Los Angeles Homebuyers Should See a More Favorable Market in 2019

January 23, 2019

 Executive Summary:

• Total Los Angeles home sales in 2018 were 11 percent below 2017, with the decline driven by fewer sales below $1 million, down by 18 percent. Higher-priced sales fared similar to 2017.
• Fewer sales were seen across the region except for in South L.A. and Malibu.
• The year 2018 saw a strong increase in sales priced between $1 million and $2 million in Mid L.A./Baldwin Hills and Northeast L.A., both up by about 70 percent from 2017.
• The region’s 20-month year-over-year decline in inventory finally reversed in the fourth quarter of 2018 and posted an 8 percent annual increase, though inventory still falls below fourth- quarter levels observed in 2016 and 2015.
• While more inventory was seen in the San Gabriel Valley communities of Pasadena, Eastern Cities, South of 210, and the East Valley, West L.A., the West Side, and Silicon Beach also saw supply gains. In contrast, more affordable areas of South L.A. and the Eastside posted inventory declines.
• Importantly, the inventory of homes priced below $1 million increased by 6 percent from the fourth quarter of 2017 — which translates to 251 homes — largely from the East Valley, the Southbay, and West LA.
• While the year started strong, it ended with a notable decline in buyer competition, leading to fewer homes selling for more than asking price. In December, only 30 percent of homes sold for premiums, down from May’s four-year peak of 48 percent.
• Sellers have adjusted their expectations, as price reductions reached a four-year high of 33 percent in December, compared with an average of 26 percent seen in last three Decembers.
• Los Angeles’ 2018 median home price increased by 8 percent on an annual basis.
  • While price growth varied, Foothilll Communities posted the largest annual increase of 21 percent
  • The Eastside, South L.A., Mid L.A./Baldwin Hills, West L.A., the Westside, and Malibu all posted double-digit percent price increases, while Beverly Hills and the Hollywood Hills ended 2018 with median prices on par with their 2017 levels.
• With more inventory, lower mortgage rates, and more price reductions, buyers are looking at a relatively more favorable 2019.

While occasionally showing confidence in 2018, Los Angeles homebuyers had a difficult year grappling with rapid home price growth, continually declining inventory, and higher mortgage rates. As a result, total home sales were down by 11 percent year over year in 2018. Fewer home sales were recorded across most Los Angeles communities except Malibu, which posted a 6 percent increase in sales over 2017, and South L.A., with a 1 percent increase.

The decline in activity was mostly driven by fewer sales of homes priced below $1 million, which dropped by 18 percent from the previous year. However, areas with relatively more inventory in that price range throughout the year fared better, such as South L.A. and the Eastside.

Among sales of homes priced between $1 million and $2 million, which remained on par with 2017, two areas showed particularly strong increases in sales: Mid L.A./Baldwin Hills and NELA, both up by about 70 percent from 2017. Both areas have seen high buyer demand over the last couple of years, driving the median price to above $1 million. NELA for example, saw 80 percent of homes sell for more than asking price at the end of 2017, which fueled price growth in 2018.

The growth of sales in the $2-million-to-$3-million range also posted a slight increase over 2017, up by 3 percent. And while sales growth dominated in Mid L.A./Baldwin Hills and NELA, the surge came on the heels of very low levels in 2017. The West Valley, the Southbay, West L.A., and the East Valley also saw relatively more sales of homes priced between $2 million and $3 million.

For homes priced above $3 million, a relative jump in sales appeared South of 210 and in Downtown L.A. and the East Valley, again an increase that followed very low previous levels. Figure 1 summarizes year-over-year changes in the number of home sales in 2018 compared with 2017 by price range and Los Angeles neighborhood. The last column indicates year-over-year changes in December. Los Angeles posted a 21 percent year-over-year decline in sales in December, which were widespread throughout the region, though some of the largest decreases were in areas closer to the beach and those affected by the Woolsey Fire - Malibu and Beach Communities in particular.

Figure 1: 2018 versus 2017 overall change in sales by price range and Los Angeles neighborhood; December year-over-year total change in sales

In conclusion, housing activity in Los Angeles ended 2018 with less enthusiasm than it began. There were overall fewer total sales in 2018. However, it’s important to keep in mind that inventory shortages persisted through most of the year, holding back many buyers who were looking for a home. Also, the significant price growth that dominated the early part of year was not sustainable for much longer and to a large degree turned off many prospective buyers.  Thus, the rebalancing of seller and buyer expectations was inevitable.

Nevertheless, normalizing trends are a welcome change, as is the increase in affordable inventory. Also, with the recent declines in mortgage rates and the anticipation by the Federal Reserve and its observers to see only one rate hike in 2019, Los Angeles buyers are looking at a relatively more favorable year and more certainty around mortgage rates.  

Uncertainties remain though, as do questions around the government shutdown and its impact on housing and the overall economy. In California, the federal government employs 245,400 people, representing 1.4 percent of employed residents. And while that is a smaller share than in some other parts of the country, it is still an important part of the economy and represents a significant number of prospective Golden State homebuyers.

Selma Hepp is Compass’ Chief Economist and Vice President of Business Intelligence. Her previous positions include Chief Economist at Trulia, senior economist for the California Association of Realtors, and economist and manager of public policy and homeownership at the National Association of Realtors. She holds a Master of Arts in Economics from the State University of New York (SUNY),Buffalo, and a Ph.D. in Urban and Regional Planning and Design from the University of Maryland.