Rising interest rates cool Southern California’s hot real estate market

With interest rates rising another 0.75%, Southern California’s once hot real estate market has calmed down.

“Every time we made an offer, it didn’t go through because someone put in an extra $50,000, an extra $60,000,” owner Ariana Sipavich said.

Sipavich finally completed the purchase of his house about four months ago, eventually buying a repairman.

“Our house was probably the ugliest house in the neighborhood,” she said.

Since then, the Southern California real estate market has taken a drastic turn. Almost at the exact moment Sipavich made the deal, the market plummeted, according to Dr. Richard Green of USC’s Lusk Center for Real Estate.

“We’ve seen a decline over the last four months of about 20% in home sales,” Green said.

Green attributes the market’s decline to attempts by the Federal Reserve to control inflation. One of the strategies the Fed uses to control inflation is to raise interest rates. With inflation hitting 9.1% – its highest level in 40 years, in June – the Fed has started raising interest rates to hopefully dissuade consumers from spending more money.

The latest round of interest rate hikes has pushed 30-year fixed-rate mortgages up to about 6% from about 3% in December.

For example, a loan of $550,000 last year at 3% would equate to a payment of $2,318 on a 30-year mortgage. Now, the same loan at 6% would be $3,297, a jump of 42%.

Estate agent David Smith said he had to make price adjustments to his listing in Woodland Hills after 65 days on the market. He added that sellers have to manage their price expectations while buyers are in charge, making it a buyer’s market now.

“Now there’s a period of positivity because there’s less competition,” Smith said. “I see fewer multiple offers – I still see them but less.”

Green said house prices are unlikely to bottom out like they did during the Great Recession because borrowing standards are much tighter now.

“I don’t know how low they can actually fall from where they are now, but I think it will be low for a while,” he said.

It’s easy to notice price drops on Zillow, but for 32-year-old Joseph De Herrara, logging onto the real estate site is no longer part of his American dream.

“I started about 5 years ago and I think I threw in the towel like earlier this year,” he said.

As home prices fall, fewer homes are entering the market as homeowners with low-interest loans are unwilling to exit.

Comments are closed.