't fallen as much as they might seem. In April 2021, when interest rates were near record lows, sales volumes soared, hitting the 11th highest level on record for that month.

"That's why we're seeing a year-over-year decline in sales," Hepp said." The strong price growth reflects an imbalance between demand and supply, even as some demand is reduced due to higher interest rates."

Fleming, a Riverside broker, speculated that some inland buyers "have a lot of money in their pockets because they sold their home in Los Angeles or Orange County and now they're buying here." Fleming said it's common to see 15 to 20 offers on a home, and one agent in her office recently received more than 50 offers.

"I feel bad for the buyers. For every offer you accept, there are 15 to 20 offers that are rejected," Fleming said." I hate telling other brokers that their buyers aren't getting the house. It actually breaks my heart."

Here's an analysis of median home prices and total sales by county, as well as percentage changes from last year.

Los Angeles County's median rose by 15.3% to $865,000; sales declined 17.1 % to 6,999.

Orange County's median rose by 20.6% to $1,050,000; sales volume declined 27.8% to 3,021 transactions.

Riverside County's median rose by 20.4% to $590,000; sales declined 15.1% to 4,027 transactions.

San Bernardino County's median rose by 19.9 % to $519,000; sales declined 13.7% to 2,874.

San Diego County's median rose by 20.0% to $840,250; sales declined 21.7% to 3,598 transactions.

Ventura County's median rose by 15.4% to $815,000; sales fell 20.0% to 967 transactions.

Bubble or no bubble? History tells us how likely a real estate crash is this year

In Gallup's annual Economic and Personal Finance Poll, only 30% of respondents said it was a good time to buy a home, down a whopping 23 percentage points from last year. In addition, a recent survey conducted by a real estate brokerage, Clever real estate showed that 45% of potential sellers said they thought a real estate bubble might emerge this year.

Fears of a real estate bubble have been brewing for months. In March, the Federal Reserve Bank of Dallas reported growing concern that a bubble may emerge as home prices continue to rise rapidly.

The fear of a new bubble is understandable. Most people remember the devastating effects of the last housing crash, which included more than 6 million families losing their homes to foreclosure.

However, those who fear a real estate bubble like the one in 2008 would be wise to look back and see how today's market will play out.

Why today's market is different from that of 2008?

In the years before 2008, a year when the financial crisis broke out, deregulation in the financial sector made it easier for many homebuyers who previously did not qualify for a loan to get one. This led to a surge in demand, which in turn pushed up home prices and led to speculation and overbuilding by investors.

Loose regulations meant that these subprime borrowers were often sold alternative loan products such as adjustable-rate mortgages or more exotic products featuring large payments. When these rates became adjustable and rose sharply, many homeowners could no longer afford the monthly payments and thus went into foreclosure.

The market looks very different today. Bill McBride, a real estate analyst and author of the CalculatedRisk newsletter, said a market collapse similar to the 2008 bubble burst is highly unlikely based on the fundamental foundations of the current real estate market.

McBride noted that the 2008 bubble was characterized by adjustable-rate loans to homeowners with a loan-to-value ratio of 105% and a loan-to-value rate of 1%. Today, ARMs are regulated and capped to prevent rates from rising out of control.

Eventually, home prices began to fall as ARM rates began to rise. People couldn't afford to pay more on their mortgages than their homes were worth, which led to a flood of foreclosures. Today, homeowners have more equity in their homes and can absorb the impact of falling home prices without losing all the equity in their homes.

McBride says: "If home prices drop 5 to10% and people still have equity, very few people will be in trouble." He adds, "I just don't know how we'll get prices to go straight down."

Instead, McBride believes that our current housing market is more likely to behave as it did between 1979 and 1982, when there was essentially a cooling market without a plunge in home prices or a flood of foreclosures.

Inflation was even higher in the 1979-1982 period than it is today, with consumer price increases peaking at 13.5% in 1980. As a result, under then-Fed Chairman Paul Volcker, the Fed increased federal funds to keep inflation in check. Mortgage rates climbed to 18.63% in October 1981, and then began a slow but steady decline. The Federal Reserve is also raising the federal funds rate to curb inflation today. Inflation has reached its highest level in more than 40 years, and mortgage rates have also risen.

Another similarity to today's market is demographic-driven demand. Like today's millennials, in 1979, baby boomers were the largest group ever to enter the real estate market, driving huge demand.

Fundamental factors in the real estate market make a crash like 2008 unlikely

1) Demographics and homebuyer’s demand

Today's high demand for housing is largely driven by the large millennial generation that is about to enter its prime buying years. However, this demand has so far been contending with a severe shortage of housing inventory at the end of the Great Recession.

The building boom that drove the housing market before the bubble burst in 2008 has slowed significantly since then. A 12-month supply of available housing stock in 2010, twice the six-month supply, is considered a sign of a healthy market. By the end of 2019, the supply of homes for sale will be about four months. At the current sales rate, there is only a two-month supply of homes available for sale.

Skylar Olsen, the chief economist at mortgage startup Tomo, noted that if there is enough buyer demand in the housing market to snap up homes for sale, then home prices are unlikely to fall significantly.

2) Inflation and Interest Rates

Inflation has been on the rise over the past year due to economic disruptions caused by the 2019 coronavirus pandemic, supply chain restrictions and the recent Russian invasion of Ukraine. in April, inflation exceeded 8% for the second consecutive month. As a result, the Federal Reserve raised the federal funds rate to curb inflation.

This move has also resulted in current mortgage rates have risen by more than two percentage points in the first four months of the year.

However, George Ratiu, senior economist at Realtor.com, believes that high inflation and rising interest rates may not be bad in an overheated real estate market like today.

Says Ratiu: "I see that prices have adjusted to rising interest rates, rising inflation and new supply, which tells me that the market actually seems to be normalizing and not to burst like a bubble."

3) Home Equity

Home prices have been rising at a double-digit rate for the past two years. In March, home prices rose 20.9% from a year earlier, the largest year-on-year increase in the 45 years of real estate data provider Corelogic's existence.

Most experts say such a rate of home price growth is unsustainable, and many predict that by this time next year, home price growth will slow to single digits, but prices will not fall.

While rising home prices may drive some potential buyers out of the market, for homeowners, it means having more sources of accessible wealth in case of an unexpected setback.

Having enough equity means that homeowners are better able to absorb a drop in home prices or use equity to cover possible expenses without necessarily putting their homes at risk.

If we're not headed for a bubble, what's next?

McBride didn’t see a housing market crash happening at all, but rather a slowdown similar to the one that occurred from 1979 to 1982, with fewer home sales, less home price growth and less demand. The question is when and how the market will slow down.

There are signs that the economic cooling may have already begun. Compared to last year, both completed and pending home sales are much lower in this year. Olson noted that while there are signs that home price growth may be starting to slow, it is still outpacing the current rate of inflation, which means we are unlikely to see a significant drop in home prices

Olson said: "If house prices are flat and inflation remains, then real house prices will fall, but I don't think house prices will fall very fast without inflation." He added: "I think real home prices will continue to rise for the rest time of the epidemic."

Latieu noted that even if prices remain flat, that's not necessarily a bad thing. Instead, he believes that low or no price growth would be a "welcome sign that the market has finally reached a normal pace.

The road ahead remains uncertain, although most experts believe we are unlikely to see a plunge in prices and a flood of foreclosures.

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