Los Angeles’ Housing Market is at a Standstill. Can Lower Mortgage Interest Rates Save It?


Los Angeles has felt the impact of higher mortgage rates harder than many other cities in the nation. From August 2021 to August 2023, just over 65,000 homes were sold, a 37% drop from two years ago. At the same time, home values in the area have risen by a whopping 34% since February 2020. A homebuyer who would have had to pay just over $2,200 in mortgage payments a few years ago would now be hit with a whopping $4,462 monthly payment, putting home ownership far out of reach of ordinary Los Angeles residents. It’s clear the real estate market in the city is in need of relief and many real estate agents are eager to see a dip in interest rates that would ostensibly cool the market and boost sales. 

Lower mortgage rates would almost certainly boost the sales of homes in Los Angeles. Data from the last thirty years shows that when rates rise, home values rise with them. When rates go down, home values still rise but at a far lower pace than they would with rate increases. While home values in the LA area have increased by an average of 4.7% since 1988, periods with steep interest rate rises saw values jump by 7.6% while steep drops in interest rates led to value increases of only 1.6%. What’s more, a drop in interest rate would encourage Los Angeles homeowners who are considering selling their home to do so, as they would be able to purchase a new home without a 100% rate increase. The increase in available housing in the LA area, coupled with a drop in monthly mortgage payments, would almost certainly jumpstart the market and increase sales. 

At the same time, the LA housing market needs more than lower interest rates to rise from the doldrums. Los Angeles is the seventh most expensive real estate market in the nation. Anyone who wants to buy a home in the city would need a good job in order to qualify for a mortgage and keep up with monthly payments. However, median annual incomes are only $665 higher than the national average and the cost of living in Los Angeles is higher than in other parts of the nation. Unfortunately, hiring is down almost 24% year-on-year and job openings are at their lowest level in two years. While a drop in mortgage rates would certainly lead to significantly lower home prices, the odds are that many aspiring homeowners in Los Angeles would still be unable to afford the purchase. What’s more, the rise in the virtual and hybrid work models means that people who work in Los Angeles don’t necessarily have to live in the city. Indeed, many have already sought homes for purchase in more affordable residential real estate markets. 

Additionally, the Los Angeles residential housing market is facing another challenge that home buyers in previous years didn’t have to worry about. The COVID-19 pandemic created multiple problems for the construction industry, leading to a decrease in new home construction starts at a time when housing availability was already low. What’s more, thanks to inflation, the cost of building a new home is higher than it was just a few years ago, and this cost will almost certainly be passed on to potential home buyers. Higher demand for homes alone won’t help the Los Angeles residential real estate market if there are few or no new homes available to purchase. What’s more, the lack of supply will almost certainly contribute to an ongoing significant rise in home values even if rates come back down. 

The Mortgage Bankers Association predicts that a recession next year will prompt the FED to lower interest rates, thus boosting residential real estate sales by making it possible for aspiring home buyers to purchase a home and encouraging current homeowners who want to move out of their existing homes to do so. This would certainly be good news for the Los Angeles real estate market, as lower interest rates would cool home prices and greatly increase home affordability. Demand is certainly there; after all, rents in Los Angeles are more than 130% higher than the national average and aspiring homebuyers know that with a home purchase comes equity that would increase their net worth. However, high interest rates and home values aren’t the only problems that LA’s real estate market faces. A recession would also bring with it a loss of jobs, making it difficult or even impossible for aspiring home buyers to obtain a mortgage loan. What’s more, a lack of supply will likely continue to boost home values, making it hard for buyers to afford a home even at pre-pandemic interest rates. There is no easy solution ahead for the city’s real estate market as only time will tell if it is able to overcome the many challenges it faces and get moving once again. 

Have questions?

If you or anyone you know has questions about financing or the current housing market, your expert Los Angeles mortgage brokers at Peak Finance are here to help. Contact us today at [email protected].

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