The Southern California Housing and Mortgage Markets in Mid-2024: A Comprehensive Overview

We are at the tail end of the first half of 2024. The real estate and mortgage markets continue to cause Southern Californians to scratch their heads. We face a market shaped by a confluence of economic factors, shifting buyer behavior, and a supply-demand imbalance. Today, we look at some key factors that influence the market and explore the impact they are having on the Southern California housing market right now.

Mortgage Rates: A Double-Edged Sword

Mortgage rates, a key driver of housing affordability, have experienced a tumultuous journey in the last few years. After reaching historic lows during the pandemic, rates have surged in response to the Federal Reserve’s aggressive monetary tightening policy aimed at curbing inflation. As of June 2024, the average 30-year fixed mortgage rate hovers around 7%, a stark contrast to the sub-3% rates enjoyed by borrowers just a couple of years ago. 

While recent weeks have seen a slight dip in rates, providing slight relief to buyers, the prospect of a return to rock-bottom mortgage rates is just not on the horizon. Most experts anticipate a gradual easing of rates throughout the year, but the Federal Reserve’s future decisions on interest rates will play a pivotal role in determining the ultimate trajectory of mortgage costs. There was some expectation that the Feds would start cutting rates later this year, but they have made it clear that this is just not going to happen during the rest of 2024.

The elevated rates have had a profound impact on the housing market, particularly for first-time buyers. The affordability crunch has forced many potential buyers to postpone their homeownership dreams. You would think that may have slowed the market down a bit, however, that is not the case. Demand is still very strong, homes are still flying off the shelves in ALL five Southern California counties. 

On another note; he high mortgage rates have spurred a surge in home equity borrowing. Homeowners who locked in low rates in previous years are now tapping into their equity through home equity loans and lines of credit (HELOCs) to finance renovations, consolidate debt, or cover other expenses. Many homeowners who may have sold and moved up, have decided to add or renovate instead.

Inventory Crunch and Price Persistence

The persistent shortage of homes for sale remains a major challenge in the Southern California market. While inventory levels have seen a slight increase compared to the historic lows of 2022, the supply of available homes remains woefully inadequate to meet demand. This scarcity has fueled fierce competition among buyers, particularly in the entry-level segment of the market, where bidding wars and offers above asking price are surprisingly STILL the norm.

The tight inventory has helped to prop up home prices, which have remained stubbornly high despite the rise in mortgage rates. While the pace of price appreciation has slowed from the dizzying heights of 2021, prices are still elevated compared to historical norms. This has created a challenging environment for buyers, especially those with limited budgets, who are finding themselves priced out of many neighborhoods.

New Construction and Builder Sentiment

The headwinds facing the housing market have also taken a toll on the new home construction sector. Rising interest rates have increased the cost of construction financing, making it more difficult for builders to turn a profit on new projects. This has led to a slowdown in housing starts, which could exacerbate the existing housing shortage and put upward pressure on prices in the long run.

Builder sentiment, as measured by the National Association of Home Builders/Wells Fargo Housing Market Index, has also soured in recent months. Builders are grappling with not only higher financing costs but also ongoing supply chain disruptions, labor shortages, and a dearth of buildable lots. These challenges are dampening enthusiasm for new construction projects, further constraining the supply of available homes.

Economic Outlook 

The future of the Southern California housing market will be shaped by the usual economic factors, including the pace of inflation, the Federal Reserve’s monetary policy decisions, and the overall health of the economy.

If inflation continues to moderate and the Fed begins to ease its monetary policy stance, as some economists predict, mortgage rates could gradually decline, potentially sparking renewed interest from buyers who have been sitting on the sidelines. 

The broader economic environment also plays a critical role. Strong economic growth and a robust labor market could bolster consumer confidence and support housing demand. However, an economic downturn or a significant rise in unemployment could have the opposite effect, further depressing sales activity and potentially putting downward pressure on prices.

To sum things up, Southern California home buyers and home sellers find themselves in a bit of a pickle right now. High mortgage rates, a persistent inventory shortage, and rising construction costs have created headwinds for both. However, potential rate cuts by the Federal Reserve and a gradual easing of inflation offer a glimmer of hope for the future, but that may not be till the new year.

For now, we have to make do with what we have. The economy is doing well. Apparently, there are still plenty of people who CAN afford to buy, so we will assume that all is well for the most part.

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